The Chinese government announced that it’s pulling the plug on what’s thus far emerged as the most serious use of bitcoins in the world—evading China’s capital control regime.
If you live in the United States (or Canada or Italy or wherever) and you’ve amassed a bunch of wealth in the local currency and decide you’d rather transform some of that wealth into yen or Australian dollars or whatnot, you’re free to do so. China’s more statist economy doesn’t work like that. The ability of yuan-rich savers to turn their money into dollars or other foreign currency is sharply circumscribed. But as is generally the case when you try to ban things, various loopholes and other options of various degrees of legality tend to emerge. Over the past few months, one of the most popular and practical ones has been bitcoin. By using a bitcoin exchange as an intermediary, a Chinese person could sell yuan and a non-Chinese person could buy them.
But this was going on more or less because the Chinese government was letting it go on. Like one of those “tax loopholes” that stays open because members of congress agitate in favor of keeping it open. Now the Chinese government has decided to close it—BTC China, the country’s main exchange won’t be taking any new deposits—and bitcoin prices are tumbling.
Now if this does manage to play out that somehow the technology behind bitcoin is so sound that the PRC government can’t stop people from using it to implement exchange controls, that’ll be interesting (and probably unfortunate—judicious use of capital controls is good policy). But as of this morning it looks like the party is over.