China's central bank barred financial institutions from handlingbitcoin transactions, moving to regulate the virtual currencyafter an 89-fold jump in its value sparked a surge of investorinterest in the country.

Bitcoin plunged more than 20 percent to below $1,000 on theBitStamp Internet exchange after the People's Bank of China said itisn't a currency with “real meaning” and doesn't have the samelegal status. The public is free to participate in Internettransactions provided they take on the risk themselves, itsaid.

The ban reflects concern about the risk the digital currency maypose to China's capital controls and financial stability after asurge in trading this year made the country the world's biggesttrader of bitcoin, according to exchange operator BTC China.Bitcoin's price jumped more than ninefold in the past two monthsalone, prompting former Federal Reserve Chairman Alan Greenspan tocall it a “bubble.”

“The concern is that it interferes with normal monetary policyoperation,” said Hao Hong, head of China research at BocomInternational Holdings Co. in Hong Kong. “It represents anunofficial leakage to the current monetary system and tradesglobally. It is difficult to regulate and could be used for moneylaundering. I think the central bank is right to make thismove.”

Bitcoin prices plunged to $875 at 6:02 p.m. Shanghai time onBitStamp, an Internet-based exchange where the currency is tradedfor dollars, euros, and other currencies. They closed at a recordhigh of $1,132.01 yesterday. On the Mt.Gox exchange, the currencytraded at $901, down from today's high of $1,240. Prices dropped toas low as 4,521.1 yuan on BTC China, after rising as high as 7,050yuan.

Bitcoin Rules

The People's Bank of China said financial institutions andpayment companies can't give pricing in bitcoin, buy and sell thevirtual currency, or insure bitcoin-linked products, according to astatement on the central bank's website.

PBOC, China Banking Regulatory Commission, and other regulatorshave held discussions about drafting rules for trading platformsthat facilitate the buying and selling of the virtual money, twopeople with direct knowledge of the matter said. They were notauthorized to speak because the information is not public.

“We're happy to see the government start regulating the bitcoinexchanges,” Chief Executive Officer Bobby Lee of BTC China, thelargest bitcoin exchange in the country, said in a phone interviewbefore the PBOC announcement. Regulations would be for “the good ofthe consumer,” he said. BTC is seeking recognition of the currencyso it can be used to buy goods and services instead of being usedfor speculation, he said.

New rules for bitcoin may not clarify bitcoin's legal status, asregulators are divided over the issue, the people said. People arefree to trade bitcoin even as China refrains from recognizing it asa currency in the short term, PBOC's Deputy Governor Yi Gang wascited by the 21st Century Business Herald as saying last month.

Bitcoin prices are unsustainably high, and the virtual moneyisn't currency, Greenspan said in a Bloomberg Television interviewfrom Washington yesterday.

“It's a bubble,” said Greenspan. “It has to have intrinsicvalue. You have to really stretch your imagination to infer whatthe intrinsic value of bitcoin is. I haven't been able to do it.Maybe somebody else can.”

A Justice Department official said Nov. 18 bitcoins can be“legal means of exchange” at a U.S. Senate committee hearing,boosting prospects for wider acceptance of the virtual currency.Fed Chairman Ben S. Bernanke told the Senate committee the U.S.central bank has no plans to regulate the currency.

Fraudulent Sites

A local branch of China Telecom Corp. is accepting bitcoins asdeposits for a new Samsung Electronics Co. handset. Phone buyerscan pay 0.1 bitcoin to book a Samsung W2014 mobile phone for pickupstarting Dec. 20, according to a statement posted on the internalwebsite of China Telecom's Jiangsu branch and confirmed by acustomer service representative.

The growth of bitcoin in China has come amid speculation thatregulators may halt trading after police arrested three people onsuspicion of stealing money from investors through a fake onlineexchange.

GBL, a bitcoin trading platform that began operating in May andhad 4,493 registered users at the end of September, abruptly closedon Oct. 26, the official Xinhua News Agency reported Dec. 3.,citing police in eastern Zhejiang privince's Dongyang city.

One investor who reported the case to the police claimed a lossof 90,000 yuan ($14,774), Xinhua reported, saying the total amountof money stolen was unclear. The Hong Kong Standard reported onNov. 11 that investors may have lost as much as 25 million yuanafter the site closed.

Regulators' Concern

There are about 12 million bitcoins in circulation, according toBitcoincharts, a website that tracks activity across variousexchanges. Bitcoin was introduced in 2008 by a programmer or groupof programmers going under the name of Satoshi Nakamoto.

“The scale of the bitcoin market isn't significant enough todisrupt China's financial system, but its growth has been verystrong,” said Peter Pak, head of trading of BOCI Securities Ltd. inHong Kong by phone. “Regulators might be worried that this couldget out of control in one to two years if they don't dosomething.”

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.