Are bitcoins a legitimate currency, or more like a speculative investment? That is one of the questions being raised following word that China has decided that its banks cannot use the digital phenomenon as currency.
In an official posting, authorities representing the People's Bank of China said bitcoins "do not have same legal status as a currency" because there is no central monetary authority governing their use and because they can be spent anonymously. The authorities are allowing individuals to use the digital money, as long as users understand the risks. In other words, it is an investment whose value could change dramatically and quickly.
That's exactly what happened on Thursday morning, when the value of each bitcoin plunged from a high of $1,240 to a low of $870 -- a 30 percent drop. The action by the People's Bank of China was the most prominent reason cited by bitcoin-watchers.
'It's a Bubble'
But there were also newsworthy comments on Wednesday by Alan Greenspan, former chairman of the U.S. Federal Reserve Bank. He told Bloomberg News that "you really have to stretch your imagination to infer what the intrinsic value of bitcoin is." He added that, "If you ask me, 'Is this a bubble in bitcoin?' " his reply would be, "Yeah, it's a bubble."
Disapproval at the governmental level is not just coming from the Chinese. On Thursday, the central Bank of France warned that bitcoins are highly volatile, "highly speculative," have nothing to back them up and pose financial risk to those who buy and sell them. While the French bank stopped short of outright banning their use in the future, it did say that if they are used as currency, they must comply with laws relating to money laundering.
Even if major governmental banks do not ban bitcoins as a currency in their territories, the money-laundering hurdle seems inevitable. Laws against money laundering are specifically designed against efforts to hide illegal gains, and so any purported currency designed around anonymous buying and selling in a country's economy would seem to fit the bill. If governments do not crack down on bitcoins' anonymity, the question is how they will be able to prevent highly effective money laundering from exploding.
In addition to money laundering issues, there is also fraud. Businessweek has reported that China is also looking at the possibility of requiring bitcoin exchanges to report large transactions and to validate users' identities, following the eight-month life and sudden closing of a China-based bitcoin trading platform called GBL. At least some of the nearly 5,000 registered users lost thousands of dollars when the exchange closed, possibly as the result of fraud.
In the U.S., a Justice Department official has described bitcoins to Congress as a "legal means of exchange," and Federal Reserve Bank Chairman Ben Bernanke has said his bank is not expecting to issue regulations.
Roger Kay, an analyst with Endpoint Technologies Associates, told us he expects that, if bitcoins remain uncontrolled by monetary authorities, "any authority will say they can't be used in my jurisdiction" as currency. To say otherwise, he suggested, would mean the authority would be relinquishing at least part of its currency control.
The Bear who killed the N:
Posted: 2013-12-05 @ 12:01pm PT
"it is an investment whose value could change dramatically and quickly" can be said of any currency controlled by any government.