Bitcoin Drops as China to Denmark Seek to Control Digital Money

Bitcoin Drops as China to Denmark Seek to Control Digital Money

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.

“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.”

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

Bitcoin Rules Drafted in Denmark as Regulator Warns Against Use

Denmark is readying rules to protect consumers from risks associated with virtual currencies such as Bitcoins after the regulator said 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.”

More and more nations are taking an official stance on virtual currencies that aren’t controlled by any government or central bank. Norway’s tax department said this month it won’t recognize Bitcoins as legal tender and will impose a capital gains tax. Since their introduction in 2008, Bitcoins have spread rapidly, with about 12 million in circulation, according to Bitcoincharts. They’re now used to pay for everything from hand-made rugs to window cleaning.

“There are clearly issues that need to be solved on the use of Bitcoins,”Benny Engelbrecht, spokesman for the ruling Social Democrats on the parliament committee overseeing financial regulation, said in an interview. “There’s clearly a need to regulate Bitcoins and other virtual currencies; it’s not something we can do on our own. It has to be done on the European level and globally.”

Mainstream View

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.”

The watchdog had explored the option of placing virtual currencies under regulatory categories including payment services and electronic money, distribution of funds, securities, financial business and even money laundering, none of which proved viable, Landberg said.

Because Denmark’s FSA doesn’t currently have the legal authority to prevent trade using Bitcoins, it was unable to stop an entity from “establishing itself in this country with the intention of operating a company that exchanges real currencies against so-called virtual currencies, among others, Bitcoins,” the regulator said yesterday, without identifying the firm.

Positive Finding

Lasse Birk Olesen, who tapped his personal savings to start Copenhagen-based Bitcoin Nordic, says entities seeking to trade in virtual currencies will benefit from yesterday’s FSA finding.

“We looked into the rules and the conclusion we came to was that our business would not be financially regulated,” he said by phone. “This is overall positive.”

The FSA’s decision also means that “entrepreneurs and investors know what they’re dealing with,” Olesen said. “It is no longer a gray area where you put your money and resources and time into and you’re not sure whether what you’re doing is entirely legal. Now we know what we’re dealing with.”

The European Banking Authority on Dec. 13 released a warning on the risks of using unregulated digital money that is susceptible to hackers.

Bitcoin Risks

“Cases have been reported of consumers losing significant amounts of virtual currency with little prospect of having it returned,” the EBA said. “When using virtual currency for commercial transactions, consumers are not protected by any refund rights under EU law.”

The price of Bitcoins has topped $1,000 this year, compared with about $12 a year ago, according to Mt. Gox, an online exchange dealing in Bitcoins.

Introduced five years ago by a programmer, or group of programmers, going under the name of Satoshi Nakamoto, Bitcoins can potentially reduce banking-transaction fees, making it an attractive option for trading via the Web or in stores.

The EBA listed among Bitcoins’ weaknesses a susceptibility to being used in crime.

Bitcoin supporters say they welcome clarity on how to treat virtual currencies.

“Denmark is still in a vacuum on whether Bitcoins should be treated as goods or as a currency or as a share,” Pascal Mikkelsen, chairman of the Danish Bitcoin Association, said in an interview. “We expect there still to be confusion for some time now because politicians and the government aren’t in a position to make a decision on something they don’t understand.”

To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net; Peter Levring in Copenhagen at plevring1@bloomberg.net

China Bans Payment Companies From Clearing Bitcoin, News Says

Chinese central bank officials told third-party payment service providers to stop offering clearing services to online Bitcoin exchanges, according to China Business News, which is affiliated with the Shanghai government.

Companies currently offering services must end services by the Chinese New Year, a weeklong holiday that begins on Jan. 31, the newspaper cited Zhou Jinhuang, deputy director of payment clearance at the People’s Bank of China, as saying at a meeting with more than 10 third-party payment service providers.

China’s central bank regulated the virtual currency for the first time on Dec. 5 by banning financial institutions and payment providers from conducting transactions in the virtual currency. Zhou was cited as saying by China Business News that the rules would be “strictly enforced.”

“The PBOC statement on Dec. 5 was somewhat vague and there is more clarity now,” Zennon Kapron, managing director of financial consultancy Kapronasia, said in an interview in Shanghai. “The way it’s reading now is that after the Chinese New Year, you won’t be able to get your money off the platforms.”

