Following massive interest that has seen Bitcoin's value increase more than 7,000 percent since the beginning of the year, China's central bank has forbidden financial companies from processing Bitcoin-related transactions. Chinese regulators are reportedly considering rules that would govern the behavior of online Bitcoin exchanges.
In a statement on its website, the People's Bank of China said that Bitcoin does not have legal status as a currency and should not be used as such, though it can be traded as a commodity. While individuals are still free to purchase and exchange the digital currency, the Chinese government is prohibiting financial firms and payment companies from buying or selling it, storing it or issuing Bitcoin-related financial products.
China strictly regulates its national currency, the yuan, but digital currencies provided a backdoor for currency speculators and others in China, allowing them to trade the yuan by another means. In its statement, China's central bank said "excessive speculation" could "harm the public interest."
"The scale of the Bitcoin market isn't significant enough to disrupt China's financial system, but its growth has been very strong," Peter Pak, head of trading of Hong Kong-based BOCI Securities, told Bloomberg News. "Regulators might be worried that this could get out of control in one to two years if they don't do something."
There has been a global surge of interest in the digital currency Bitcoin over the past two months. Much of that interest has originated in China, which now accounts for about half of the daily global trade in bitcoins. More than a third of those transactions pass through a single exchange, BTC China, which recently overtook Tokyo-based Mt. Gox as the world's largest exchange. Although BTC China is open only to Chinese traders, it raised $5 million of venture capital last month to expand its business.
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Following the announcement by the People's Bank of China, Bitcoin prices plummeted on the world's major online exchanges, but have since rebounded, though not to their earlier highs. Bitcoin is now trading above 6,000 yuan on BTC China, or more than $980 per bitcoin. On Coinbase, the buy price at 11:40 a.m. EST was $1,010.06 per bitcoin and the sell price was $1,001.28.
And while China is cracking down, at least one Western financial institution is sending different signals about the cryptocurrency. David Woo and other currency strategists at Bank of America issued a note to clients Thursday saying Bitcoin has "clear potential for growth." Woo noted Bitcoin's promise in the realm of ecommerce, something even its critics acknowledge, and pegged the ultimate Bitcoin market cap at $15 billion, or about $1,300 per bitcoin.
However, Woo did highlight some potential concerns with Bitcoin -- namely the fact that it could be used to avoid paying tax or circumvent capital controls. Those concerns are what prompted China's central bank to issue its ban.
But so far Bitcoin -- and to a lesser extent the other digital currencies, such as Litecoin and Ripple, collectively known as "altcoins" -- looks to have staying power. In late November, the price of a single bitcoin on the Mt. Gox exchange surpassed the price of an ounce of gold for the first time ever. (Gold was valued at $1,241 an ounce.)
And earlier this week, a pair of Wall Street analysts made a much more dramatic prediction than Woo's, saying the value of a single bitcoin could reach nearly $100,000 in the future. "We believe Bitcoin and its associated technology represent a potentially game-changing disruption" to payments companies, analysts Gil Luria and Aron Turner said in their report.