Bitcoin in China: An Insider’s View

Image source: Dazhi

The price of Bitcoin was highly volatile last year due to high speculation and a spectacular bubble, but the volatility of Bitcoin prices last year was significantly more stable than the year before. Now we are in a more rational development period, which provides us with an excellent opportunity to take a step back and analyze the current state of the Bitcoin industry.

The concept of Bitcoin and its development in China

In 2008, Satoshi Nakamoto published a paper titled "Bitcoin: A P2P Electronic Cash System", which elaborated on the concept of this payment system and related technical details. From this paper, we can know that Bitcoin is a payment system that allows individuals to receive and pay money without involving any financial institutions. This is the birth of Bitcoin.

Then Bitcoin gradually spread around the world and began to get more attention. Bitcoin really started to get hot in China in 2013. On November 19, 2013, Bitcoin reached its highest price in currency exchange at 8,000 RMB, which was 20,000 times higher than three years ago. This extraordinary development brought unprecedented public attention and also attracted great attention from government regulators. On December 5, 2013, the People's Bank of China and five other government departments jointly issued an official notice titled "Preventing Bitcoin Risks", which stated that Bitcoin should not be used as a currency.

In response to this news event, the price of Bitcoin fell 35% in 40 minutes. In February 2014, the world's largest trading platform MtGox declared bankruptcy, casting a shadow over the entire Bitcoin industry.

Since mid-2014, the price of Bitcoin has been in a long-term downward trend. On August 12, 2015, the price of one Bitcoin was only close to RMB 1,700.

The development of the global Bitcoin industry

Since Bitcoin is a cutting-edge Internet financial technology, almost all Bitcoin companies are start-ups. According to the latest statistics, about 100 Bitcoin companies have received angel round investment, of which 30 are located in Silicon Valley. In China, there are about 20 large-scale Bitcoin companies with 800,000 users, and these companies' business accounts for about 70% of the global Bitcoin trading volume. (RMB trading platforms are free of transaction fees, while US dollar trading platforms charge transaction fees, so RMB trading volume seems to be greater than the actual potential investment.)

As of June 2015, the Bitcoin industry has received over $800 million in venture capital, with over $400 million of capital flowing into the accounts of Bitcoin companies in Silicon Valley.

The Bitcoin industry chain includes production (commonly referred to as "mining"), transactions, storage and applications.

Production: Bitcoin mining

China has a strong competitive advantage in Bitcoin mining, and currently accounts for at least 50% of the global Bitcoin network mining capacity.

Bitcoin Trading

Currently, trading is the most important financial application of Bitcoin. There are about 100 Bitcoin trading platforms in the world. The top ten Bitcoin exchanges in the world are mostly in the United States, China and Eastern Europe, and the Bitcoin trading volume in these regions accounts for 90% or more of the global trading volume.

The USD and RMB are currently the two most active currencies for Bitcoin trading, but there are also Bitcoin exchanges for the JPY, AUD, CAD, KRW, BRL and other currencies.

Since 2015, compliance has become a focus of attention among bitcoin and dollar exchanges, with U.S.-based exchanges Coinbase and itBit having received business licenses from the relevant U.S. government departments. In China, the relevant government departments have not yet formulated relevant licenses for digital currencies, so compliance has not become a major development obstacle for Chinese bitcoin exchanges.

Huobi, OKCoin and BTC are the three largest Bitcoin exchanges in China, of course there are some other smaller exchanges in China.

Bitcoin Wallet: Storage and Transactions

Since Bitcoin is a complex technology, it is still not very convenient for mainstream users to use. Therefore, there are many Bitcoin wallet service providers who do their best to enable mainstream consumers to conveniently and safely receive, spend and store Bitcoin.

Bitcoin wallet provider Blockchain has created 3.6 million bitcoin wallets, while Coinbase has more than 2.3 million users. The growth potential of bitcoin wallets is particularly important as bitcoin has recently gained regulatory legitimacy in the United States.

In China, there are relatively few merchants that can accept Bitcoin payments while accepting regulatory uncertainty, so most users still prefer to keep their Bitcoin currencies on Bitcoin exchanges.

Bitcoin Applications: Real-Life Use Cases

When it comes to transactions, payments and international money transfers are the two most important applications in the Bitcoin industry right now. There are currently more than 100,000 merchants around the world that accept Bitcoin payments, including big companies like Microsoft, Dell, Expedia, and Newegg.

The largest Bitcoin payment processor is BitPay, which has officially partnered with PayPal.

Circle is an example of a consumer internet financial services company. But there is no doubt that we are still in a very early stage of Bitcoin application development, and there is still a lot of room for development to be completed in order for mainstream consumers to accept Bitcoin.

Development direction

As early as a year and a half ago, the People's Bank of China issued a relevant official notice, which is currently the only official policy document related to Bitcoin.

Since then, the development trend of the Bitcoin industry has become clearer, and government policies around the world have begun to take shape. Based on our experience and analysis, we have several recommendations for China's Bitcoin policy.

There are four possible directions in which Bitcoin can develop, and these directions are not mutually exclusive.

1. Bitcoin as a global financial asset

This is the most important function of Bitcoin today.

2. Bitcoin as a financial tool for providing currency exchange

The current global clearing and settlement system is highly inefficient, with long settlement times, high costs and exchange rates, and high complexity.

Bitcoin could solve those problems, especially when it comes to international remittances, and there are already several Bitcoin companies in the space that are challenging established, larger players.

3. Bitcoin as a Payment Network

Today Bitcoin already exists as a payment network, but it is still quite small compared to competitors like PayPal and Visa.

Due to the uncertainty of Bitcoin's scalability technology, it is not yet certain whether Bitcoin can become the world's leading payment system.

Also, there is a possibility that existing payment companies (if they innovate) and Bitcoin wallet companies like Circle and Coinbase may be able to meet the vast majority of global payments.

4. Bitcoin as a non-financial instrument

Bitcoin may develop functions beyond basic financial functions to accomplish a range of things, which may include decentralized autonomous organizations, smart contracts, prediction markets, and Internet-related things.

Proposal for Bitcoin Policy in China

1. Distinguish the difference between Bitcoin and blockchain technology

The former is a financial asset and instrument, while the latter is a new information technology that can be widely used in many fields.

In order to prevent systemic risks to the financial system and prevent financial crimes, legislation in the financial sector should be limited. The relevant regulations cannot be too strict, otherwise the global competitiveness of Chinese companies will be suppressed.

2. Regulate under existing laws

Bitcoin legislation should be regulated under the existing mature financial regulatory system. The safe storage and transportation of digital assets are core areas of consideration.

3. Observe the behavior of other lawmakers

Before China makes any decisive decisions, it is necessary to observe and analyze the relevant policies of the United States on Bitcoin. At present, there is no urgency for my country to establish a detailed Bitcoin regulatory policy, so waiting and learning from the United States is a low-risk strategy that can help formulate better policies.

4. Support research and innovation

Academic research and innovation in Bitcoin should be given official encouragement and support. This technology has great potential in the future. MIT, IBM, the New York Stock Exchange, Citigroup, and many other leading financial and technology institutions have already received a substantial investment and achieved initial results.

In order for China to be at the forefront of finance and academia, Bitcoin technology must be supported by appropriate policies and given a priority in research and development.