After the Central Bank Inspection: Where Does the Bitcoin Industry Go?

Since June, several major domestic Bitcoin trading platforms have resumed withdrawal services. This means the end of the central bank's inspection. Where will the Chinese Bitcoin market go?

In January this year, the central bank sent an inspection team to the main trading platforms for on-site inspections. Previously, China’s bitcoin trading volume accounted for 90% of the world’s total, and bitcoin platforms were also suspected of becoming a new channel for money laundering.

During the inspection, the central bank explicitly required trading platforms not to engage in financing and currency lending businesses in violation of regulations, not to participate in money laundering activities, and not to violate national regulations on anti-money laundering, foreign exchange management, and payment settlement.

Interestingly, after the central bank's inspection, China's trading volume dropped from 90% of the global share to 20%. The price of Bitcoin on Chinese trading platforms was once about 10% lower than the international market. Various trading platforms also actively responded to regulatory measures and announced that they would fully upgrade their anti-money laundering and risk control systems.

What kind of inspection did the central bank conduct? What problems do trading platforms have? Is Bitcoin really a tool for crazy money laundering? After the inspection, what upgrades did the trading platform make to its anti-money laundering system? What impact will the suspension of financing and currency lending have on trading platforms? Why has the price of Bitcoin skyrocketed recently?

Xu Mingxing, CEO of OKCoin, a well-known Chinese Bitcoin trading platform, accepted an exclusive interview with Tencent Technology.

In Xu Mingxing's opinion, there are indeed cases of money laundering using Bitcoin, but they are extremely rare. Although OKCoin had anti-money laundering measures before the central bank's inspection, they were not sound enough. After the inspection, the company upgraded its anti-money laundering system in accordance with the guidance of the inspection team.

"Only by making good things stronger and more successful can we make bad and illegal things disappear." Xu Mingxing said that the regulation of Bitcoin is a difficult problem faced by all countries.

Xu Mingxing admitted that after the financing and currency lending business was stopped, the company's main revenue became collecting transaction fees from users. Although this is slightly lower than before, the company is still slightly profitable as a whole, while reducing market risks and returning China's trading volume to its true level.

How do you view the attitude of Chinese regulators? Xu Mingxing pointed out that the Chinese regulators’ non-one-size-fits-all approach is very wise. On the one hand, they see the risks of Bitcoin, and on the other hand, they see the future of Bitcoin and blockchain.

"There is indeed a bubble in the field of Bitcoin or blockchain, but just like beer, when you remove the bubble, there is still sweet beer." Xu Mingxing pointed out that blockchain technology represented by Bitcoin is like the Internet technology of the year, which is subversive and will have a broad application space. It will have a significant impact on the real economy and giants at the level of BAT will be born in this field.

The following is the transcript of the interview:

Withdrawals resumed after anti-money laundering system upgrade

Q: Many media reported that Bitcoin has become a tool for money laundering. Has OKCoin ever encountered such a situation?

A: We did encounter a case. In 2014, not long after the company was founded, a person transferred 2 million yuan of stolen money to our platform. After buying Bitcoin, others came to collect the money and froze the company's 2 million yuan. After the lawsuit, we were ordered to pay more than 600,000 yuan. After this incident, the platform systematically upgraded its anti-money laundering rules, strengthened the management of the real-name system, and strictly reviewed the source of funds of suspicious traders to avoid such incidents from happening again.

In fact, Document No. 289 of 2013 clearly stipulates that Bitcoin is a virtual commodity that citizens can buy and sell freely. Bitcoin trading platforms must have ICP registration and fulfill anti-money laundering obligations.

However, we previously focused more on internal company operations and risk prevention, and our anti-money laundering measures were indeed not systematic.

Q: What problems did the central bank inspection team point out in our anti-money laundering efforts?

Answer: According to the national anti-money laundering law, anti-money laundering has four core components: a sound anti-money laundering system; customer identity identification; reporting of suspicious transactions; and preservation of customer identity information and transaction information.

