Editor’s note: Do you remember the bitcoin trade crisis of 2012? Maybe you weren’t awake when it happened, because after more than 18 months it turned out that almost everything about it was wrong. We covered it extensively. Only then did the truth emerge. Now, nearly four years later, the Bitcoin exchanges we visited as industry leaders are fully open and operating freely. Some of the biggest names in the bitcoin space have since paid a price for their failure to heed the lessons of the previous collapse. But there were also signs that the bubble was taking a different shape, and a different phenomenon was playing out.
We have more on that here.
But the Central Bank of China’s decision on Thursday to direct banks not to handle any dealings in digital currencies took Bitcoin to its lowest levels in months, in a move to give regulators more control over these “virtual currency” assets.
The CMB statement said the virtual currency was “too risky” to invest in at this stage, and that it was being promoted with funds not suitable for the purpose. It said banks should use their core business of lending to customers and not set up business that “ignore legal and regulatory requirements.”
The ruling had a devastating effect on Chinese cryptocurrency exchanges, already hit by the shock decision by South Korea’s top cryptocurrency exchange Coinrail to shut down.
The CMB’s decision, which it did not fully announce on its website, caused the price of bitcoin to crash almost 18 percent to below $7,000, from the all-time high of $11,000 reached in May. It also caused prices for other digital currencies to plummet, with the XRP down 20 percent and the BTC down 13 percent.
Within hours of the CMB statement being published, the Bank of China had pulled its reverse-LTRO funds meant to support growth in the local currency.
China has been keen to crack down on the financial industry as it tries to impose limits on the rise of a rapidly expanding shadow-banking system. But the idea of bitcoin was born from China’s seemingly endless search for ways to keep track of how local investments were performing.
The central bank statement said banks were also prohibited from carrying out transactions related to trading bitcoin and “mining” with it. This refers to the process of taking an endless stream of data from a large number of computers and re-purposing it into a useful form of computing power. This is a common process to mine bitcoin, which generates funds by crunching an ever-growing stream of code. The process tends to be secretive, with many miners refusing to identify themselves publicly.
The CMB statement also said the virtual currency would not be allowed to be used in exchanges that “enable the circulation of illegal securities products,” which does not specifically refer to bitcoin but would likely be applied to it. Some brokerage firms are believed to operate this type of business in China.
The Australian Bankers’ Association has put a temporary stop to the sale of bitcoin or other virtual currencies to its member banks until the actions of the CMB are clarified.
Reports from South Korea on Monday suggested some of the country’s roughly 200 exchanges are now also closed down. The South Korean government stepped in in an attempt to stamp out bitcoin activity and made it illegal to use trading software made outside the country. Bitcoin exchanges were also ordered to report bitcoin users to the police if they broke the law.
After six days of activity, Coinrail failed to publish a list of investors and the software had been removed from its website. It was not clear when Coinrail planned to reopen its business.
The CMB statement did not name China’s 14 biggest virtual currency exchanges.
China became a major hub for bitcoin trading last year as it began adopting Chinese software provider BitGo’s peer-to-peer payments system. But Chinese regulators have signaled increasing hostility to bitcoin as the currency’s value took off.
A bitcoin plummets 18% on New York Stock Exchange.
Bitcoin transaction value
September 2000 – US$30.11
December 2000 – US$370.64
January 2001 – US$501.62
February 2001 – US$1,217.08
March 2001 – US$1,413.22
April 2001 – US$1,927.93
May 2001 – US$2,163.97
August 2001 – US$2,627.68
September 2001 – US$1,689.18
December 2001 – US$1,495.95
January 2002 – US$1,923.01
February 2002 – US$1,300.43
March 2002 – US$1,204