The PBOC’s news department didn’t immediately comment on the Bitcoin report when contacted by Bloomberg News. Two calls to Li Yue, director general of the central bank’s payment and settlement department, were unanswered.

Bank Ban

Bitcoin prices on BTC China, China’s largest exchange, plunged to as low as 3,251 yuan ($535) today before rebounding to 4,155 yuan at 4:16 p.m. local time. The drop in prices was triggered by concern that PBOC officials may visit lenders next to enforce the ban against Bitcoin settlement, Kapron said. The number of banks and payment providers that can transact Bitcoin has shrunk since the ban was announced, he said.

Bitcoin prices on the CoinDesk index jumped as much as 11 times since October, prompting former Federal Reserve Chairman Alan Greenspan to call the market a “bubble.”

Speculation that authorities in China may halt trading in Bitcoin surfaced after police arrested three people on suspicion of stealing money from investors through a fake online exchange.

GBL, a Bitcoin trading platform in China that began operating in May and had 4,493 registered users at the end of September, abruptly closed on Oct. 26, the official Xinhua News Agency reported Dec. 3., citing police in eastern Zhejiang privince’s Dongyang city.

To contact Bloomberg News staff for this story: Gregory Turk in Shanghai at gturk2@bloomberg.net

China’s Biggest Bitcoin Exchange Unable to Take New Deposits

BTC China, China’s largest Bitcoin operator, can no longer accept new deposits, according to Bobby Lee, its chief executive officer.

YeePay, a third-party payment provider, gave notice today to BTC China that it would no longer provide deposit services, Lee said in a phone interview. Withdrawals are unaffected, according to BTC China’s official microblog. Bitcoin prices fell as much as 35 percent from today’s high after the announcement.

Lee’s comments came less than two weeks after China’s central bank barred financial institutions and payment companies from handling Bitcoin transactions. The ban reflects concern about the risk the digital currency may pose to China’s capital controls and financial stability after a surge in trading this year made the country the world’s biggest trader of Bitcoin, according to BTC China.

“We’ve suspended customer deposits,” Lee said. “It is unfortunate but we apologize for that inconvenience. We think this is due to government regulation. We have to play by the rules of the government of China.”

Chinese central bank officials told third-party payment service providers to stop offering clearing services to online Bitcoin exchanges, China Business News reported yesterday. The newspaper is affiliated with the Shanghai government,

Companies currently offering services must end them by the Chinese New Year, a weeklong holiday that begins on Jan. 31, the newspaper cited Zhou Jinhuang, deputy director of payment clearance at the People’s Bank of China, as saying at a meeting with more than 10 third-party payment service providers.

Prices Plunge

TenPay, another payment provider owned by Tencent Holdings Ltd. (700), earlier halted service with BTC China by “mutual agreement,” Lee said today. People can’t transfer money into BTC China any more, said an YeePay employee who answered the company’s customer service hotline, declining to give her name.

“Nobody can put more money into BTC China for now,” Lee said.

Bitcoin prices fell to as low as 2,551 yuan after BTC China posted a notice on its microblog about the payment service stoppage at 12:35 p.m. Bitcoin, whch traded as high as 3,918 yuan this morning, was at 2,780 yuan as of 4:31 p.m.

PBOC said on Dec. 5 that financial institutions and payment companies can’t give pricing in Bitcoin, buy and sell the virtual currency or insure Bitcoin-linked products.

“The PBOC statement on Dec. 5 was somewhat vague and there is more clarity now,” Zennon Kapron, managing director of financial consultancy Kapronasia, said in an interview yesterday in Shanghai. “The way it’s reading now is that after the Chinese New Year, you won’t be able to get your money off the platforms.”

Bitcoin Bubble

Bitcoin prices on the CoinDesk index have jumped as much as 11-fold since October, prompting former Federal Reserve Chairman Alan Greenspan to call the market a “bubble.”

Speculation that authorities in China may halt trading in Bitcoin surfaced after police arrested three people on suspicion of stealing money from investors through a fake online exchange.

GBL, a Bitcoin trading platform in China that began operating in May and had 4,493 registered users at the end of September, abruptly closed on Oct. 26, the official Xinhua News Agency reported Dec. 3., citing police in eastern Zhejiang privince’s Dongyang city.

