Although primarily a digital currency, some physical bitcoins have also been produced.IBTimes UK

When Chinese New Year takes place on 31 January the country's bitcoin users may have little to celebrate, as restrictions announced a month earlier come into force with the potential to cripple crypto-currency use.

News spread in December that China's Central Bank would soon prevent financial institutions and payment processing companies from handling bitcoin, effectively outlawing the exchanges used to convert local currency yuan into bitcoins, and visa versa.

Absolute clarification on where this leaves China's bitcoin businesses is difficult to come by, but that hasn't stopped bitcoin forums and conferences the world over expressing panic and confusion.

Some bitcoin owners claim nothing will change, while others predict 31 January will mark the end of bitcoin, with any coins in China permanently locked behind a central bank-controlled firewall.

China 'sent chills through the bitcoin ecosystem'

Serial entrepreneur Malcolm Casselle, who has operated businesses in China, told IBTimes UK: "The rumor to date has been that moving money into and out of a bank account for a [bitcoin] exchange is basically a no-no. Some exchanges have already implemented compliance and some are ignoring it.

"The ones ignoring it are at risk for a number of reasons but the main one is tax. Basically there is no legal way to move money in and out of a corporate account without a tax liability much greater than the cost of doing transactions."

Casselle added: "And using a personal account is a bigger liability even though all exchanges started out that way."

Speaking at the North American Bitcoin Conference in Miami this month, Casselle said the Chinese government's action "sent a chill through the bitcoin ecosystem."

Bitcoin crash

Indeed, when news of China's upcoming regulatory changes emerged in mid-December the value of bitcoin crashed by almost 50% from a high of over $1,000 (£600) to around $500 in a matter of days. BTC China, the world's largest bitcoin exchange, stopped accepting bank deposits from its users, causing further panic.

At the time, BTC China chief executive Bobby Lee said: "We've suspended customer deposits. It is unfortunate but we apologise for that inconvenience. We think this is due to government regulation. We have to play by the rules of the government of China. It is what it is."

The temporary closure was due to payment processing companies severing ties with bitcoin exchanges for fear of reprimand by the central bank.

BTC China: Open for business

On 30 January, one day before the restrictions come into affect, BTC China started accepting bank deposits once again. Lee told CoinDesk: "We looked again at the guidance issued in December and we think it's reasonable for us to accept customer deposits via our corporate bank account."

But the circumstances could still change, and the Chinese government could "change the rules of the game," enforcing stricter policies, Lee said. For now, he believes his business is doing nothing wrong.

Licenses on a case-by-case basis

Casselle believes China will establish a regulatory system whereby exchanges can be granted licenses to operate. "When China establishes a regulatory for bitcoin, likely only the three big players will be granted licenses, with other licenses being granted on a case-by-case basis."

Meanwhile, members of the BitcoinTalk forum have expressed fear over the potential closure of Chinese exchanges, with hundreds of posts gaining tens of thousands of views from the crypto-currency community.

One forum member, using the name 'Bitcoinlitcoinbtcltc' said that after 31 January, "Chinese can no longer do anything related to bitcoins. They can not withdraw money from Chinese exchanges. So the bitcoins they have on Chinese exchanges are 'dead'. They can not trade those bitcoins in for real money, or withdraw that money. It's like that money doesn't exist anymore."

This doomsday scenario was echoed by another used called 'Proudhon', who has contributed to the forum for three years. The user said bitcoin's fall from $1,200 to its current level of around $900 will "continue until bitcoins are worth $0."

Much of Proudhon's comments from "confirmed sources" have been dismissed by other forum users, but the sense of unknowing shared across the community is hard to ignore.

Don't panic

This doubt was made crystal clear when, during Casselle's talk in Miami, an alarmed audience member from Shanghai stood up and said, if reports of China's bitcoin ban are true, he will tweet about it, and "if I tweet, the price is going to drop."

An awkward silence followed, before Casselle said this is all speculation at the moment, adding: "Nothing is confirmed so please don't be alarmed at this point."

That audience member's tweet may not have gone far, but a massive price drop is something bitcoin investors are all too familiar with - and given the currency's recent stability, added to suggestions of positive regulation changes in the US and UK, a crash is something bitcoin is desperate to avoid.