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China Moves to Cool Bitcoin Trade but Heat Lingers

TAIPEI (TheStreet) -- Stateless currency bitcoin is cooling down in China, the world's biggest trading post for the virtual currency. Merchants are reverting to legal tender and shoppers are cashing out after government warnings and restrictions. This reversal from a mid-year bitcoin rage will offer stability but raises questions about what will happen in 2014.

In early December, the People's Bank of China and four government ministries said financial institutions should stop accepting payment in bitcoins, which the government does not consider legal tender. Those who still accept it must gather information on their customers, they said -- apparently in a measure to stop black market trading and other shenanigans.

With bitcoin worth 66 times more this month than at the start of 2013 -- and widely accepted by big-name Chinese merchants -- you'd think it would boil over about now. But the warnings have simply slowed the spending of bitcoins, channeling them into a passive investment alternative to cash for common Chinese people. That is, until further government guidance determines bitcoin's fate in China. Merchants are happy to accept the yuan again, and that's what risk-averse China investors want to see.

Chinese bitcoin users have sold off much of the virtual currency for cash to play it safe since the government warnings on Dec. 5. Merchants have been pulling back to avoid financial regulators' wrath.

Bitcoin prices dropped 35% after China's warnings, the state-run Xinhua News Agency reports. The currency took off in April after China saw film star Jet Li's One Foundation get a donation of several hundred bitcoins.

Holders of the currency -- mainly individuals rather than institutions -- were quick to sell before the price went lower. The urgency to sell grew as some in China speculated that an all-out bitcoin ban would be announced next year.

"Bitcoin, a form of digital e-money stored in a virtual wallet, can pass from person to person around the world in secret, allowing users to remain anonymous," Xinhua said, reflecting the official line. "It bypasses both banks and banking regulators worldwide."

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