The Chinese government has warned banks to follow new regulations, or else face public censure. Over the last several months the Chinese government has been looking to crackdown on Bitcoin, and as a result, Bitcoin prices have plummeted from over $1,000 dollars to less than $500. Bitcoin is a user generated cryptocurrency that is not backed or recognized by any national government.

Bitcoins Fraud

Just last year it looked like the Chinese government might embrace Bitcoin. After all, the crypto-currency offered an alternative to the globally dominant dollar. Problem is, Bitcoin also offered an alternative to the Chinese yuan and given the Chinese government’s ambitions to position the yuan as a global currency, Bitcoin simply didn’t fit into the government’s plans.

Banks must follow regulations

Bitcoin banks will not be required to set up special groups to monitor Bitcoin transactions and follow other tight regulations. Those banks that do not follow the new regulations will face public censure. Already, five of China’s top banks have been admonished for not following the new regulations closely enough.

Meanwhile, BTC China, the country’s largest Bitcoin exchange, was forced to suspend yuan deposits as banks have begun to pull out. Already, China’s largest bank, the Bank of China, has stopped supporting Bitcoin. Several other small banks have also begun to curb support.

Bitcoin used as way to counter inflation

Chinese investors started to flock to Bitcoin because many saw it as a way to fight inflation. Indeed, Bitcoin was initially designed to fight inflation by strictly limiting the flow of new Bitcoins into the market and capping the total number of Bitcoins available to be mined (created) at 21 million coins.

Inflation has been a major problem for China, with the consumer price index often growing in excess of 3% on a yearly basis, and other assets, such as real estate, growing even more quickly. As a result, the yuan will likely by a lot more today than it will a year or two from now.

Many investors have thus been looking for highly liquid investments that can hedge against inflation. Bonds and property can be great for fighting inflation, but are not liquid. Meanwhile, stock markets can be unstable, especially in China were low reporting and accounting standards make investing in local stocks quite the gamble.

Bitcoin seemed to offer a good alternative. Demand from China and a sudden boom in the country’s Bitcoin community sent Bitcoin prices skyrocketing. In the matter of a few months, prices rose from about $200 bucks to a thousand. For better or worse, however, the Chinese government quickly switched from tacit support to outright suspicion of the currency.

Bitcoin’s status remains uncertain around the world

While no government as yet moved to completely outlaw Bitcoin, none have exactly moved to embrace the currency yet either. So far, a cautious wait-and-see approach has been adopted by most countries, though tax authorities, such as the IRS are interested in getting their cut and have generally classified Bitcoin as an investment commodity.

The Department of Defense recently released a report discussing how Bitcoin and other virtual currencies could be used to aid in terrorism. Meanwhile, the on-going Silk Road drug scandal used Bitcoin to support millions of dollars worth of drug trade. While the FBI was able to close the Silk Road down, seizing the millions of dollars worth of Bitcoins has proven to be more difficult.

The ability for Bitcoin to function outside of government control could create rising resentment and suspicion from governments. And if a major government, such as the United States, decides that Bitcoin is a threat to be eliminated there might be little the Bitcoin community could do to prevent the currency’s destruction.