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."
China has not declared bitcoins illegal, however. The December warnings are still floating around as one of the country's fabled trial balloons to gauge public reactions.
The government wants to cool the bitcoin trade to forestall an unmanageable middle-class black market. China struggles already with too many other such rackets, from brand knockoffs sold in premier tourist districts to widespread graft. At the same time, authorities want to cool bitcoin without impacting upon prices, spending or domestic investment, any of which could sag if bitcoin transactions suddenly stopped cold.
Foreign merchants that have entered China but play by more conservative international rules should welcome the limits on bitcoin -- especially if China manages to restrict bitcoin without economic fallout. Plus, local peers such as Internet content provider Baidu (BIDU) and national carrier China Telecom (CHA) may disappoint consumers by cutting off their trade in the virtual currency.
However, the reduced trade in bitcoins could be simply Chinese investors waiting to see what's next. They're still ravenous for news about bitcoin and in some cases are holding onto their stashes as an investment until the government makes its ambitions more clear.
But the exchange issue is still a sensitive one. "Although the guidance didn't specifically state that bitcoin could not be exchanged for goods and services, Chinese companies accepting bitcoin were clearly shaken and decided to play it safe," Denver-based consultancy Digital Currency Research said on its blog Dec. 19.
Digital Currency Research continued, "It does not appear that the announcement will affect bitcoin's use as a store of value and a means to skirt strict capital controls for the Chinese people, and the exchange rate has begun a volatile climb higher since the news."
At the time of publication the author had no position in any of the stocks mentioned.
Ralph Jennings is on LinkedIn.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.