China's central bank notified the organizations comprising the country's banking infrastructure that they are not allowed to deal in bitcoin. The People's Bank of China said it made the declaration to protect China from the risks associated with the volatile alternative virtual currency and its money laundering potential. But the move may be a precursor to China eventually regulating bitcoin, a development that would confirm the long-term viability of the controversial digital currency.
On Dec. 5, 2013, the PBC, along with China's other bank regulatory agencies, issued a blanket statement to the country's financial and payment institutions that they cannot have any association with Bitcoin, either to buy or sell it, or in any way establish processes for exchanging, underwriting or saving it.
In a statement, PBC said it made the decision "to protect the public's property rights, to protect RMB's official currency status, to prevent money laundering risk and to protect financial stability…" The RMB (renminbi) is China's official currency.
PBC said bitcoin is "not currency in the true sense. Bitcoin is a specified virtual commodity, it does not have equal legal status with currency, and it cannot and should not be circulated as currency on the market." The bank noted that no financial institution issues bitcoin, no central authority regulates it and that it is exchanged anonymously, which makes it a prime money laundering tool.
After the PBC made the announce-ment, the value of bitcoin on the open market subsequently dropped as much as 30 percent, from a high of over $1,200 per bitcoin unit.
Tom Waters, Director of Sales at Bank Associates Merchant Services, believes that the PBC's notice is a first step in the eventual regulation of bitcoin in the East Asian economic powerhouse. "This notice is actually pretty good news for bitcoin," he told The Green Sheet. "It suggests that China is open to the technology and is preparing for its widespread adoption by taking precautionary measures." Waters noted that the PBC is not shutting down the bitcoin marketplace in China, where the practice is increasing in popularity and where the largest bitcoin exchange by volume, Shanghai-based BTC China, operates. "In other words, the banks cannot perform direct, bitcoin-related services," he said. "Nothing really speaks directly to independent exchanges or the banks' relationships to those exchanges."
Instead, the PBC is attempting to keep the cryptocurrency from facilitating money laundering activities and destabilizing the RMB. "Bitcoins can be freely used for online commerce as long as consumers recognize that they are taking all the risk. Bitcoin processors are allowed to continue as long as they are not deemed financial institutions," Waters said.
The U.S. federal law enforcement community officially took notice of bitcoin in March 2013 when the Financial Crimes Enforcement Network (FinCEN) sought to define virtual currencies, and bitcoin in particular, for the purposes of regulating them in the fight against money laundering and other illegal activities.
Also in March, Amazon.com integrated the bitcoin payment functionality of Atlanta-based BitPay Inc. for its Fulfillment-by-Amazon web service that facilitates distribution for merchants who sell goods on Amazon. BitPay said the integration represented the first move into large-scale e-commerce for "companies wishing to accept payments over the bitcoin peer-to-peer payment network."
BitPay settles bitcoin transactions in U.S. dollars. Waters equated BitPay's process to dynamic currency conversion, where exchange rates are locked in at the time transactions are made. Therefore, merchants receive full value for a bitcoin transaction worth $100 at the time of the transaction, rather than $50 should the volatile currency lose half of its value tomorrow, Waters said.
Waters believes bitcoin is here to stay because it provides benefits to vendors, merchants and consumers alike. He said bitcoin is not costly for consumers to exchange, can be exchanged almost instantly and is nearly universal as a worldwide accepted currency.
He added that bitcoin payments would also reduce chargebacks for merchants because bitcoin transactions are nonrefundable; nor do merchants have to pay fees to banks or other network operators as they do to accept bankcards.
The bitcoin payment option can be ideal for high-risk merchants vulnerable to credit card fraud, and for businesses in the small-ticket market, such as e-book sellers, where micro transactions as small as a quarter can be conducted securely via bitcoin payments, according to Waters. Bitcoin is also attractive to payment vendors because of its low processing costs, he noted.
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