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Has the Bitcoin Received a Major Blow?

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Bitcoin, the virtual currency that has everyone’s attention this year, seems to have been dealt a major blow by the People’s Bank of China. The Chinese central bank has reportedly banned financial institutions in the world’s second-largest economy from handling bitcoin transactions.

The digital currency, which has seen its dollar value surge an exponential 9,000% year-to-date (YTD), saw its price drop more than 30% in the hours after the announcement. The price of one bitcoin tanked from a daily high of $1,240 to a low of $870 on Mt. Gox, the most liquid bitcoin exchange.

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The ban comes just a few days after the largest Chinese bitcoin exchange, BTC China, held discussions with regulators on how the bitcoin exchange could be formally recognized. That recognition could have helped the digital currency be adopted more widely in commercial transactions.

After announcing the ban, People’s Bank of China has reportedly said that bitcoins have no “real meaning”, and that the public can engage in bitcoin transactions at their own risk.

China is the largest trader in bitcoins, and controls more than half the global volume through the 20 trading platforms located in the country. The country had shown the most potential for bitcoin adoption up until now; the virtual currency was being used to purchase anything from a cup of coffee to real-estate in Asia’s economic juggernaut.

Former Federal Reserve chairman Alan Greenspan had said in a television interview yesterday that the bitcoin phenomenon was a bubble and the currency had no intrinsic value. But prices had held steady despite Greenspan’s bearish comments. However, the prohibition on Chinese financial institutions from trading the currency may have dealt a blow to bitcoin’s future prospects.

China’s prohibition of bitcoin trading is the second instance a country has moved to regulate the virtual currency’s usage. The Central bank of Thailand had imposed a ban on the currency earlier this year.

But the regulation of the bitcoin should not be seen as a negative only. As more and more countries start regulating the crypto-currency, they will seek to curb its use as a money laundering vehicle and as an abettor of illegal activities. Regulation may even be a harbinger of long-term stability for bitcoin prices, which have lately been too volatile for the virtual currency’s use as money.

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