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China places restrictions on Bitcoin

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China announced on Thursday that Bitcoin will restrict banks in its use of it as currency, due to concerns about money laundering and the concern to financial stability, reports the N.Y. Times.

The notice curtailing financial institutions’ involvement with Bitcoin was issued by the People’s Bank of China and four other ministries and agencies, and the directive said the step was needed to 'protect the status of the renminbi as the statutory currency, prevent risks of money laundering and protect financial stability.'

Computer transactions have grown faster in China than use in the U.S. and Western Europe. Tracking of Bitcoin can be done on a website set up by Andrew Hodel, ‘Fiatleak’.

China lists the virtual currency as a commodity not backed by anything of material value and it does not have legal status.

Last month the US Homeland Security and Governmental Affairs Senate Committee held a hearing on Bitcoin. It was acknowledged as a virtual currency but representatives of the FBI and the Dept. of Treasury warned of the potential for money laundering and other criminal activity associated with such networks.

Bitcoin after the Senate hearing on Nov.18 did propel over $1000 and is currently at $1100 on the Mt.Gox exchange, which handles Bitcoin trading online.

Bitcoin appeared in 2009 on the Internet as a release by an anonymous programmer or several people under the name, Satoshi Nakamoto. It is an open source program, so no one owns it. Part of the attraction to it is that the value of the currency is limited to a maximum of 21 million units that can be created. Investors bid up the price as demand grows.

Alan Greenspan told Bloomberg today in an interview: 'There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual'.

Bitcoins are produced on the internet by Bitcoin miners who use an algorithm set up by Nakamoto. A miner collects transactions from the network, validates them and does not allow conflicting ones, places them into large bundles called blocks, computes cryptographic hashes over and over until one is ‘good to count’ and finally submits the block to the network. The commission is paid in Bitcoin to the miner.

China’s central bank released the following statement on Thursday as to why its banks would not be able to treat it as currency:

Bitcoins possess “quite high speculative risks,” because of the relatively small market and 24-hour trading, with no curbs on market declines. It said: “The price can be easily controlled by speculators, creating severe turbulence and huge risks. Ordinary investors who blindly follow the crowd can easily suffer major losses.”

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