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Bitcoin vs Assets
Bitcoin to Yuan
China is at the forefront in the Bitcoin market as its citizens have become leading traders and miners of the cryptocurrency.
Bitcoin is known for its volatility, but that doesn’t stop people trading it. Transaction volumes continue to see exponential growth.
At the time of writing this article, Bitcoin price is at an all time high – $1179 per apiece.
I like how Duan, VP of Beijing-based OKCoin Co., one of the country’s biggest Bitcoin exchanges, puts it – “Talking about the impact of digital money now is like trying to predict how the Internet would transform lives in the 1980s,”
“We know it’s going to be huge. It has the potential to change the entire economic infrastructure. We’re just not sure about when and how.”
Bitcoin in China and Hong Kong
- 1 $ 0.00
- 2 Bitcoin in China and Hong Kong
- 3 Bitcoin Market in HK continue to slip away
- 4 Hong Kong Exchange to Implement Blockchain
- 5 Global Blockchain Business Council (A step in the right direction)
- 6 China’s Five-year Financial Regulation Plan
- 7 Bitcoin Exchanges Freeze Withdrawals
- 8 Why the Chinese government is going after these Bitcoin exchanges?
- 9 Xotto: Blockchain Version of the Famous Hong Kong Mark Six Lottery
- 10 Bitcoin Mining in China
- 11 Buy Bitcoin in China and Hong Kong
- 12 Conclusion
A couple of years ago, the head of the People’s Bank of China (PBoC) made an analogy saying that to the Chinese government, Bitcoin is essentially like buying and selling rare stamps. The same is the case in Hong Kong.
Now the times have changed. PBoC is recognizing the potential of digital currency and has gotten involved with Bitcoin exchanges in China and HK as we will see further in this article.
Although Bitcoin is unregulated, but some of things that people want to do with Bitcoins are regulated.
For example, if I were to use Bitcoin to sell drugs, I’d get in a lot of trouble, but if I am using Bitcoin for money transmissions, then I will need to get proper licenses.
It is important to understand that Mainland China does not consider Bitcoin as a currency. What it means is that Bitcoin is not subject to the regulations involving currency possession.
Mainland China has capital controls. Moving money out using Bitcoin is subject to capital control regulations.
In Mainland China, banks are forbidden from trading Bitcoins, and payment processors cannot use Bitcoin. All the Bitcoin exchanges are subject to the same internet censorship and licensing restrictions which are enforced by the Ministry of Industry and Information Technology.
Exchanges are also required to get people’s real identities, oddly this is not enforced by the banking authorities but the internet control authorities, that says, “all Mainland Chinese websites are required to record and verify people’s real names and identities.”
In China, no matter what your business is, the government maintains a general level of control over all businesses. So if you run a business in China, it is in your interest to maintain good relations with the local government. When they ask you to do something, you can’t really say no.
Hong Kong’s situation is slightly different than that of China. In order to trade Bitcoin, a bank has to have the permission of the Hong Kong Monetary Authority (HKMA). HKMA does not ban any bank from trading Bitcoins, but shockingly, no bank has asked for permission because the answer will likely be ‘no’. Weird.
Hong Kong goes so far to make it harder for companies involved in Bitcoin to open bank accounts, even though there is no formal ruling for this.
Up until two years ago it was widely believed that HK has fallen behind in the fintech race. Experts said if Hong Kong needs to be at the forefront of the fintech revolution, they need to increase the adoption of Bitcoin and blockchain technologies to keep up with the other financial capitals of the world.
The Bitcoin adoption will only occur once there are enough use cases for everyday consumers to consider it a valid payment method.
In 2015, when Starbucks took a plunge at this and embraced Bitcoin in HK. They not only started accepting Bitcoins at the coffeehouse as payments, but also disbursed employee’s salaries in Bitcoins too.
However the reality was a bit different. It was found that the Starbucks’ staff was refusing to accept digital currency payments. Sure, this news was tiny as compared to the Bitcoin adoption around the world, but it certainly revealed how the China’s special administrative region (Hong Kong) was lagging behind the world in terms of FinTech adoption.
Hong Kong Applied Science and Technology Research Institute (ASTRI) went so far to say, many financial institutions in the region still don’t understand Bitcoin’s underlying technology.
Hong Kong doesn’t want to lose the title of being one of the financial powerhouses in the world and finally after two years, HK started to act (or it at least looks like it).
HK’s regulators went on record to say that blockchain can curb money laundering and can help ensure proper implementation of AML and KYC regulations by the banks.
Bitcoin and Blockchain go hand in hand, but for some reason Bitcoin is not a favorite among banks and regulators. Its underlying blockchain technology receives a much favorable view. As per the regulators in Hong Kong, the Bitcoin’s underlying technology can genuinely help curb money laundering issues.
Benedicte Nolens, the head of risk and strategy for the Hong Kong Securities and Futures Commission has voiced her opinion about the distributed ledger technology at the MIT Technology Review Emtech Conference saying –
“I do think quite obviously KYC and AML stands out there as a pretty significant inefficiency and problem case. If you start tallying up the fines, that banks have been subjected to globally for this field, you’re into the 10 billion or more of US dollars,”
She is convinced that blockchain can be applied to banks and financial institutions in places where solutions to the problems are clear.
Interestingly, her view comes at the time when Mainland China, as well as Hong Kong, are opening up to the implementation and use of blockchain technology in banking and financial sectors.
Last year, Hong Kong’s Steering Group on Financial Technology had explained how blockchain technology can be integrated into local financial services industry to make it faster, secure and more economical. The People’s Bank of China also has expressed its interest in the use of blockchain and digital currencies at the same time.
