Bitcoin bashed in China and France: what that means for the crypto-currency
| Los Angeles
Bitcoin, the virtual money with the odd name, is聽raising hackles in European and Asian capitals.
On Thursday, China banned the nation鈥檚 financial institutions from using the virtual currency, while the Bank of France warned against the use of a currency not backed by any government.
Does this spell the聽beginning of the end for this new kind of online cash?
Hardly, say experts in crypto-currency. Just this past month, the US government held hearings on virtual currency without聽taking any official聽positions.
A Bank of America report issued Thursday, for instance, states 鈥淏itcoin has clear potential for growth.鈥� And then there is the Kentucky town of Vicco, where officials have announced they will pay their police chief in Bitcoin.
These聽varying attitudes suggest the future of crypto-currency is anything but clear, say experts in the field.
Merely 鈥渄iscouraging鈥� the use of Bitcoin, or BTC, or issuing warnings in any jurisdiction will not have much impact on its use, says James Jalil, a partner at the New York law firm Thompson Hine who specializes in Bitcoin issues.聽鈥淭hose who wish to use Bitcoin technology do so for a purpose, and for the most part understand the technology,鈥� he adds via e-mail.
Indeed, the very fact that the governments of two of the top five world economies chose to weigh in on an emerging form of currency can be counted as a major 鈥渨in鈥� for the new technology.
鈥淵ou could argue that even allowing this new kid on the block to be seated at the table bestows a legitimacy on the Bitcoin advocates,鈥� says William Luther,聽assistant professor of economics at Kenyon College who specializes in emerging currencies.
鈥淭he fact that聽major governments are merely talking about聽Bitcoin rather than outright banning it could be seen as an implicit endorsement of its right to exist,鈥� he says, noting that while the Chinese government did ban its national institutions from using it, the ban does not extend to individuals.
The Bank of France merely extended warnings.
"Even if Bitcoin is not currently a credible investment vehicle and therefore do not pose a significant risk to financial stability, they represent a financial risk for those who hold them,鈥� the bank said in a statement.聽The bank also pointed out that the anonymity of Bitcoin聽presents the risk the currency could be聽 used for money-laundering and terrorism.
The US has already聽cracked down on sites such as Silk Road that specialize in illicit drugs and weapons, a move that Bitcoin advocates say has helped distance the currency from becoming the preferred means of exchange for those operating outside the law.
However, another major concern of many observing the new currency is its ongoing volatility.
Following China鈥檚 announcement Thursday, the price of the聽electronic cash swooned as Chinese traders cashed in, leading to a nearly 20 percent drop in the trading price for a bitcoin 鈥� a figure that has seen a nearly 400 percent run-up over the past year,聽recently topping $1,000.
These swings聽spotlight the聽instability of Bitcoin,聽says Usha Haley, a business professor at West Virginia University and author of 鈥�.鈥� Bitcoins are inherently volatile with speculation based on emotion and not rationality, she says.
鈥淏itcoin speculators understand that it is unregulated, online money not backed by central banks, governments, or physical assets,鈥� she says via e-mail. But, she adds, most speculators expect, 鈥渋rrationally as with the 17th century tulips, to cash in before the bubble bursts.鈥�
The attention focused on Bitcoin at the moment will not necessarily help stabilize its value, adds Professor Haley. 鈥淭his current government-generated publicity may actually increase Bitcoin鈥檚 medium-term value as people become more aware of its potential markets,鈥� she says.
Ultimately, despite the fact that Bitcoin is beloved by its early adopters for its independence of government,聽regulation may be the key to stabilizing BTC for the future.
鈥淏itcoin could evolve into a currency, but a government will need to control it,鈥� says Peter Cohan, an adjunct lecturer at Babson College in Wellesley, Mass., and president of Peter S. Cohan & Associates, a management consulting and venture capital firm.
The most important hurdles would be that government would need to register each bitcoin to an individual and be able to track each transaction to make sure it is not being used for illegal ends, he says.聽鈥淚f governments supported it, then the other hurdles would be easier to overcome 鈥� such as getting retailers and other businesses to accept it as a means of payment.鈥�
