The People's Bank of China (PBOC) has announced a ban on financial institutions handling Bitcoin transactions. The central bank declared that Bitcoin was a currency without “real meaning.” The move comes shortly after China became the world's largest trader of the virtual currency.
As China moves to restrict the use of Bitcoins here are three reasons why governments are running scared of the private currency.
1. Challenge to government monopoly on money
Bitcoin is a peer-to-peer currency with no central bank. The cryptocurrency is challenging the contemporary landscape of how money works. As Bitcoin gains popularity and other projects mirror its example citizens may begin turning to private alternatives instead of state backed currencies. Bitcoin cannot be taxed and can move across borders with only minimal transfer fees.
Many features of Bitcoin mirror gold in that it is scarce and fungible. Some have gone so far as to label Bitcoin "gold 2.0." Satoshi Nakamoto, Bitcoins mysterious inventor said the problem with conventional currency "is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."
The digital currency is untraceable unlike third party payment systems such as PayPal. The virtual currency allows its users to trade with each other all over the world without the fear of being watched by government authorities. Government officials fear that this anonymity will lead to a spike in purchases of illegal goods such as drugs.
3. Money laundering
One of the primary reasons for the PBOC's decision was to prevent money laundering. The PBOC said in a statement "it is extremely difficult to monitor capital flows and can facilitate money laundering and terrorist activities." The Chinese central bank provided no evidence of either taking place amongst Chinese Bitcoin users.
The PBOC confirmed that individuals will be free to use Bitcoin but will assume certain risks.