Many international banking majors are already part of the banking consortium led by R3 to develop blockchain based solutions for the banking industry.
Notably, Santander Bank said blockchain technology in the banking industry will allow banks to cut their operating costs by millions of dollars.
Looking at what leading decision makers have to say about blockchain, it is clear that financial world is sold to blockchain technology.
Bitcoin Market in HK continue to slip away
According to a recent report by South China Morning Post, Bitcoin businesses are slowly dying in the region.
Once Hong Kong was considered the place to be if you wanted to start a business on cryptocurrencies, but now experts believe that existing laws in both China and Hong Kong aren’t maintaining the technology’s pace.
A lot of entrepreneurs from around the world had flocked to HK to escape the heavy-handed Bitcoin regulations in their countries, only to find themselves in a situation that they were trying to get away from in the first place.
The absence of clear cryptocurrency regulations have lead to various government bodies come up with their own sets of conflicting rules and regulations. Entrepreneurs and investors are not anymore confident about the situation in HK.
They have called for regulators to come together and draft unified regulations which can spare Bitcoin businesses from all the confusion.
The president of the Bitcoin Association of Hong Kong, Leo Weese says, “I think regulators should be less risk averse, it is not their obligation to shield the Hong Kong economy from people losing money or other negative things.”
Country’s banking sector is also to be blamed for not extending its services to Bitcoin and fintech businesses. As I mentioned earlier, businesses that deal with cryptocurrencies find it difficult to open bank accounts in HK leading to mismanagement of their finances.
The co-founder of Bitspark, a remittance platform, George Harrap says, “the banks in Hong Kong don’t consider the compliance requirements, existing licenses or operation history before refusing service to Bitcoin and fintech companies.”
However, the bureaucrats have a different story to tell. They believe that Bitcoin has been overshadowed by the advances in blockchain technology and its applications. To put it simply, according to them, blockchain is good and Bitcoin is bad, which actually makes little sense.
Sure, banks and exchanges in a lot of countries are looking at blockchain as a revolutionary technology. Hong’s Central Bank last year said: Blockchain Holds ‘Enormous Potential’ and Hong Kong stock exchange is already looking to implement blockchain (see next section).
With all this confusion businesses are finding Singapore to be a much better option for Bitcoin operations. If this wasn’t enough ‘Bitfinex hack’ only added fuel to the fire.
Either way, the current situation will likely impact Hong Kong’s standing as one Asia’s leading financial hubs.
Last year in August, Hong Kong-based digital currency exchange, Bitfinex, reported the theft of about US$65.8 million worth of Bitcoins.
Bitfinex is one of the largest Bitcoin exchanges, and is known for having a platform that has deep liquidity in the USD/BTC currency pair.
In an unfortunate event the exchange saw second largest security breach ever of such an exchange (behind MtGox hack) – leading to 119,756 Bitcoin (0.75 percent of all bitcoin in circulation) stolen from users’ accounts.
Zane Tackett, Director of Community & Product Development said, “The bitcoin was stolen from users’ segregated wallets,”
This sent shockwaves around with every other news organization reporting the hack. Needless to say, Bitcoin price took a big hit as a result. It plunged just over 23 percent after the news broke.
Tackett added that the breach did not “expose any weaknesses in the security of a blockchain”
It is still not clear whether the hack was an inside job or hackers were able to gain access to the system externally.
Bitfinex soon after suspended trading to further investigate the matter with authorities.
The exchange also said as it goes through individual customer losses, all settlements will be at the market price after time hack was reported.
Hong Kong Exchange to Implement Blockchain
The Stock Exchange of Hong Kong (SEHK) is considering blockchain for their next generation transaction settlement system.
SEHK Chief Executive, Charles Li said that, in addition to retooling its trading platforms, SEHK is looking for options for upgrading its post trade system as well.
According to Li, it would take three to four years for the system to be implemented, during which the exchange would seek to both cut costs and reduce risk across its operations.
As a part of that process, SEHK is considering blockchain for possible use.
Li further went on to say, “In 2016 we started to look at the role new technologies (such as cloud computing and distributed ledger) can play in our future development and this will continue in 2017 when we will determine our NextGen roadmap.”
SEHK has already been in talks with New York based NASDAQ exchange concerning the blockchain technology.
As per the President and Chief Operating Officer Adena Friedman, the Nasdaq stock market is hoping to bring its blockchain technology to the Hong Kong Stock Exchange.
There are numerous benefits of using blockchain technology for any stock exchange. Blockchain records a transaction in such a way that prevents duplication (aka double spending problem). It also lowers the risk of frauds, for instance, logged entries cannot subsequently be rewritten or the dates changed.
The Hong Kong Monetary Authority (HKMA) has already launched an innovation hub that will test blockchain and distributed ledger solutions. It aims to spur banks to embrace technology to make financial transactions safer, speedier and more convenient for consumers.
“Our technology allows them to grow and leverage blockchain if they choose to. The [Hong Kong markets] can use ours or they can use someone else’s – we’re agnostic to that in terms of how the technology is created.” Friedman added.
Apparently, it is not only SEHK that is going after blockchain technology, a dozen of other world trading platforms has shown an interest in blockchain, including the Australian Securities Exchange (ASX), South Korean Stock Exchange, London Stock Exchange, Japan Exchange Group and Nasdaq.
Particularly, ASX believes that the need for the clearing system may largely disappear with the implementation of blockchain.
What could this mean for startups and angel investing
The stock exchanges are extremely good at implementing new technologies and they know how to make them work. You can buy or sell shares in seconds without running into any issues.
