Bobby Lee Speaks: The Future of Bitcoin in China

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I met Bobby Lee, BTC China’s CEO, at the café/bar Room 77 in Berlin on 11 February 2014. The venue was quite fitting as Room77 is a pioneer in accepting Bitcoin payments. We had a beer and a chat:

 Is Mt Gox dead?

Mt Gox is not dead. Experience has taught me that running an exchange is challenging and hard. Because we are dealing with Bitcoin which is decentralised, non-reversible, if we or MtGox make mistakes, real Bitcoins are lost, and we cannot retrieve funds. If we allow customers to double withdraw, the money is gone. There is no law enforcement to get the money back. I understand fully Mt Gox. As far as I know they had an issue with how they did operations. I cannot put the blame on anyone. They shut down the withdrawals for a period of days to investigate. If that is the case, it is reasonable to get to the root of the problem. However, the longer it takes the more it gets suspicious. They got egg in their face for blaming the Bitcoin protocol itself. I think it is more about their customer service being faulty. They did lose some credibility, respect with this episode, they have been doing so for a year which is unfortunate. It is hard for an exchange to go away completely unless they run away or are shut down. Often due to their large deposits, exchanges can keep running even with negative equity. We have seen examples of this before. More and more exchanges will be recognised as insolvent this year. Your question should be rephrased to ‘Is Mt Gox insolvent?’ The delays in FIAT withdrawals are suspicious.

BTC China is the 4th exchange by volume in the world, what are your plans to get back your place as number 1 ?

Our business is not to be the number one in the world. We got to the top of the chart by accident. At that point, we had no commission on trading and a mass uptake in China. Exchanges operate on different markets around the world. It is like telecom operators. Each country, region has their own operator. We do not compete. China mobile does not compete in Europe. Each operator has their market to stake out. Our plan is to be top exchange in China. Huobi has got a lot of attention, unfortunately. We suspect much of their trading volume is fabricated. It is a common practice to fabricate trading data in China. We have taken a stance, my co-founders and I, not to play that game. We play by the book, and we are at a disadvantage when measuring trading volume. None of them dares to get listed on the Bitcoin charts. Huobi brags about their numbers in China, it is what it is.

Last year, the Chinese authorities called for a ban of the ties between Bitcoin exchange platforms and third-party payment processors. Was this BTC China’s darkest moment? How did you cope personally with the stress?

Those were nervous times. I remember distinctly December 16th, that was a week and a half after regulation was announced on December 5th. The media was still deciphering the announcement of December 5th. And then came the events of December 16th. A verbal warning was given to third-party processors not to do business with us. Those were nervous days. Unfortunately, when regulation comes out in China what is written on paper is letters on paper but it is vague, there is a lot of room for interpretation. Words are added at the end of sentences to make them much more malleable.  That is the Chinese way. By analogy, a country might say that alcoholic beverages above 50% proof are not allowed, in China they would say anything overly alcoholic is not allowed. This is to leave them a margin to change their mind. At the time we had doubts, we didn’t know if, as a business, we could exist. Two months on it seems we are allowed. As a business we have not been shut down. We were a bit over concerned.

How would you describe the Bitcoin market in China now and in the future?

The Bitcoin market in China now is off its peaks. Our volumes are not as high as compared to fake volumes of competitors, but we have a good pulse on the market.  Our research has shown us a lot of people are on the sidelines. The Chinese government put a chill factor on the market in December and scared a lot of people. Half of the people are scared. Some strong believers are still there. Volume is one tenth of what it used to be. The peak was late November, December. It is a chill factor. People were scared the government could do more. From the current consumers’ perspective the future is uncertain. I admit to that. If you interview large numbers of Chinese consumers that have engaged in Bitcoin transactions, the survey will show the future is uncertain. We are industry insiders, we have talked with Government, industry and from what we know Bitcoin regulation will not take a turn for the worse in China. What was done is already enough. They ratcheted up their announcement of the 5th on December 16th. They did not realise the consequences of this. It was a very hard squeeze that scared everyone away. That was not their intention. They intended to calm down the market so that it would not shoot sky high. They achieved this. Based on our prediction, the government will not do more. Bitcoin is not on top of the government’s list. The regulation on paper gives them enough latitude to make changes if necessary. Exchanges like ours will tend to cooperate with the government so there is no worry on their behalf, no worries about volatility, AML etc. We will work hard to comply. That is why I think 2014 will be an even bigger year for Bitcoin in China. We need a few months for the dust to settle, so the Chinese consumers regain confidence. There is demand for Bitcoin in China. Bitcoin’s features remain, it hasn’t become less scarce, less decentralised or less a store of value.

Bitcoin is a hybrid product, in part a means of payment in part a store of value. Do you think high volatility will condemn it as a means of payment?

 It appears to us that the reason there was a hard government crackdown with a one punch, two punch in December is because they thought there was too much volatility. The government has a right to think it is too volatile. When the first punch didn’t work, the second one did the trick. We have a better answer to volatility. We have an innovative maker-taker commission model. We reward our market makers with a commission rebate. Our market makers bring the price gap to 0.1 of one RMB. It is the smallest gap of any exchange. We have the deepest liquidity. At any moment, people can buy or sell Bitcoins without moving the price. Our solution will allow Bitcoin commerce to take off. Bitcoin prices will still change over time but this will not affect commerce. I agree that on a global scale Bitcoin volatility will go down over the next few years. As Bitcoin prices go up, volatility will go down. As more merchants and people adopt Bitcoin, the price will go up to a point and then stabilise. It all comes down to the fiat currency. The Bitcoin price is the inverse of what is happening with fiat.

Chinese authorities want to have some control over Bitcoin, just like with the Internet. Yet in Hong Kong, even though it is in theory a completely autonomous legal system, Bitcoin strives. Do you believe the Chinese authorities want to test Bitcoin in Hong-Kong as a laboratory before deciding how to regulate it in the mainland?

There is no truth to that last part. You said the Chinese try to encourage Hong Kong to be the Bitcoin guinea pig. There is no truth to that. I have spoken to regulators in Hong Kong. It is essentially the same attitude. Hong Kong Bitcoin regulation is not very different from that in China. They both don’t treat Bitcoin as a currency, they both don’t allow financial institutions to deal directly with Bitcoin. I have heard Hong Kong regulators talk of laissez-faire. The reality is very different. These regulators are very smart. They say we will not regulate Bitcoin, do what you want but they won’t issue bitcoin licenses to companies nor will they give carte blanche for banks to work with Bitcoin exchanges. Today, a Bitcoin exchange in Hong Kong has to lie to open a bank account. When banks find out the truth, they shut down the accounts. In Hong Kong, things are worse. In appearance it is free etc.. but in practice banks are governed by the HKMA (Hong Kong Monetary Authority) and they are strict. We are a Chinese business, you can imagine we have considered doing business there. The fact we do not have a robust business there shows Hong Kong is not easier.

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