Central banks are beginning to issue bitcoin warnings, specifically about the hazards of using a virtual currency with no underlying assets versus a legal currency.
Bitcoin is a digital currency that started four years ago. It is a peer-to-peer electronic cash system that was initially proposed by Satoshi Nakamoto in 2008.
Bitcoin can be sent peer-to-peer online without having to go through any central authority. It operates as online cash and is the first completely decentralized digital payment system.
Chinese and French central banks have warned today of the perils of using bitcoin.
Bitcoin prices more than quadrupled in November.
At the world’s largest Bitcoin exchange, BTC China, bitcoin was trading at $1,213 (7,395 yuan) on December 1st. After the People’s Bank of China (China’s central bank) and the Banque de France made their statements today, prices dropped to $1,000 (6,100 yuan).
Bitcoin warnings – People’s Bank of China
The People’s Bank of China today said that banks and other financial institutions should not provide bitcoin-related business, including collateral business, custody services or deposits. Insurance services are now forbidden in China from dealing with bitcoin-related enterprises. Put simply, China’s central bank has barred all banks, insurance companies and other financial institutions from doing bitcoin-related business.
Investors can still buy and sell bitcoin in China, but at their own risk, the central bank stressed. Authorities in China will require online bitcoin exchanges to register trading records and take necessary measures to prevent money-laundering risks that have been linked to virtual currency transactions.
Experts say it is too early to tell what effect China’s measures and France’s central banks warnings may have on the value of bitcoin. Chinese demand for the virtual currency has increased significantly over the last few months, in parallel to its surge in prices.
China’s central bank says it plans to increase public awareness and education regarding bitcoin business and trading.
Bitcoin warnings – Bank of France
According to the Bank of France, the price of bitcoin in legal currencies is inherently volatile. It added that bitcoin users might find it difficult to cash in their digital currency, i.e. convert them into real money.
The central bank added that bitcoin’s relative anonymity makes it an ideal instrument for money-laundering, the financing of terrorism and other illegal activities.
The Bank of France wrote:
“Even if bitcoin is not currently a credible investment vehicle and therefore does not pose a significant risk to financial stability, it represents a financial risk for those who hold them.”