Why China had to crack down on bitcoin—and may eventually regret it

December 17, 2013
December 17, 2013

China’s brief yet torrid love affair with bitcoin is drawing to a close.

The country’s central bank, which earlier this month banned Chinese commercial banks from trading in the virtual currency, has now told third-party payment platforms like Alipay that they cannot do business with Chinese bitcoin exchanges, making it much more difficult (though not impossible) for its citizens to purchase bitcoins. That cuts off the huge surge in investment that sent the currency to dizzying new heights over the past last few months.

Ultimately China had little choice but to crack down on bitcoin, because it made it all too easy for Chinese investors to evade already- porous currency controls and anonymously move their funds out of the country. More generally, Beijing had an aversion to a volatile, decentralized and possibly destabilizing digital currency that it could not control.

Now compare China’s bitcoin predicament to the stance taken by the US government in recent months. While bitcoin poses some theoretical challenges to Uncle Sam—funding terrorists, abetting drug dealers, enabling tax evasion—the US seems to be going out of its way to make encouraging noises about bitcoin’s potential. That’s because bitcoin’s negative disruptions are potentially outweighed by its benefits, in the minds of American policymakers and many others.

Bitcoin’s greatest promise is that it might one day become a frictionless and extremely cheap method for moving money around the world. Economies with access to such a technology would enjoy a competitive advantage against those with cumbersome payment mechanisms.

By shunning bitcoin, China, home to innovative e-commerce companies like Alibaba and an underdeveloped consumer banking sector, may be passing up the chance to leapfrog the rest of the world by fostering the growth of bitcoin-esque digital currencies and the secure, efficient payments that they may enable. But when a country is simultaneously trying to grow, reform, and maintain tight control of its economy, something’s gotta give.

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