As of now Hong Kong is trying take back its lost crown of being a startup hub. It wants to be a place where any startup in the world can come in order to get funding, but there are too many inefficiencies in the startup investing system because no office is automated.
Here is the situation right now, if you manage to convince a group of investors to invest in your startup, it can take weeks just to do the paperwork. Worse is, if suppose one angel wants to transfer their shares or debt to another angel, that too can take days. In the end, you must fill out the forms and keep track of what you’ve promised to whom – nothing short of a nightmare.
Since, Hong Kong Exchange is serious about implementing blockchain, they can perhaps create a shares/debt ownership registry that any company in Hong Kong can enter information into by using blockchain.
As of now, HK private companies are by law required to have a registry of who owns what shares, and what debt has been issued. Those registries are on paper in some filing cabinet in an accountant’s office.
By creating a registry of share ownership, the Hong Kong Exchange could revolutionize startup investments – in turn making it possible to transfer shares and debt easily.
Once this registry is in place, local Hong Kong brokers can also access that registry (thanks to blockchain) and if you are a professional investor, you can manage your angel investments as easily as you manage your holdings of bonds and stocks.
So when a bunch of investors agree to invest in your startup, they can go to their local HK broker, show proof that they are a professional investor, and just buy the shares.
The best part of this system would be that it requires no regulatory changes. Angel investors and companies will be subject to exactly the same rules as before. Everything will happen as it used to, only instead of paper they can record ownership on a system run by HKEX.
Also, needless to say, anything that involves even minor regulatory changes means that it will take you years and even then it may never go through.
‘Input Output Honk Kong’ collaborates with Tokyo Institute of Technology
Input Output Hong Kong, a blockchain developer and the Tokyo Institute of Technology have shook hands to create a blockchain collaborative within the Tokyo Tech School of Computing.
The institutions will promote joint research in blockchain related technologies. They both recognize that cryptocurrencies can revolutionize not only the banking system, but also societies worldwide by providing more efficient and inclusive ways to make financial transactions.
In a nutshell, Bitcoin 2.0 is any application that makes use of decentralised public ledgers for purposes other than digital currencies. These applications are sometimes also referred to as “crypto 2.0”.
The partnership between IOHK and Tokyo Institute aims to tackle various challenges of blockchain. For instance, one goal is to develop young professionals and to educate society about the new technology.
“This collaboration has two main goals: the first is develop our business area, which is cryptocurrencies and blockchain related technologies in the fundamental level,” said Charles Hoskinson, IOHK CEO and co-founder. “The second is to nurture and develop global talent in these areas in Japan.”
According to Yoshinao Mishima, president of Tokyo Tech, this initiative matters because the school wants to enhance the collaboration with industries and universities in Japan and abroad by delivering groundbreaking results in research and engineering.
The Collaborative Research Chair is the continuation of a 6-month joint agreement between the two parties. It is designed to:
- Research blockchain-related technologies and related areas
- Nurture global talent and expertise
- Promote collaboration among researchers worldwide
Global Blockchain Business Council (A step in the right direction)
Last month, The Bitfury Group, the world’s leading full service Blockchain technology company, in collaboration with international law firm Covington, launched the Global Blockchain Business Council (GBBC) around the World Economic Forum 2017 Annual Meeting in Davos, Switzerland.
The mission of the GBBC (a multinational body comprising of representatives from some of the 25 participating countries) is to bring together the world’s leading businesses to educate on the latest innovations and advances in Blockchain technology and advocate for its global adoption.
The GBBC aims to aims to provide a forum for information, collaboration and partnerships.
The event was attended by many global leaders, including senior representatives from the likes of Overstock, EY, McKinsey, Palantir etc.
Guess who played the most important role in the summit? That’s right. China.
The Chinese representatives at the summit called for a unified approach towards creating blockchain solutions. This comes when the People’s Bank of China started cracking down on the country’s Bitcoin exchanges to identify and put an end to any unfair practices.
If the reports are to be believed, this whole initiative is spearheaded by the Chinese delegation comprising of members from some of the leading banking and financial companies in the country.
Deng Di, the head of China Blockchain Representative Team, called for his Chinese industry peers to join the council.
With the new GBBC, China might be trying to counter the rise of R3 Consortium, which is now part of the Hyperledger project.
China’s Five-year Financial Regulation Plan
China recently introduced a five year financial regulation plan. The idea is to introduce some major changes in market regulations.
By 2020, the plan is to address fake goods, food, and drug safety issues. Chinese government will also be imposing more consumer protection measures, as there are not many right now.
What could this mean for Bitcoin in China? It is still unclear, but it will likely have some effect.
Here is a thing about Bitcoin – it tends to rise when there is concern about traditional currencies and assets. This year we have seen China has been tightening capital controls. On the other hand India has demonetized 86% their currency notes. All of this has boosted the demand for Bitcoin.
People in China and all around the world are aware of the fact that Bitcoin is extremely volatile, but they see the cryptocurrency as something that is even more immune than gold.
Not to forget, Yuan accounts for majority of trading in terms of Bitcoin which is partly because of the unique fact that Chinese exchanges do not charge transaction fees.
At the time when Yuan is depreciating and returns on Chinese assets are falling, these new tightening of regulations have made Bitcoin a popular way for Chinese people to take the money out of the country.
No wonder, whenever the Bitcoin price rallies or crashes, experts start to gauge the Chinese market.
The recent drop in Bitcoin price, fueled by a short-lived positive performance of Chinese yuan, the government decided to review the cryptocurrency platforms. This review came amid allegations of Bitcoin fueling the capital outflow.
The cryptocurrency community believed that harsh regulations were in the store, making them to indulge in panic selling.
It is clear that moving forward China wants to strengthen its market regulation.
