China Pulls Rug Further on Bitcoins

Even in this age of globalization, the sovereign retains a monopoly on two things:  the legitimate use of force and the power of coinage.  The rise of the bitcoin, and digital currencies general, pose a challenge to this monopoly and bitcoin advocates recognize this.

While many also realize that these are still early days for the evolution of digital currencies, they tend not to give sufficient consideration to the competitive response that is likely from those businesses and financial services that, at least theoretically, may be squeezed by digital currencies.

Sovereigns have already begun responding.  Officials took a keen interest in the use of digital currencies and especially the bitcoin to conduct illegal transactions and/or circumvent laws.  They are still grappling with how to respond to the legitimate uses.

The bitcoin phenomenon really captured some of the imaginations in China.  Much of the Chinese media seemed particularly enamored by it, not just to facilitate e-commerce, but as a potential rival to the US dollar.  Many had confused the Chinese official comments with an endorsement.  Recently, the central bank banned banks from trading it.  This immediately had a cooling off effect on e-merchants who were willing to accept bitcoins in lieu of the yuan for payment.

Today, Chinese officials moved more aggressively to curtail the growth of bitcoins.  They have banned the bitcoin exchanges from accepting new currency deposits that can be used to buy bitcoins.  The market, as it were, responded immediately, taking the bitcoin down by around 25% according to reports.  It had hit a high of CNY7395 earlier this month and was near CNY2800 after the announcement.

Individuals are still allowed to trade bitcoins, but the ban on third-party payment services from doing bitcoin business marks the greatest hurdle to date on continued growth of the market.  This seems to be taking place before the bitcoin network reached a sufficient critical mass.

Other sovereigns have responded in recent days.  The director of taxation in Norway was quoted in the press arguing bitcoins were not money but should be regarded as an asset, subject to capital gains tax.   Germany is not recognizing the bitcoin as a foreign currency, while a former Dutch central banker compared it the bitcoin to the tulip craze.  The European Banking Authority is considering regulation, while Germany appears to have rejected classifying the bitcoin as a foreign currency.

There is a motion in  the Swiss parliament (supported by 45 of the 200 members) that advocate the bitcoin be treated as a foreign currency.  They see an opportunity for the Swiss financial sector, but also want to consider modernizing the regulatory environment to incorporate digital currencies. 

China Pulls Rug Further on Bitcoins China Pulls Rug Further on Bitcoins Reviewed by Marc Chandler on December 18, 2013 Rating: 5
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