To contact Bloomberg News staff for this story: Gregory Turk in Shanghai at gturk2@bloomberg.net

How Much Does that Burger Cost in Bitcoins?

The digital scrip doesn’t meet the requirements to be a real currency.

BRIAN WESBURY

Dec. 15, 2013 6:33 p.m. ET

In the 1930s, when the Federal Reserve let the money supply contract, there was a true shortage of currency. At least 150 communities experimented with scrip—printing their own money to grease the wheels of commerce. None worked, and all have disappeared.

Today, because of worries about the Fed printing too much money, a private online global scrip, called Bitcoin, has been created. This scrip is supposed to protect society from inflationary monetary policy.

Could Bitcoins become an alternative to the money or monies that exist across the globe? One of the biggest investors in Bitcoins thinks so. The Winklevoss twins, of FacebookFB -0.09% fame, think the market for Bitcoins could increase 100-fold to more than $400 billion. And a Costa Mesa, Calif., luxury car dealer is reportedly selling cars, including a Tesla S and a Lamborghini Gallardo, for Bitcoins.

Bitcoins are “mined” by running a computer algorithm, creating a digitized code. That code can then be used to complete online transactions. The algorithm makes it progressively harder to mine Bitcoins as the total number increases. Preset limits supposedly cap the maximum number of Bitcoins at 21 million, and right now there are roughly 12 million in existence. Rising hope of wider acceptance drove the price of a Bitcoin to more than $1,200 a few weeks ago. But when Baidu.com, BIDU -1.29% the Chinese web services company, said it would not accept the scrip, the price fell sharply and it currently trades near $900.

Bitcoins meet most of the criteria of money. They are a medium of exchange, a unit of account, a store of value and a standard of deferred payment. But what ultimately gives money value is that it is accepted by others in trade for something of value. And that is why scrip doesn’t work.

Let’s say a barber in a Wisconsin town accepts scrip for haircuts and uses it to eat at a local restaurant that buys its produce from a local farmer. As long as each of these businesses kept all their purchases in the community, all would be well. But why would a scissor manufacturer in Germany or China or even Chicago accept this scrip? The car dealer in California, for example, is not actually accepting Bitcoins for his vehicles—they first have to be converted to U.S. dollars.

To become a true alternative currency, Bitcoins need to be accepted in a wide enough swath of society to facilitate the normal transaction of business. If they aren’t, they will always trade at a discount to their potential value.

Right now, total cash and deposits in the U.S. banking system (the M2 money supply), is roughly $11 trillion. Assuming 21 million Bitcoins are mined and they become an accepted currency, each one could be worth as much as $524,000. This is a massive potential appreciation from their current level.

However, the list of companies that accept Bitcoin as payment for actual transactions make up what I estimate to be less than one-hundredth of a percent of all spending, or GDP. Since money gets its value from the goods, services and assets that it can purchase, a Bitcoin is currently worth only 0.01% of its true potential, or about $52.40.

Bitcoins require storage space (in a computer), power to run the computer (electricity), security (from hacking), and computational power (serious encryption) on both sides of a transaction. There are firms that act as middlemen in Bitcoin transactions, and firms that make a market in Bitcoins, but they are new and have no serious financial track record. Many Bitcoin transactions facilitate illegal commerce. The Bitcoin world is not friction-free, or clean.

And is it really true that no more than 21 million Bitcoins can be produced? Hackers keep getting better, and the temptation to expand the supply of money has been powerful (and profitable, for the issuer) since the time of the Romans. These costs and questions all impact the value of a Bitcoin substantially.

To become a real alternative currency, Bitcoins must be recognized by a majority of businesses and consumers. They must be as safe, or safer, than currency issued by a central bank. And they must be transportable. Currently, the Bitcoin does not meet any of these requirements, and this is why it is trading for much less than its actual convertible U.S. dollar value.

If you believe Bitcoin in time will become an alternative to the world’s currencies, there are huge potential profits as the value of a Bitcoin rises to $524,000—or higher if drug dealers and other nefarious users are willing to pay a premium for anonymity.

But to be truly successful, Bitcoins have to win the battle of money on all levels of competition and that is a very high hurdle to clear.

Mr. Wesbury is chief economist at First Trust Advisors LP.