Money Matters Part 2: China's Bitcoin Ban

This second of a two-part series about bitcoin looks at the impact of China’s recent ban on the virtual currency. Part 1examined the viability of bitcoins as a potential global currency.

In early December, the People’s Bank of China — China’s central bank — banned banks and other financial institutions from handling all bitcoin transactions, effectively ending inflows from renminbi into bitcoins. In addition, on Dec. 17, authorities banned domestic third-party payment companies from providing clearing services to bitcoin exchanges. As a result of these two events, the price of bitcoins has fallen 60% from $1,242 at the end of November to about $500 currently.1

Opportunity for other currencies?

Does the bank’s ban on conversion of bitcoins to renminbi, and vice versa, represent an opportunity for the Hong Kong dollar or other currencies?

In my view, it doesn’t offer opportunity beyond what already exists. Having a freely convertible currency is highly advantageous to Hong Kong residents — and to the residents of the US, the eurozone and the UK, for that matter. Not having a freely convertible currency is a big disadvantage to Chinese mainland residents, who have many fewer opportunities than those residing outside the mainland.

But the real problem with bitcoin, as I see it, was that it offered a way for Chinese mainland residents to circumvent China’s foreign exchange, or capital, controls. By using bitcoin, individuals or companies resident in mainland China could obtain foreign currency, make payments abroad or receive payments from abroad. Any of these transactions might be in violation of China’s foreign exchange controls. This, I believe, is the fundamental reason why the price of bitcoins rose so steeply — from less than $100 at the end of July to $1,242 at the end of November1 — and why the Chinese authorities have now acted to outlaw conversions from renminbi to bitcoins and vice versa.

As I stated in Part 1 of this series, bitcoins, in my view, were never a serious contender as a private or global currency, and the ban by the People’s Bank of China reaffirms that observation.

Important information

An investment in new technologies such as cryptocurrencies may be extremely volatile and not appropriate for all investors. Additionally, cryptocurrencies and cryptocurrency exchanges are not regulated and offer little to no protections to investors.

1 Source: Mt. Gox Bitcoin Exchange, Dec. 19, 2013

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.




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