Bitcoin value plummets after China bars banks from Bitcoin dealings

bitcoin-chinaThe fiat currency value of Bitcoin took a steep plunge on Thursday after China’s central bank banned the country’s financial institutions from using the popular crypto-currency. The People’s Bank of China issued a statement saying Bitcoin didn’t offer the security of fiat currencies and ordered financial firms not to allow Bitcoin deposits, custody services or offer insurance to Bitcoin businesses. However, the statement maintained that individual Chinese citizens could continue to trade in Bitcoin, much as they would any other commodity, assuming they understood the inherent risk.

The bank’s statement also assigned new responsibilities to Chinese Bitcoin trading platforms. Sites like BTC China – which recently surpassed Tokyo-based Mt. Gox as the world’s largest Bitcoin exchange by volume – will now have to obtain proper identification from users, eliminating the relative anonymity that had been one of Bitcoin’s main selling points. Trading platforms will also have to report suspicious transactions to reduce the potential for money laundering.

The news – which followed similar warnings by central banks in France and the Netherlands – sent Bitcoin into a tailspin, shedding nearly a quarter of its value within a few hours. The price has since recovered some of this loss, but is still well off the $1,240 high it hit a week or so back, which temporarily eclipsed the value of an ounce of gold. Bitcoin’s value had increased eightfold in just the past two months, leading a former Dutch central banker to compare it to the infamous ‘tulip mania’ of the 17th century, except when that speculative bubble eventually popped, “at least then you got a tulip. Now you get nothing.”

Bitcoin backers – including more and more online gambling sites – insist that the wild value fluctuations stem from the currency’s relative unfamiliarity, which will dissipate as more and more mainstream institutions recognize Bitcoin as a bona fide payment method. This attempt to de-emphasize the influence of speculators wasn’t helped by the report earlier this week from a couple of Wall Street analysts that suggested the price of a single Bitcoin could eventually reach $98,500. Irrational exuberance redux, anyone?

CHINA MAKING THE SAME MISTAKES AS US?
Thursday’s announcement does underscore the fact that China is increasingly key to Bitcoin’s success or failure. Thanks in part to US efforts to contain the Bitcoin phenomenon, China now accounts for half of all Bitcoin trading. Last month saw venture capital firm LightSpeed Venture Partners plunk down a hefty $5m to buy a piece of BTC China. Jered Kenna, founder of the San Francisco-based Bitcoin exchange Tradehill that closed in August after its bank cut off Bitcoin-related clients due to “regulatory issues,” said LightSpeed’s Chinese investment was “the biggest indicator that the US is losing this battle.”

Kenna’s experience is far from unique. Last month, Forbes detailed the woes of San Diego-based Coinabul, which used to sell precious metals using Bitcoin until US Bank and Chase announced they were ending all relationships with Bitcoin-based clients. Countless Bitcoin exchanges were similarly banished from US banking circles, despite complying with instructions to register as money exchangers with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

So is China about to repeat the same US mistakes and surrender its spot in the Bitcoin driver’s seat? Expect much discussion of China’s announcement at the upcoming Inside Bitcoins Conference, which kicks off Dec. 10 in Las Vegas. Speakers include BTC China CEO Bobby Lee, Ardon Lukasiewicz, founder of turnkey casino services provider Bitmarkers and Playsino CEO Brock Pierce.