CEO of BTC China, Bobby Lee, spoke to CoinDesk Editor Emily Spaven about the company's triumphs and struggles in 2013, and his vision for the coming year.
BTC China has had an interesting year. In April 2013 the company set the world record for bitcoin's highest value, becoming the world's most active exchange by November.
“We think we are a long-term player and we have funding so we’re not running away – we’re not going anywhere.”
Bitcoin value hit a record peak of $1,242 on Mt.Gox on 4th December 2013. It began to plunge, though, after China's central bank issued a statement the following day forbidding financial institutions from participating in the bitcoin market.
Shortly after that, the authorities began to restrict access to third-party payment providers as well.
The subsequent action was "a shock and a devastating blow" for BTC China, according to CEO Bobby Lee, who described those December days as his company's "darkest hours".
Price volatility could have been the problem. BTC China had reduced trading fees to a "promotional" 0% in September, but the market quickly overheated as high-frequency traders and speculators leapt in.
"If we'd known what was coming in December, we wouldn't have done this," admitted Lee.
The company attempted to deal with the issue by raising fees to 0.3% in mid-December. However, this – together with lack of access to bank deposits – saw BTC China's volumes dwindle to under 1,000 BTC per day.
Lee had expected other exchanges to follow suit with fee increases designed to appeal to the People's Bank. Since then, BTC China has fallen to third place in the China's bitcoin trading market as competing exchanges kept their fees low or simply non-existent. Lee said:
"All our competitors have flocked back to a 0% fee structure. Which we know is not what people want to see. It only benefits speculators, it only benefits high-frequency day traders – it doesn't benefit the regular people who want to buy bitcoin, nor does it benefit the bitcoin miners who want to sell bitcoin, because of the high volatility."
He added: "We are holding our principle. It's not that we want to take money from our users – that's not it at all. We want a healthy long-term bitcoin ecosystem."
"We want to work closely with regulators and we want to play by the rules they want: which is low volatility, and friction. They want friction. They don’t want to see a situation where we have 0% fees and speculation is rampant and large volatility and price swings."
"We have high confidence that that's what the PBOC wants to see."
BTC China this week announced a new fee structure. Under the new system, CNY withdrawal fees are reduced from 1% to 0.5% and a new "maker-taker" fee model will apply to transactions.
"Maker-taker" is a system whereby those posting multiple buy/sell offers and increase liquidity in the market ("makers") are paid a fee, whereas those who take the offers and remove market liquidity (the "takers") are charged a fee. The fees received and given back (as in BTC China's case) are equal, resulting in zero trading profit for the exchange.
"We are giving the fee to the market makers: the people who put in a limited order, waiting for you to buy or sell your bitcoin. We feel very confident and we hope to dominate the market with this model."
Lee called it a "reverse rebate" system, saying it was part of BTC China's goal to help bitcoin in the Chinese market more than to earn revenue for the company. It does not make any profit from this fee structure but intends to use it to prevent the kind of "free-for-all" that may have caused last year's troubles.
China's other bitcoin exchanges have dealt with the new situation regarding financial institutions and transfers in their own way. Some have continued to accept deposits into personal or corporate accounts.
BTC China sees that as a temporary measure not conducive to bitcoin's longer-term success, and one that could get companies mired in regulatory and taxation issues down the road.
Lee's company now has a "voucher system" for users to upload and withdraw funds. In legal terms, this is different to a third-party payment processor: anyone who wants to enter the market must first purchase a voucher code, which they can use to buy bitcoins.
Withdrawal works in the reverse direction, buying vouchers for bitcoin which are then sold to a separate company for local cash.
Threats to central banks
Perhaps it's the near-vertical rise in bitcoin's value over the past couple of months that spooked central banks internationally to issue warnings. It has resulted in a range of responses from hands-off cautionary solutions (Malaysia, Singapore, Germany) to more active attempts to cool bitcoin trading down (India, China).
The US has taken an investigative approach while authorities in other large economies, such as the UK and Japan, have remained silent. Referring to the Chinese authorities' December bans, Lee said:
"If prices rocket again, we risk that third hammer hitting, which won't be good for anyone in China. So that is why we want to moderate prices in bitcoin."
It's not an attempt to manipulate the market, he added, just a pragmatic view of political realities in his country and others.
BTC China's trading volumes may have plummeted in December, but they have since recovered to a more robust 20,000 BTC per day under the new maker-taker fee system.
Precise data on the trading volume of other Chinese exchanges is difficult to judge, with researchers having to rely on the statistics they publish on their own pages.
As well as taking a transparent approach to BTC China's fortunes, Lee also wants to maintain a long-term view of bitcoin in China, saying trading volumes are a secondary indicator and that everyone is always at the mercy of any new regulation.
"We think we are a long-term player and we have funding so we're not running away – we're not going anywhere," he said.
"Our volumes are healthy now and we're not going to die without a fight."
Co-written with Emily Spaven
Chinese freeway image via Shutterstock