The inspection team pointed out several problems we had.

First, although we have some measures, they are still flawed. We do not have a systematic anti-money laundering system, such as anti-money laundering confidentiality, anti-money laundering internal audits, anti-money laundering publicity and training, and suspicious transaction reporting.

Second, we have not established a monitoring list for anti-money laundering and anti-terrorist financing. In the past, we were not able to obtain this list because it is unified nationwide.

Third, the anti-money laundering system requires the classification of customer risk levels. Previously, we only classified risk levels into two levels: no risk and suspicious, but we need to classify them into multiple levels.

Fourth, in terms of customer identity identification, we only registered the name and ID number, but no other information such as occupation, residence, and workplace.

Fifth, in terms of real-name authentication, we used to only conduct real-name authentication for users with a balance of more than 10,000 yuan; however, the Anti-Money Laundering Law requires that customer identities must be re-identified at regular intervals.

Q: So what corrections and further standardizations have we made?

A: The central bank inspected us for four months and gave us a lot of guidance. In terms of anti-money laundering, we could not do it no matter how much money we spent on training. We also made a lot of improvements, hoping to be as close to the anti-money laundering standards as possible.

First, when registering, users need to provide more personal information, which needs to be compared through third-party services.

Second, when a user tops up, only the user himself is allowed to top up, and the bank card must be verified by a third party to be his own. If the user is not the one himself, the card will not be allowed to be bound.

Third, if you use a bank card other than your own to top up, we now strictly refund the original account. Previously, we would call and ask the user to transfer the account.

Fourth, when customers withdraw money, they need to provide a photo of their ID card and a photo of themselves holding their ID card.

Fifth, if the withdrawal amount exceeds 10,000 yuan, you will need to provide video images and pass video authentication.

Sixth, we have established a suspicious transaction analysis algorithm, requiring users of suspicious transactions to come to the company’s office for identity verification. If we find it suspicious, we will submit it to the regulatory authorities.

Seventh, in addition to storing customer identity information and transaction records in the online system, we also use cloud storage to store them for more than five years.

This is the work we do on identity identification. In terms of other system construction, we have also hired a professional risk control team to develop a professional anti-money laundering system. At the same time, we need to conduct regular internal training on these systems and keep them confidential.

Q: The ransomware virus that appeared some time ago required infected users to pay Bitcoin. What do you think of Bitcoin becoming a tool for extortion?

A: This virus has extorted a lot of money in the past, such as cash, US dollars, Alipay, etc., but this time it chose a more cutting-edge Bitcoin, but it only extorted a small amount of money. Looking at its account wallet, it only received 16 Bitcoins.

This is a common problem faced by entrepreneurs and regulators around the world. This is true not only in China but also in the United States. In fact, you will find that for all technological innovations, when mainstream practitioners have not yet completed them, the public has already applied these technologies to pyramid schemes, fraud, etc. Only by making good things stronger and more successful can we make bad and illegal things disappear.

Q: Recently, several of your platforms have resumed the currency withdrawal business. What are your considerations?

Answer: During the inspection, several major Bitcoin platforms in our country discussed together and felt that they should cooperate with the regulatory authorities to control risks. So after consultation, they took the initiative to decide to suspend withdrawals. The only option was to sell Bitcoin and exchange it for RMB withdrawal.

After upgrading the anti-money laundering system, in response to customer requirements, several of our platforms discussed again and felt that after making anti-money laundering more stringent, we could allow limited withdrawals because the risks are controllable.

The impact of stopping and resuming withdrawals on the business is quite small, and the transaction volume is about the same as before. Because most users choose to store Bitcoin on our platform, how individuals can safely store Bitcoin is still a very professional matter.

Q: But in the past two months, the price of Bitcoin has skyrocketed to 20,000. Is this related to the resumption of withdrawals?

A: It doesn’t matter. First of all, the rise was after the central bank launched on-site inspections, which definitely has nothing to do with China. China’s trading volume is so small, accounting for only 20% of the world’s total. Moreover, during the rise, the price of Bitcoin abroad was about 10% higher than that of Bitcoin in China. China’s market is more of a follower, not a dominant market.

The reason is that Western countries used to have a neutral attitude towards Bitcoin, but now they have a neutral to positive attitude, believing that it is a new technology that will have a significant impact on the real economy in the future. This is the fundamental factor behind the recent rise in Bitcoin prices.

It is clear that the driving force comes from Japan and South Korea. Japan passed a financial bill last year, which came into effect on April 1 this year, making Bitcoin a legal means of payment in Japan.

There is no large-scale Bitcoin exchange in the industry

Question: How long did the central bank's on-site inspection of your company last?

A: I entered the market in January and withdrew on April 30, nearly four months. The background at that time was that the price of Bitcoin soared in 2016, and China's trading volume accounted for more than 90% of the world's total. Many people believed that there was a great risk, so the regulatory authorities began to conduct in-depth investigations into the industry.

Q: What are the main contents of the inspection?

Answer: It refers to the company’s product form, business model, shareholder structure, capital structure, financing structure, user transaction status, risk control policy, team member composition, financial status, etc.

We transparently present all of the company's operating data to regulators and explain in detail how the trading platform operates on a daily basis.

Q: Can you tell us what the company’s current revenue is?

A: The company has been operating at a slight profit for the past few years, but I am not in a position to disclose the specific amount.

Q: What changes will this inspection bring to the entire Bitcoin industry?

A: First, it is clear that the price of Bitcoin is mainly driven by Japan, the United States, and South Korea, and the Chinese market has little impact on the price of Bitcoin. After inspection, the price of Chinese platforms is more than 10% lower than the US price and more than 20% lower than the Japanese price.

Second, it clarifies the risks in this industry and makes it clear what can be done and what cannot be done.

Third, it was made clear that Chinese users’ demand for Bitcoin transactions is a normal investment. During the inspection process, Bitcoin users did not flee in a rush.

Fourth, it is clear that it is objectively difficult to exchange foreign currency through Bitcoin, and there has been no large-scale foreign exchange activity.

Fifth, stopping leverage and reducing risks is a very meaningful thing.

Q: How should we correctly view Bitcoin?

A: Bitcoin emerged when the Internet developed to a certain stage. It is an objective existence. You cannot easily say whether it will work or not based on the extent of its development in the future. But there is one thing we know: it is difficult to eliminate it through administrative means, unless the Internet is cut off.

Second, as a virtual commodity, it can be said that Bitcoin cannot be used for payment, but the sale of the commodity itself is difficult to prohibit.

Bitcoin trading is private, and without a trading platform, regulation is even more difficult. Trading platforms actually provide a way to "easily regulate" and help regulatory structures bring Bitcoin trading into the public domain. Once our platform goes bankrupt, Bitcoin trading will go underground, making it more difficult to regulate and predict risks.

A new BAT will emerge in the blockchain field

Q: Bitcoin and blockchain are becoming increasingly popular nowadays. Is there a bubble? How big is the bubble?

A: There is indeed foam in the Bitcoin or blockchain field, but just like beer, when you remove the foam, there is still sweet beer.

I think blockchain will go through the following stages of development in the future:

The first stage is to be defined as a digital asset. Currently, all countries have included Bitcoin in their regulation, including my country’s central bank, which has established a digital currency research institute and is trying to issue a national digital currency based on Bitcoin.

The second stage is enterprise-level blockchain applications. Since 2016, some traditional banks have begun to use blockchain technology to improve efficiency, including WeBank, which has applied blockchain extensively. Alipay has also made several simple blockchain applications, such as Alipay's donation system, which is based on the blockchain.

In the third stage, many physical assets will be linked to form digital assets on the blockchain. There is a listed company on Nasdaq that issues equity as blockchain tokens, which can be circulated and traded globally like Bitcoin. In the past, non-standard equity required lawyers and contracts to determine the correctness of ownership.

This is a brand new era. In the future, non-standard physical assets can be made into blockchain tokens. In addition to equity, some people make gold into tokens, and some people make copyrights, even land and houses into tokens on the blockchain, and then trade them freely.

Q: What is the relationship between Bitcoin and blockchain?

A: Many people think that Bitcoin is a purely virtual thing that does not serve the real economy. In fact, most people have a very different understanding of the relationship between Bitcoin and blockchain.

First, blockchain originated from Bitcoin, which is recognized by everyone and there is no dispute.

Second, there is no doubt that blockchain technology may have a large application space in the future and will have a significant impact on the real economy.

Third, blockchain technology is actually most widely used in Bitcoin. The blockchain accumulation in Bitcoin is very important for guiding other fields.

Fourth, all blockchain applications must solve the consistency problem, which is the Byzantine Generals Problem. This problem is difficult to solve. Bitcoin uses mining to solve it, but what about other blockchains?

If it is a private chain, it will be relatively easier, just design some protocols; if it is a public chain, you can't design a mining mechanism for each blockchain.

Now everyone thinks that Bitcoin is an investment hype. In the future, all public chains will need to pay Bitcoin as the fee to solve the Byzantine Generals Problem. It is possible that it will become the underlying technology and infrastructure of the global blockchain.

Q: So, in which fields are blockchain applications most likely to be implemented first in the future?

Answer: The first is the payment field, the second is the legal and property rights confirmation aspects; the third is the financial infrastructure field; the fourth is the national digital currency. The central bank has just established a digital currency research institute to try to issue digital currency using blockchain technology; the fifth is the Internet of Things.

The Internet of Things means that all devices have IP addresses and payment capabilities. Wherever my car goes, the money is paid. When the light is out of power, I recharge it myself. Blockchain is likely to become the infrastructure of the Internet of Things society, and all device payments are made on the blockchain. The underlying layer of these blockchains is the Bitcoin blockchain.

Q: What level is China at in terms of the underlying technologies of Bitcoin and blockchain?

A: The starting point of all countries in the world is similar because there is no information gap. One difference is that foreign countries have mature regulatory systems, how to prevent and control risks, and what obligations to fulfill. China is still in the stage of observation and exploration. If the regulatory attitude is not clear enough, many investors will not dare to enter this industry.

If regulators take a simplistic approach, such as shutting down trading platforms across the board, will that solve the problem of money laundering? Will it solve the problem of investment speculation? No.

China's regulatory agencies are very smart. On the one hand, they see the risks of Bitcoin, and on the other hand, they see the future of Bitcoin and blockchain. Governor Zhou Xiaochuan once said that the future development of digital currency and blockchain is limitless.

Q: Since blockchain is regarded as a disruptive technology, do you think it is possible for BAT-level companies to emerge in this field?

A: I personally think it is possible. But we also need to see that the early Internet giants no longer exist. Blockchain may become a big technological wave, but successful business forms and products may not necessarily be the current ones.

Question: Specifically for your company, will the Bitcoin business gradually decline in the future, while the business of other blockchain applications, such as OKLink, will gradually increase?

A: Probably. Oklink is also growing very fast, with monthly payments exceeding tens of millions of dollars. One-third of our people are working on Oklink, and many are working on other blockchain applications.

Q: Many large companies are researching blockchain technology. As a startup, how can OKCoin compete with Internet giants?

A: The only characteristic of a startup is flexibility. They can create applications that others don’t like and build their own advantages and barriers. For example, OKLink is an international cross-border payment service, but BAT thinks the market is small and the difficulty is high. This is how startups work. You have no advantages in talent or capital, but your only advantage is your strategic advantage.