Chomping at the Bitcoin: An Expert's Take on Bitcoin in China

NEWS
Jon Southurst
Sep 30, 2014 at 18:50 UTC  |  Updated  Oct 1, 2014 at 13:54 UTC

Around mid to late 2013, the bitcoin world started waking up to an interesting realization: bitcoin growth wasn't being driven by the typical finance and tech centers of New York, London or Silicon Valley. In fact, China was playing the more significant role.

At that time, exchange BTC China had already posted the record-high bitcoin price of $308 (CNY equivalent) in April 2013 and was surpassing Mt Gox in trade volumes. Chinese factories were cranking out mining machines and the country's residents were downloading more bitcoin wallets than anyone else in the world.

In November, China was leading the global rise of bitcoin, as its price was growing exponentially. The digital currency hit its all-time high of over $1,230 a few weeks later.

Then, on 5th December, the People's Bank of China (PBOC) entered the narrative with a warning for all financial institutions to steer clear of bitcoin, the first of many that effectively ended bitcoin's chances at becoming part of China's everyday economy. Bitcoin's price fell 25% at the news, and the rest is history.

These days, the country is known for having the world's busiest trading exchanges and ASIC-filled mining mega-farms. As one local investor said: "Trust China to turn bitcoin into another manufacturing industry."

Mixed forecast

In the aforementioned bitcoin in China feature, CoinDesk spoke to Zennon Kapron, a Canadian-born financial technology expert and owner of the Shanghai-based consultancy Kapronasia.

Kapron has since turned his observations into a new book called Chomping at the Bitcoin, titled similarly to presentations he gave in late 2013, in which he looked at China's investment environment, the mining scene and gave a prescient warning about government intervention.

Book Cover: Kapron: Chomping at the Bitcoin

While the book remains optimistic about bitcoin's potential as a disruptive technology, Kapron is slightly downcast on its short-term prospects for success in China.

Considering the rarity of credit card chargebacks and the low fees available for existing payment options in the country, there just isn't a compelling use case, he wrote. Speculators, meanwhile, have moved on to other investment opportunities.

As for the PBOC's intentions, Kapron said bitcoin probably "got in the way" of the Chinese authorities' "cautious and pragmatic approach" to economic reform. The more successful digital currencies threatened to become, the greater their potential to destabilize China's growth and its citizens' financial wellbeing.

Cryptocurrency's role

The notion that wealthy Chinese would use bitcoin as a means to bypass strict capital controls on the yuan were probably exaggerated, Kapron said.

Chinese are still allowed to move the equivalent of $50,000 out of the country per year, and those who managed to hit that limit could avail themselves of advisors and overseas connections to shift funds in one business day for a less than 1% fee – cheaper than bitcoin exchanges.

Bitcoin, where it is used publicly, is still chiefly a marketing stunt. China's main contributions to the global bitcoin ecosystem remain mining and trading. Significant roles they may be, but not likely to cause a financial revolution in their homeland by themselves.

The future of bitcoin in China is like the rest of the world, Kapron concluded. It must move beyond being a speculative tool hoarded by users and become something actually useful in daily transactions.

Bitcoin in China

Zennon KapronCoinDesk spoke to Kapron for a second time to discover the reasons for his continued interest in bitcoin's Chinese presence and his views on its foreseeable future in the country.

CoinDesk: Why did you decide to write the book?

Zennon Kapron: We started covering bitcoin in China around June of last year and so saw the massive run-up in bitcoin price, the regulations, and then the subsequent fall in value. In our research, we met and talked with a number of industry people who had really interesting stories about how they had been involved with speculation, mining or actually accepting bitcoin.

That was the first feeling that I had that it could be bigger than just a research report. In addition, while coverage at Coindesk and all the other publications that look at bitcoin in China was good, no one had really told the whole story in one sitting – and that is how everything got started.

Can China play an adequate role in world bitcoin development merely by providing mining factories, ATM hardware and speculative exchanges?

China needs to be part of the global bitcoin story if the virtual currency is to be successful in the long term, but it remains to be seen if and when that happens.

We do have some of the most advanced and sophisticated exchanges globally here in China and, of course, some of the biggest mining equipment manufacturers and mining operations.These all play a part in the global ecosystem, but right now there's not much being done to develop the basic usage of bitcoin domestically.

Is it actually necessary for China build a full local bitcoin-based ecosystem? Or do the existing centralized payment platforms there work well (and economically) enough?

That's the challenge for bitcoin globally and more specifically in China: what problem does or can it solve? Merchant fees in China are low compared to the West and platforms like Alipay and WeChat/Tenpay have the mobile and non-bank payment market here wrapped up, so there's not too much opportunity there.

Bitcoin doesn't have enough critical mass to be a store of value at this point beyond the miners and early adopters, so also not very appealing there. Could we see China continue to just innovate with exchanges and mining? Certainly.

You said reports that wealthy Chinese are using bitcoin to move money abroad are overblown. What, if anything, might change that?

I really don't see that changing. If anything, regulations on the cross-border flow of RMB are loosening, which would indicate that moving money around will be easier in the future. In addition, with programs like the HK-Shanghai stock connect being setup, Chinese nationals have new choices and venues through which to invest. The need to use something like bitcoin to move money abroad is diminishing.

Do larger, more powerful countries (eg: China and the US) have more to lose by allowing bitcoin to run free?

For larger more mature financial industries and economies, bitcoin certainly has some risks, but manageable risks. China's financial system has its own challenges right now. Shadow lending, credit quality and liquidity are all issues that are top of mind for regulators.

I think the regulators see bitcoin as more of a risk than something that is completely necessary for the economic progress of the country, so they pushed it to the side for now and largely eliminated the direct risk to the financial system. Chinese regulators are not known for backtracking on regulation especially in the financial industry, so I doubt we'll see any change in this positioning unless acceptance and usage really starts to pick up [outside] China.

You said short-term returns and lack of creativity "will be central to bitcoin's undoing in China". Will bitcoin come undone in China? Some parts of your book seem to take bitcoin's failure there as a given. Is that the case?

It's challenging. For bitcoin to be successful globally, it needs to solve a specific problem or set of problems. In China, we may be putting the cart before the horse. We have innovative exchanges and miners, which is great, but what about the purpose of bitcoin itself?

What concerns me is that there is not enough focus in China with making bitcoin accessible and useful for the masses, rather than a select group who just mine and speculate. Until that changes, bitcoin will always remain a side-story in China.

Would you personally invest in any current bitcoin related ventures? And if so, what kind?

Although we work directly with a number of bitcoin startups both here in China and abroad, we don't invest directly.

That being said, trade and international payments are two areas that we are particularly interested in as both pose significant challenges for large and small companies alike. We like companies that are focused on B2B business models especially with trade, and definitely see it as an opportunity for bitcoin globally.

Lucky coins image via Shutterstock

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