Bitcoin Drops as China to Denmark Seek to Control Digital Money

Dec. 19 (Bloomberg) -- Matt Miller reports on where in the world bitcoin can be used. He speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Bitcoin prices plunged against the yuan and the dollar after China’s largest online market for the virtual currency stopped accepting Bitcoin deposits and Scandinavian authorities said they will impose regulations.

Bitcoin fell as much as 49 percent to 2,011 yuan ($331) on BTC China, which said its payments subsidiary YeePay would no longer offer deposit services. Against the dollar, Bitcoin declined as much as 43 percent on the Bitstamp, an online market where the digital money can be traded for legal tender.

Since the digital money isn’t controlled or authorized by any country or banking authority, Bitcoins have also attracted the interest of authorities concerned that they can be used to trade in illicit goods or evade financial controls. While Bitcoins have been around since 2008, their growing use has lured speculators, fueling a rally that drove up the price of the virtual currency more than 80-fold this year.

Is Bitcoin Real Money?

“Every day brings a new twist and turn,” said Gil Luria, an analyst at Wedbush Securities Inc. “Longer term, the technologies that have been introduced, innovations that have been involved in Bitcoin will have a very big impact. What the actual value of Bitcoin is going to be is far harder to determine, particularly since the market is illiquid.”

Photographer: George Frey/Bloomberg

Bitcoin fell as much as 49 percent to 2,011 yuan ($331) on BTC China, which said its payments subsidiary YeePay would no longer offer deposit services. Close

Bitcoin fell as much as 49 percent to 2,011 yuan ($331) on BTC China, which said its... Read More

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Photographer: George Frey/Bloomberg

Bitcoin fell as much as 49 percent to 2,011 yuan ($331) on BTC China, which said its payments subsidiary YeePay would no longer offer deposit services.

More nations are taking an official stance on virtual currencies. Norway said this month it won’t recognize Bitcoins as legal tender and will impose a capital gains tax. BTC China’s decision to stop taking deposits follows a move by China’s central bank to bar financial institutions and payment companies from handling Bitcoin transactions.

Money Controls

“China represented a lot of the incremental demand for Bitcoin over the last few months,” Luria said. “Removing that demand lowers the price very substantially, and creates the perception that maybe other countries won’t allow trading.”

The Treasury Department’s Financial Crimes Enforcement Network has said that Bitcoin businesses may be considered money transmitters for the purpose of complying with anti-money laundering laws. The agency sent letters to “about a dozen” Bitcoin-related businesses last month asking them either to register or explain why they are not subject to its jurisdiction.

“Fincen often sends letters to banks, credit unions, jeweler, casinos and the like,” said Steve Hudak, a spokesman for the Financial Crimes Enforcement Network “This should not be surprising to anyone.”

Gaining Credibility

Introduced five years ago by a programmer, or group of programmers, going under the name of Satoshi Nakamoto, Bitcoins exist as software and can potentially reduce banking-transaction fees, making it an attractive option for trading via the Web or in stores. Bitcoins are being used to pay for everything from Gummi bears and digital cameras to Tesla electric cars on the Web, with more than 12 million in circulation.

The virtual currency gained credibility last month after law enforcement and securities agencies said in U.S. Senate hearings that Bitcoin could be a legitimate means of exchange. The U.S. government shut down in October the Silk Road Hidden Website, where people could obtain guns, drugs and other illicit goods using Bitcoins. That generated optimism the digital money would become more widely used for legal purposes.

The price of Bitcoins topped $1,000, and have since dropped to trade around $562 today on Bitstamp, one of the more active online exchanges where Bitcoins are traded for dollars and other currencies.

The jump in Bitcoin prices prompted former Federal Reserve Chairman Alan Greenspan this month to call the market a “bubble.”

European Level

Denmark is the latest nation to prepare standards to protect its consumers from risks associated with virtual currencies after the regulator found it lacked authority to prevent a company creating an exchange for the software.

The most likely outcome would be an “amendment to existing financial legislation so that we have regulation covering it,” Michael Landberg, chief legal adviser at the Financial Supervisory Authority in Denmark, said yesterday in a phone interview. “It is also important to have this included in money laundering acts.”

Denmark plans to “align” itself with other nations in designing a framework that deals with gray zones created by the use of Bitcoins and its competitors, Landberg said. The FSA is preparing draft legislation for lawmakers to consider, he said.

“We’ll seek to follow the mainstream,” Landberg said. “Bitcoins are not forbidden in the U.S. and the U.K. It is out there and will continue to be out there. It just needs to be regulated. The challenge for us is how to do that.”

To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net; Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net; Christian Wienberg at cwienberg@bloomberg.net

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