Critics have already started questioning the validity of official economic growth numbers coming from China. Moreover, consumer protection measures are hard to come by, a situation that needs to be addressed sooner rather than later.
The Chinese government is much more careful about Bitcoin regulations than ever before. Considering the potential of Bitcoin and gigantic user base in the country, the government has decided to implement certain measures to safeguard the interests of investors.
This five-year plan confirms China’s commitment to improving the financial ecosystem in the country. Strengthening consumer rights and removing barriers to entrepreneurship will be two other key points of focus over the next few years.
Under this plan China wants to ensure “transparent market access rules”. The government will try to improve the commercial registration system to ease market access. Up until now, foreign companies struggle to enter Chinese market, unless they adhere to strict requirements. It seems China wants to ease that regulation.
A transparent market would not only help Bitcoin companies around the world to enter China, it will be beneficial for companies in other sectors as well.
To add to this, The People’s Bank of China is already considering the possibility of assigning third party custodians for Bitcoin market.
Central Bank in Talks with Bitcoin Exchanges
The central bank has conducted spot inspections of major Bitcoin exchanges in the country including BTCC, Huobi, and OKCoin.
According to the reports, the inspections were carried out to investigate whether the platforms have violated any existing rules including market manipulation, money laundering, and unauthorized financing.
The cryptocurrency reacted sharply to reports in the past that China may tighten rules on the digital currency to curb capital outflows.
When these closed door meetings were reported, they lead to a fall in Bitcoin price.
“There are a lot of people shorting bitcoin now, one because of the regulatory environment, another because the price is relatively high,” said Tian Jia, a Beijing-based trader of bitcoin.
“The fact that PBoC continues to look into this issue might make people think that the whole thing isn’t over, and based on past trends, whenever the central bank holds meetings with exchanges the price will drop.” Tian added.
If China keeps implementing these new regulations, it may help legalize Bitcoin as a currency, although it remains unclear if that is the plan.
“The Chinese government’s policy is an important factor,” said Yang, who owns about $2 million of Bitcoins. “There may be room for further gains in price, but there’ll be a big pullback soon. It’s hard to sustain such a rapid rise for a long time.”
Right now all the three major Chinese exchanges have started charging 0.2% of transaction fee to suppress speculation and prevent big price swings.
This just goes to show that China’s regulators will enforce trading fees even in subsidiaries outside of the country.
OkCoin Chief Executive Officer, Star Xu, suggested the PBoC set up a third-party custodian platform to prevent exchanges from absconding with users’ money.
Bitcoin trading volume plummeted in China following the imposition of exchange fees, while its price had risen 11 percent last month after this move.
China’s Central Bank gives Formal Warning to Bitcoin exchanges
Following the strengthening of regulations and secret meetings with ‘big three’ Bitcoin exchanges, BTCC, Huobi and OKCoin; on Feb 9, 2017 The People’s Bank of China issued a statement warning nine domestics startups dealing in Bitcoins.
These meetings were much more serious than last time, including a number of lesser-known Bitcoin and cryptocurrency exchanges, namely, BTC Trade, Yunbi, HaoBTC, CHBTC, BTC100, BitBays, Yuanbao, Dahonghuo and Jubi.
PBoC again issued specific directives to the businesses, reiterating that the platforms must enforce anti-money laundering (AML) and foreign exchange regulations.
The central bank said, “If the exchanges violated the above requirements, and if the circumstances were serious, the inspection team may ask the relevant departments to close down the exchanges according to law.”
Soon after the statement, all three exchanges started working on their trading fees.
As per the sources, all exchanges have largely agreed to limit margin trading and zero-fee trading in response to pressures from the central bank.
“Somehow, they perceive the high price and the rising price as a threat,” said one exchange executive. ‘BTC Trade’ issued a statement saying that it would now impose similar fees as its competitors.
All these steps taken by the Chinese authorities seem to suggest its intention to have more control over the cryptocurrency without banning it.
China is a leading Bitcoin market and by protecting the interests of investors, the government is encouraging more people to become part of the cryptocurrency community.
That said, making market regulations stronger could actually favor Bitcoin adoption in the future.
Bitcoin Exchanges Freeze Withdrawals
Clearly, 2017 wasn’t the best year for Bitcoin exchanges in China. If the warning from Central Bank wasn’t enough, what followed was more shocking.
Two of China’s most widely used exchanges, Huobi and Okcoin, announced that they will suspend Bitcoin and Litecoin withdrawal for one month effective immediately, while they update their KYC & AML procedures.
The effects of the news were immediately felt on the price charts as Bitcoin plunged from $1060 to as low as $936 in less than 2 hours.
Although, the price fall didn’t last too long. The news caused the price to react sharply, the halt on margin trading and zero-fees instituted during January caused the CNY to lose its weight in the global market which explains the quick recovery of Bitcoin.It looks as if the PBoC’s actions seem to affect Bitcoin less and less as they are issued.
It is evident that during the meeting between the PBoC and nine other Bitcoin exchanges, new KYC/AML requirements have been put in place by the PBoC, given that all exchanges in the country have issued the same warning regarding the KYC/AML update.
However, Huobi and OKcoin were the only exchanges to freeze withdrawals immediately, or so everyone thought.
Just a week later, BTCC also followed the suit and froze withdrawals, saying they would prohibit cryptocurrency withdrawals as part of an effort to combat money laundering at the request of China’s central bank.
The official statement said, “After the upgrade of the industry and the completion of the audit system, the bitcoin and litecoin currency will be back to normal. If the system upgrade can be completed ahead of time, all business will return to normal immediately.”
