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China’s ban on bitcoin doesn’t make a difference—it was banned already

The People’s Bank of China, the country’s central bank, and four regulators banned financial institutions and payment services (link in Chinese) from bitcoin-related business earlier today. This was done “in order to avoid harm to the public and to the legal monetary status of the renminbi [a.k.a. the yuan]” that might occur as a result of “excessive speculation” in bitcoin and other virtual goods, said the statement.

The market didn’t much like this:

Screenshot of mtgox.com

Bitcoin prices in China dove 25% within two hours of the news. As you can see above, after prices on Mt. Gox, the biggest global trading platform, plunged nearly 30% from $1,238 earlier this morning, they have since bounced back—they’re now down about 12% from the morning’s high.

That’s maybe because, in reality, China’s statement doesn’t change much.

The government banned using virtual currencies in the real economy back in 2009, cracking down on surging transaction volume of Q Coin, Tencent’s virtual currency, had grown to several billions of yuan a year, growing at a rate of 15-20% annually. Some estimate it made up 13% of China’s cash economy prior to the crackdown.

But that’s not the only reason the PBOC’s statement changes little about China’s appetite for bitcoin.

First, it doesn’t alter the motivation. Though bitcoin could in theory function as a medium of exchange, few merchants in China accept it. Exceptions include e-commerce arms of Alibaba and Baidu, which are now banned. But it’s not the ability to buy Baidu’s firewall service drove a run-up like this:

Screenshot of mtgox.com

Gutsier Chinese people started buying up bitcoins not because they wanted to spend them, but because they’re an easily accessible alternative to holding yuan.

As Bobby Lee, CEO of BTC China, told the Wall Street Journal, “the vast majority [of BTC China users] are buying bitcoin for investment purposes, hoping that prices will go up in the long term” (paywall).

For instance, bitcoins are much easier to get ahold of in China than, say, shares of overseas-listed companies, foreign bonds or foreign currencies in quantities above $50,000. That’s because the Chinese government rigidly seals shut its capital account—something that won’t change any time soon.

As has happened with many other theoretically tradable assets (e.g. tea, bad art, Q Coin, maybe worm grass fungus), once bitcoin entered the Chinese market, speculators piled on. And as more and more online trading platforms sprouted up in China, speculation went mainstream, in much the same way that gold speculation has throughout this year. In turn, the China Bitcoin Rush of 2013 probably fueled still more speculation from elsewhere on the planet.

The government’s policy also hasn’t altered Chinese access to bitcoin trading. It neither forbade people from trading bitcoin nor banned trading platforms like BTC China.

That’s probably simply because it can’t. While the government could in theory block trading platform URLs, it can’t stop people from circumventing the Great Firewall to trade online (provided the platform accepts yuan, which Hong Kong-based sites can).

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