Chinese regulators are cracking down on Bitcoin, the anonymous open-source virtual currency. Officials at China’s central bank announced this week that they were banning all third-party payment processors from accepting Bitcoin, effectively shutting down the exchanges they are sold on.
For a long time, the country has kept its banking system, and currency, closed to the outside world. By subsidizing interest rates and enforcing capital controls, China has been able to provide cheap credit for its state-owned enterprises. Until recently, the government has also strictly controlled the Chinese Renminbi from being traded internationally, preventing individuals from exchanging their Renminbi for foreign currencies such as the U.S. dollar.
Chinese regulators cracked down on Bitcoin because it undermines this system. Bitcoin’s anonymity and virtual presence enable its sale or purchase essentially by anyone with an Internet connection and a bank account.
With Bitcoin, individuals can circumvent China’s capital controls, allowing them to buy foreign currency or send money to family abroad, which so far they have been doing. China is the biggest market for Bitcoins, with 46 percent of transactions using Chinese Renminbi. Meanwhile, 45 percent have been completed using the U.S. dollar. This means Bitcoins might be a pass through, allowing traders to buy Bitcoins with Renminbi and then sell them for U.S. dollars—evading China’s capital controls.
It’s not just China; the same is true for Western countries like Cyprus. In March, Cyprus instituted capital controls to prevent capital outflows, a part of its $14 billion bank bailout. Not surprisingly, the price of Bitcoin spiked by over a hundredfold, as individuals looked to evade the country’s new controls.
Bitcoin may evolve into a scalable, usable currency in the future, or, as some anticipate, it could collapse. Either way, Bitcoin’s recent popularity is really about the desire for economic freedom—not the currency’s long-term viability. Individuals should have the freedom to move their money around at will, both within and between countries. The track record of capital controls and other measures that inhibit the free flow of capital is spotty at best. They simply distort prices and, in some cases, cause inflation.
It is about time officials focused on deregulating their own economies, rather than on regulating Bitcoin.