It is worth noting that these withdrawals are frozen for one month and users can still exchange their holdings for CNY and withdraw them normally.
After the halt on cryptocurrency withdrawals, bitcoin.org, an introductory website for new Bitcoin users, removed both OKcoin and Huobi from its list of recommended exchanges, but for some reason BTCC is still hanging around there. Confusion much?
Maybe they didn’t want the ‘China list’ to be empty.
Here is the situation of various Bitcoin exchanges in China as of Feb 11, 2017:
BTCC CEO, Bobby Lee, recently held an AMA on reddit. The top question was: “What does PBoC want?” This was Bobby’s response:
Zennon Kapron, author of “Chomping at the Bitcoin: The Past, Present and Future of Bitcoin in China“, suggested the domestic Bitcoin industry will likely be in for a long road of changes.
“In the end, these exchanges need to be connected to and sharing data with PBoC’s SAFE,” he said. “That would give them the surveillance to ensure that people aren’t moving more than their yearly $50,000 limit of money out and cover any AML concerns.”
After all this drama one thing is clear – it is not easy to just destroy Bitcoin. Other countries like Russia, Japan, Philippines have already moved towards a more bitcoin-friendly regulatory scene. I don’t think China has an alternate option, but to follow the suit.
Why the Chinese government is going after these Bitcoin exchanges?
This is indeed a 21 million Bitcoin question. Get it?
The Chinese government absolutely do not want its citizens to take cash out of the country simply because it will further weaken Yuan.
With Bitcoin it is quite easy to do so. Just buy Bitcoin onshore at 0% transaction fee, sell it offshore for another currency and then move the money to a bank account.
The government has stepped up requirements for citizens converting their yuan which is already subject to a quota.
Qiu Difan, a Shanghai-based economist at SWS Research Co. said, “Under regulations on cross-border flows, the appeal of using bitcoin to obtain foreign exchange and take capital out of the country will increase, especially for funds that may have been used in illegal operations such as money laundering,”
“Regulators have always been passive about bitcoin. Tighter regulation is inevitable going forward.” Qui added.
The government is also focused on working with Bitcoin exchanges to prevent money laundering and possibly even directly limit trading. This is not the first time regulators have shown interest in the cryptocurrency. They have been studying measures to limit outflows via Bitcoin and impose quotas on the amount that can be sent abroad.
In 2013, the PBoC barred financial institutions from handling Bitcoin transactions and said it isn’t a currency with “real meaning,” resulting a slide in Bitcoin price.
BTCC’s CEO Lee believes that the authorities are unlikely to repeat such statements. They’d rather prefer to have licensed exchanges that give PBoC all the information they ask for, especially since Bitcoin’s nature makes it hard for authorities to eradicate anyway.
“What they can do is crack down on bitcoin exchanges, but they can’t crack on bitcoin itself,” Lee said. “If you actually shut down the bitcoin exchanges in China, the desire will just go underground, and when the desire goes underground, it’s out of control.”
The encryption is precisely the appeal of Bitcoin. Its supply isn’t determined by any central bank, which probably irks the Chinese authorities. A network of miners validate transactions by their computers which require encrypted electronic signatures, and in return earn fees based on market prices.
“It’s impossible to kill Bitcoin” – Former President of Bank of China
Every time a government tries to abolish something people like, those things move to where it can’t be stopped. We have seen this time and again, whether it be gambling, war on drugs or digital piracy.
It’s now happening in China, where the government has been trying to crack down on Bitcoin.
Just two days ago Bitcoin prices had hit an all time high.
What does this mean? Two things. First, the Bitcoin market is already adjusting to new regulations from PBoC regarding trading fee, AML and KYC policies. Second, and more importantly, it seems the global Bitcoin market is less dependent on China now.
While it was widely believed by the traders and investors that the Chinese market controls over 90% of the global Bitcoin exchange market, it is not the case anymore. Sure, Chinese market did demonstrate dominance in the past, but it is gradually dying down.
We are seeing the emergence and development of major US and Japanese bitcoin exchanges including Kraken, Bitfinex, and Bitflyer to takeover and outpace China.
Banning LocalBitcoins is also not an option because people can easily use private virtual networks to access it anyway. Besides, plenty of trading happens on lesser-known sites and on micro-messaging services such as WeChat and QQ.
Bitcoiners don’t own physical coins or even digital ones for that matter. They own permanent transaction histories recorded on a global ledger, replicated by participants all around the world.
If tomorrow a government shuts down every bitcoin node in its country, a bitcoin user can still transact as long as a single node is accessible overseas.
It’s impossible to control something that exists nowhere and everywhere at the same time. The best regulators can do is go after Bitcoin exchanges running in the country. That is exactly what China is doing.
PBoC’s recent involvement and statements on Bitcoin have had little to no effect on the value of Bitcoin and as a result, global Bitcoin market has become less dependent on China, its government and market.
Immediately after the PBoC’s actions, there was a negligible spike in Bitcoin’s volatility. Since then, the volatility has normalized. The bump that takes place in ‘Jan-17’ below represents the bump in volatility as the PBoC made its recent announcements.
The Japanese market and the optimistic viewpoint of its government towards Bitcoin have also served as a major factor behind the recent decline of the Chinese market.
“While it might be too early to reach a conclusion, an early hypothesis is declining trading volumes in China will be replaced by another geography,” said Chris Burniske, Product Lead at ARK blockchain.
“Japan comprises now roughly 60% trading volumes, whereas before 90% went through China.”
A highly anticipated bill, a revision of the Payment Services Act will officially be activated and implemented by the Japanese government, which considers Bitcoin as a legal method of payment.
