The Chinese clampdown on bitcoin has taken some of the wind out of a frenzy that has, in recent months, been fuelled by the promise of a new way of using digital money – and left difficult questions for those who just days ago stood at the heart of a booming online trade.
Beijing has barred commercial banks from accepting bitcoin, amid worries about its unstable nature and the ease with which it can be used in illegal activities such as money laundering. Though bitcoin can still be traded like a stock, it has now, in China at least, been officially sidelined – and its value has since fallen nearly 40 per cent.
Perhaps nowhere will the effect be more visible than in a cramped office high in a tower in Shanghai, at the global headquarters of BTC China. This bitcoin exchange has been one of the digital currency's best hopes for vaulting from the fringes into the mainstream. The people here have overseen nearly a third of all global bitcoin transactions in recent weeks, as people flock to convert renminbi. It's a flood of digital trade silently washing through.
For them, the question is: Is the flood receding?
The Chinese move "definitely put a damper on the enthusiasm of the speculators," said Hao Hong, who leads China research at Hong Kong-based Bocom International Holdings Co. Bitcoin will "probably remain as an alternative payment methodology between people." But, "the central bank doesn't want to recognize it because it represents a hole in the current monetary system and makes it difficult to regulate."
That has, for now, put to an end the riotous growth in bitcoin's value – from $13 (U.S.) per bitcoin in January to more than $1,200 by the end of November – that has made it the talk of everyone from U.S. Congress to the "miners" who oversee the bitcoin system, using high-powered computer systems to validate transactions and mint new digital dollars.
Underlying much of the growth has been China, where speculators and early adopters latched on to an open new form of money in a country with stringent foreign currency restrictions.
China has seemed like the place bitcoin might gain real ground. Baidu, the Chinese equivalent of Google, had begun accepting bitcoin for some transactions. A subsidiary of state-controlled China Telecom did the same, which seemed to suggest an official sanction.
But Baidu has closed its bitcoin window, and the digital currency faces a less certain future. Bitcoin is digital money that can flow online from person to person with no need for banks or other intermediaries. Transactions are overseen, or "mined," by a network of computers that solve complex equations in order to validate those transactions. It is a limited-supply currency that is largely anonymous, and is both easy and cheap to move around.
But unlike cash, it's not backed by a government, a fact that lies at the root of its current problems, as governments – whose monetary controls are often a reflection of broader political policy – struggle with what to do about the digital currency's growing popularity.
On the other side of that struggle are the bitcoin owners, traders and dreamers – and that small office in Shanghai that has, until recently, been a haven of optimism.
"You are in the world's largest bitcoin exchange," says Bobby Lee, speaking hours before the Chinese announcement. "This is like the New York Stock Exchange. This is it."
As BTC's chief executive, Mr. Lee is in a singular position to watch the fortunes – and future – of bitcoin. He is convinced bitcoin is an "unstoppable force" that will, whether it's in two years or five or 10, find its way into a good chunk of the world's digital wallets.
"Bitcoin today is so revolutionary, so wide of a field. It's just like the Internet was 20 years ago," he said. "Imagine if bitcoin is interwoven into every aspect of our lives, just like the internet is today. … Bitcoin is going to revolutionize finance and payments, revolutionize the concept of personal and private money. There's so much to be done, the sky is the limit."
The exchange is just a beginning, he said. He believes bitcoin could one day become a paper currency, for example. "We plan to build a full-scale bitcoin company." Google, after all, "started out as search. Today it's much more than that."
If more governments do not follow in China's steps – if bitcoin does not fade from view as fast as it has risen – there is little question the ground is fertile.
"There are many services that could be required. We're building out a whole new financial infrastructure, after all," Mike Hearn, a leader in the bitcoin community, said in an e-mail.
But Beijing's actions have highlighted what some see as a pressing demand for bitcoin to move out from its back alley roots in the online sale of drugs and arms. "A big part of the bitcoin community, if it's anarchist or libertarian – I don't know the right tag – but it's certainly not made up of conventional followers of the government," said Jean-Jacques Cabou, a lawyer with U.S. firm Perkins Coie, who has worked with bitcoin companies.
But even after last week's crash, the world's stores of bitcoin are worth nearly $9-billion, meaning it's now on a very different stage. "One of the things companies really need to address is how does bitcoin interact with regulators?" That's true, too, for people who might want to use bitcoin themselves: "there aren't that many people who are really comfortable living outside the law," Mr. Cabou said.