Several questions come to mind as the Chinese government responds to the reality of Bitcoin. http://www.cnbc.com/id/101281272. One question is what exactly is China trying to accomplish by ordering third-party payment providers to cease using virtual currency?  The answer to that question remains unclear; however, if the goal is to put Bitcoin exchanges out of business in China, the newly announced policies could very well do so.  If that is not the goal of the Chinese government, then the policy that forbids “custody, trading and other services,” related to virtual currency is certainly an overly broad brush that seeks, perhaps, to remedy a more discrete and narrow concern.

Of course, it will be virtually impossible to ban the underlying technology that supports Bitcoin and other virtual currencies.  So then, what might this arguably aggressive Chinese stance accomplish?  Well, overly aggressive regulation can only serve to drive legitimate Bitcoin players out of the market and leave what’s left of the market to operate in the underground netherworld inhabited by money launderers and other criminals.

Perhaps, China is intimidated by the fear or perception that some Chinese may be utilizing Bitcoin as a mechanism to move yuan out of China.  However, broad-brush policies might only serve to accelerate such a process and ultimately have little effect on those intent on moving yuan out of the country, driving the process of moving yuan out of the country to the Deep Web.

Is it possible that China has put the brakes on Bitcoin only temporarily as the government studies the appropriate regulatory mechanisms to put into place?  It’s possible.  However, such an approach is likely to prove ill-considered, as the current policy endangers the current investments already made by current Bitcoin operators.  Furthermore, such a policy does not encourage new investment into Chinese Bitcoin operators.