This will likely have a significant impact on the Bitcoin industry in Japan and all around the world as the bill would provide clear legality and definition of bitcoin in the Japanese market.
L H Li, former president of the state-owned Bank of China (the fifth-largest bank in the world) has said that it’s impossible to kill Bitcoin.
“Bitcoin was built on a platform without national boundaries. If you want to kill bitcoin, it will be an impossible task. So, it will continue to exist. What’s important now is that we should properly regulate it.” Li adds.
In hindsight, the whole PBoC-Bitcoin exchange fiasco have been beneficial to the global bitcoin market, as it allowed the market to become independent and eliminate its reliance on the Chinese market.
The price trend of Bitcoin is optimistic and daily trading volumes in markets like Japan and the US are growing at an exponential rate.
So how does a country with the infamous Great Firewall counter this nature of Bitcoin?
It is unclear how the exchanges will be regulated. There are two likely options, covert nationalization through a “third party custodian” scheme, or at arms-lengths regulations which leaves exchanges free to conduct their businesses as long as they fully apply the law.
Particularly, so long as exchanges enforce foreign exchange rules, cooperate with taxation authorities, guard against money laundering and apply a strict AML process.
There is one more way. Wait for it. How about —drum roll please— “A PBoC backed cryptocurrency”.
Yes, that’s right. China is developing its own digital currency and if the reports are to be believed, it is well on track.
In the past there were news circulating about China hiring blockchain experts to develop its own digital currency. Guess what, they were true.
As the saying goes, “If you can’t beat them, join them”. China is doing exactly that.
The People’s Bank of China assembled a research team back in 2014. It has already done some trial runs of the cryptocurrency.
Although there are number of other countries that are working on their own digital currency, but most of them are still in the development stage. China could be the first country to issue its own digital money that can used to buy just about anything.
A PBoC-backed digital currency will be no different than Bitcoin for users that transact over phones or laptops. It would just be like using Alipay or Wechat. Sellers, on the other hand, would get digital payments directly from the buyer, lowering transaction costs and cutting the middleman.
While PBoC is working on its own digital currency, it is increasing scrutiny of Bitcoin and other private digital tenders. Basically, they don’t want the Bitcoin bubble to burst.
Traditionally currencies have been issued by the state, not private players, China doesn’t want to give up on the cryptocurrency space to companies they can’t control.
Mobile payments are on the rise in a lot of developing countries including China. This probably is the best time for PBoC to introduce their own digital currency if they want to stay ahead in the game.
Duan Xinxing, vice president of OKCoin said “Getting to know more precisely how much banks lend, where the money goes and the pace of credit creation is key to curbing money laundering and making monetary policy more effective.”
For PBoC, their own digital currency could be a “blessing in disguise”. Blockchain will allow them to trace transactions and collect “real-time, complete and authentic” data to compile precise monetary indicators such as money supply growth.
“The transparency of economic activities in every corner in the country will significantly improve,” Duan said. “The central bank will have unprecedented knowledge of how the economy runs.”
Although there is no formal date announced for the launch of PBoC’s cryptocurrency, but PBoC was kind enough to publish the research paper outlining how their digital money could work:
- The PBoC creates cryptocurrency and transfers it to commercial banks when more liquidity is needed
- Consumers would top up digital currency from modified automated teller machines or from bank tellers and store it in a crypto wallet on their mobile phone or other device
- For purchases, consumers wire from their person wallet to the merchant’s account
- The merchant deposits the cryptocurrency into their commercial bank account
A separate paper published in the central bank’s magazine said that the cryptocurrency would be part of the overall money supply, replacing part of the outstanding paper tender.
Xotto: Blockchain Version of the Famous Hong Kong Mark Six Lottery
Xotto shows the magic of blockchain.
Thanks to the blockchain technology, XOTTO is now more transparent and it solves one major problem in online gambling – money withdrawals.
Everything is trackable, fully automatized, fair and easy to use. There is no need for registration to purchase a XOTTO ticket and play. This provides complete anonymity unless the player himself decides to leave the email address and get notified.
The best part? The winner doesn’t even have to claim the reward, because the prize is automatically delivered to his digital wallet once the winning numbers are released by Hong Kong Mark Six lottery.
Technical part: XOTTO is operated by means of a cryptocurrency named VEROS (VRS), which was launched in October 2016. The jackpot of the lottery is also collected in VEROS and is comprised from the amount of sold tickets. The winner receives the prize directly to a VEROS e-wallet address, from which the ticket was purchased.
In future payment options in BTC and ETH will become available.
There are only two parties involved in the game – the player and the smart contract. The information about the automatically drawn lottery numbers and the transactions (pay-ins/pay-outs) is available to everyone on the Ethereum blockchain.
The smart contract, based on the jackpot, executes a VEROS transaction from the jackpot wallet to the winners’ wallets automatically.
Naturally, because of blockchain, all tickets and the jackpot can be verified on the distributed ledger, which goes to show how fair and straightforward the game really is.
The drawing occurs three times a week: on Tuesday, Thursday, Saturday or Sunday at 9:30 pm (Hong Kong time), followed by the announcement of the results on TV, radio, the HKM6 and the XOTTO lottery websites.
Bitcoin Mining in China
China is the world leader when it comes to mining Bitcoin. Chinese mines comprise about 70% of the world’s Bitcoin processing power. That’s a lot.
This China domination is estimated at around $9.2 Billion Bitcoin market capitalization. Some critics view this influence as a threat to Bitcoin because China’s miners are opposing some of the reforms to improve Bitcoin transaction speed as bitcoin use expands.
So why is China mining so much? Two reasons. Cheap electricity and excess coal.
