China has restricted its banks and payment companies from using Bitcoin as a currency. The People’s Bank of China said Thursday in a statement that Chinese financial institutions can’t buy, sell or give pricing in Bitcoin. Chinese authorities said it’s not a currency in the real sense, and poses a threat to the country’s financial stability.


Bitcoin falls after China’s directive

Bitcoin is an untraceable virtual currency. In addition to its widely acceptable uses, it can also be used in illicit transactions such as purchase of drugs and guns, because the buyer remains anonymous. Bitcoins can easily be transmitted electronically or carried on memory sticks. Though there is no official data, experts say China has been a major market for the virtual currency, reports Jonathan Standing of Reuters. Its prices have risen about 10-fold in less than three months. After the PBOC announcement, Bitcoin prices tumbled more than 20%. On Thursday, the virtual currency fell from the intraday peak of $1240 to $901 on the Mt.Gox exchange.

The PBOC said that it was a necessary step aimed at protecting the status of the yuan as the statutory currency. The measure will also prevent the risk of money laundering. The People’s Bank of China’s directive said that Bitcoin is just a virtual commodity that can’t, or shouldn’t, be used as a currency in the marketplace.

Ordinary people can still participate in Bitcoin transactions

The growing acceptance of Bitcoins in the marketplace prompted U.S. federal authorities to argue that it could be brought under the regulatory umbrella in the future. But former Federal Reserve chairman Alan Greenspan called it a bubble. Even Chinese officials had started supporting the legitimacy of virtual currency. PBOC deputy governor Yi Gang said last month that people should participate in the virtual currency market.

Though the People’s Bank of China prohibited financial institutions, it said that the ordinary public is free to participate in Bitcoin transactions at their own risk. Of course, Bitcoin has high speculative risks. It can be traded 24/7 and has a relatively small market.