Electricity in China is extremely cheap as compared to other countries. Electricity costs is the most important factor for a profitable mining operation.
As mining difficulty increases, the least efficient miners are forced to shut down first. The miner that can solve the fastest gets the reward. China’s cheap electricity keeps Chinese miners at peak efficiency and allows them to outlast their competitors.
In China, energy producers can also burn coal and use the energy for Bitcoin mining. Instead of physically moving coal, it’s easy to just burn the coal and convert it into Bitcoin through mining.
Interestingly, the Chinese government has not been very intrusive with the mining operations. The government banned banks from trading bitcoin in 2013, but individuals were permitted to trade, and miners were allowed to operate.
Sichuan is the new home
Sichuan is a southwestern Chinese province that is known for its spicy food flavors. Now, though, it is becoming a Bitcoin mining capital.
According to China Money Network, since 2015, over 30 percent of China’s bitcoin mining machines have been purchased from the Sichuan province.
As per the report, there are around 10,000 Bitcoin mining machines in Sichuan working around the clock for the digital currency.
Sichuan is getting all this love for one reason – cheap electricity. Also, cold climate and low population density makes it a perfect destination for mining operations. The city provides cheap electricity through its hydroelectric power plants.
Chinese power companies established hydroelectric plants in western Sichuan during the country’s economic expansion. When the economy slowed, they were no longer able to sell to the national power grid.
Bitcoin miner and investor, Chandler Guo, revealed that electricity in China has become so cheap due to rising supply and decreasing demand that electricity companies are coming to local miners to purchase ASIC chips and mining equipment to allocate unconsumed electricity to Bitcoin mining.
Eric Mu, Chief Operating Officer at HaoBTC, said it makes sense for the power companies to sell electricity to anyone willing to pay for it.
HaoBTC has a mine in Sichuan with more than 11,000 machines that earn more than 80 Bitcoins daily.
Another mining company in Sichuan is Mabian Tianjia Network Technology Co., Ltd. It produces as many as 27 bitcoin per day.
Before you decide to move to Sichuan and start buying Bitcoin mining machines, understand that the upfront costs involved are very high. Electricity bills alone can cost thousands of dollars while the profitability remains uncertain with the price of Bitcoin remaining highly volatile.
Green Mining Power
As of today, the Bitcoin mining sector is robust with computations faster than the world’s top 500 supercomputers combined. The global Bitcoin mining economy consumes around $500 million in electrical and operational costs.
It is estimated that the Bitcoin network could use as much electricity as Denmark by 2020. Earning Bitcoin through mining is clearly an expensive process and consumes a lot of energy as the machines operate 24×7.
Over the years miners have managed to find ways to utilize the heat generated by the machines to warm their houses and warehouses.
Mining facilities are always on the lookout for various techniques to acquire cheap electricity and some of them with environment in mind.
Some mining operations use burning cheap coal in plants to more greener energy solutions like hydropower. Iceland has quite a few mining facilities in the country because operations make use of the cold air and geothermal steam power plants.
Bitcoin’s energy consumption have raised many eyebrows. People believe there will be the need for more hydropower plants that can produce 1,000-10,000 megawatts per plant. Some say, Bitcoin mining may even go nuclear utilizing its energy resource of 7,000 to 10,000 megawatts per energy station.
It is great that Bitcoin miners are already practicing greener energy solutions. Some miners are looking at better ways to use the heat generated by these massive mining facilities.
In the future, Bitcoin mining will only grow. We may see more techniques that harness bitcoin minings energy and power in a much more useful way.
As of now, power acts as Bitcoin’s greatest security advantage. There will never be a time in the future when there is no electricity in the world unless.. we’re talking zombie apocalypse. In that case, Bitcoin would be the last thing in our minds.
The debate on whether to increase the block size or not has been going on for a while in the Bitcoin community.
First started back in 2015, how best to scale blockchain remains the dominating disagreement.
One year later, some miners again want measures that would raise the bitcoin block size in an effort to support more transactions. As of now, Bitcoin network can only achieve 7 transactions per second.
To put this in context, Visa says its payment system processes 2,000 transactions per second on average and can handle up to 56,000 transactions per second if needed.
This is how it works. When you use Bitcoin to pay for an item, that transaction needs to be verified on the blockchain. This is done by miners who use computing power to solve increasingly complex mathematical equations to mine new Bitcoins, which come in “blocks” and are mined about every 10 minutes.
These blocks are used to record all transactions made on the bitcoin network, and have a maximum size of 1MB, meaning they can record just seven transactions per second, at most.
The problem at one point grew so large that there were 40,000 bitcoin transactions waiting to be cleared.
The average time it takes for a bitcoin transaction to be verified is around 50 minutes, but some transactions can even take days. If you add a small fee to your transaction, it bumps that transaction up in the queue, meaning that those who didn’t pay such a fee – may have to wait more.
This has led the Bitcoin to split into two distinct groups over the past two years. The first group is known as Bitcoin Core, the network’s volunteer developers who want to change the way the signatures are stored on the blockchain rather than increase the size of the blocks.
The other is Bitcoin Classic, a group comprised of developers and enthusiasts who propose the adoption of an alternative blockchain (incompatible with the original) that would increase the block size to 2 MB or more.
When there were more than 40,000 transactions pending on the Bitcoin network, Core team suggested the slowdown in transactions was because of the members of the Classic group who were spamming the network with low-fee transactions that miners simply don’t want to accept, and therefore clogging up the network.
Lately, China’s Bitcoin miners are seeing more profits in bigger-block blockchain.
At China’s first miner conference, an event organized by major miner Bitmain, Huang, a Bitcoin enthusiast and miner, spoke at length on scaling the blockchain. He said it is “pretty much determined” how the Bitcoin network will scale.
Huang argued that the blocks are already full that is why we are not seeing growth in transaction volume. Limited space, he said, would lead to higher fees, turning away potential Bitcoin users.
He warned in this environment other alternative cryptocurrencies, like litecoin or ethereum, could maybe gain traction.
Huang discussed when the current 1MB limit on transactions per block is raised to 2MB, 8MB or “removed completely”, it would be much better for miners, and more lucrative.
He went so far to say, “This is controversial and I may be a bit extreme but I will say it anyway, that is switching your hashrate to those pools supportive of scaling.”
Bitcoin Unlimited is a new grassroots client that continues the transaction capacity increase method bitcoin used for much of its existence.
That means, just like without any centralized direction miners somewhat spontaneously increased the block limit from 250kb to 500kb to 750kb and then finally to 1MB.
With Bitcoin Unlimited, they can now increase it in the same manner from 1MB to 2MB to 4MB as per the demand.
Jiang Zhuoer, founder of BTC.TOP, a new bitcoin mining pool that has suddenly shot to around 8% of the network’s hashrate, tells CCN in an interview:
“The market needs big blocks. If Core doesn’t want to (or can’t) give it, the market will take it by itself. No one can go against the market, unless he can show more money.”
The debate is now going on for more than two years with no conclusion reached so far. That said, it looks like Bitcoin Unlimited is gaining momentum. Its hashrate share has been increasing for about a month or more and may soon significantly surpass segwit.
If and when the hashrate crosses 50% it will become clear that Bitcoin Unlimited is the preferred client. Businesses, individuals and miners will need to upgrade. It will be an interesting twist in the Bitcoin’s story.
Bitcoin Core’s Take
It isn’t surprising that this move by Chinese miners have since been criticized by Bitcoin Core developers.
Bitcoin Core developers cited the work of Princeton researchers that found bitcoin to be unstable without a valuable block subsidy, a finding that would seem to contradict that a fee market could power bitcoin alone.
The developers further asserted that miners would not able to unilaterally switch to a new blockchain through a hard fork, as they would need the consent of full nodes and consumers.
This could mean the emergence of two chains, which would substantially devalue the currency. Only the time will tell how this whole debate will pan out.
Bitcoin Mining Pools in China
China has four of the five largest Bitcoin mining pools.
DiscusFish, also known as F2Pool has mined about 19.5% of all blocks over the past six months.
Antpool is maintained by Bitmain. It mines about 18.5% of all blocks.
BTCC is China’s third largest Bitcoin exchange. Its mining pool currently mines about 11.5% of all blocks.
4. BW POOL
BW, established in 2014, mines about 8% of all blocks.
This is how the current hashrate distribution looks like as of Feb 25, 2017:
Buy Bitcoin in China and Hong Kong
Following is the list of most popular ways to buy Bitcoin in China and Hong Kong:
1. LocalBitcoins (China and HK)
An escrow service which also helps to match bitcoin buyers and sellers. The most common method of payment for purchase is cash deposit. However, users usually advertise the preferred way of accepting payments.
Buying bitcoins via an in-person meeting, secured and facilitated by LocalBitcoins, may be one of the fastest and most private ways to buy bitcoins in any country.
2. BTCC (China)
China’s second largest Bitcoin exchange and the longest-running Bitcoin exchange in the world. You can fund your exchange account online via bank transfer.
3. OKCoin (China)
OKCoin is the largest Bitcoin exchange in China.
4. Huobi (China)
Huobi is the third largest Bitcoin exchange in China. The exchange accepts CNY bank transfer or with USD via OKPay (1.5% fee) or international wire transfer (1% fee).
5. Gatecoin (Hong Kong)
Gatecoin accepts bank transfers from around 40 different countries. Users can buy bitcoin using HKD, EUR, USD and CNY.
6. Bitfinex (Hong Kong)
Bitfinex has long been one of the largest USD Bitcoin exchanges in the world. The accounts can only be funded by bank wire only. Their fee on accepting wire transfers is as low as 0.1%.
Coinmama allows customers from almost all the countries to buy bitcoin with a credit or debit card. Although they have a very high fee, around 8% on each purchase.
8. Bitcoin Meetups
If you’re new to Bitcoin and just want to buy for a few dollars worth to try it out, there is a good chance you will find someone to trade with at Bitcoin meetups in Hong Kong.
9. Bitcoin ATMs
You can also walk up to a Bitcoin ATM to buy Bitcoin with cash. China has three Bitcoin ATMs (two in Beijing and one in Shanghai), whereas Hong Kong has five.
Bitcoin ATMs can be a quick and easy way to buy bitcoins and they’re also private, but most ATMs charge fees anywhere between 5-10 percent.
When you’ve got some Bitcoins in your wallet, go ahead and spend them. Just go to spendbitcoin.com and search the product that you’re looking for. You will see the list of seller that accept Bitcoin in your country.
There are more than 150,000 merchants around the world that are accepting Bitcoin as payments. Microsoft, Dell, Overstock are to name a few. Here is the complete list in case you ever need to buy something from them.
All the efforts by Chinese authorities to curb Bitcoin have neither affected Bitcoin prices nor the transaction volumes. It is clear that global Bitcoin market is not dependent on China anymore.
China and Hong Kong are leading in digital payments and quickly migrating towards a cashless society. In the middle of this transformation I don’t see how Bitcoin will lose any importance in the coming future. In fact, the popularity of Bitcoin will only rise.
Bitcoin is one asset that can not only recover from a major price swing but also offers hope for growth in the future and due to its limited supply, its value can increase at any moment.