Yonsei University Graduate School of International Studies
 

Bitcoin in China: The RMB is no longer the yuan and only currency

What do the bailout of Cyprus and the Lushan earthquake in April 2013 have in common? They both drew the attention of Chinese eyes to Bitcoin. In Cyprus, tax evaders were using the digital currency to get their money out of the tax haven resulting in a jump from US$80 per Bitcoin to US$260. In the Lushan, Jet Li’s One Foundation used a Bitcoin address for donations in the wake of the disaster. A month later, China Central Television (CCTV) showed a documentary on the cryptocurrency that got a lot of Chinese investors excited, not only because they heard about this opportunity for the first time, but also because CCTV’s coverage signalled a tacit approval from the Chinese government. In November 2013, Yi Gang, the deputy governor of the People’s Bank of China said that people were free to participate in the Bitcoin market, making the rate shoot up to US$1200 per coin. Later that year, the Chinese government banned financial institution from using cryptocurrencies, and a steep drop in value followed.

Investors had a lot of questions that year. What is Bitcoin? Does it have intrinsic value? Will it ever enjoy widespread use? Bitcoin (Bitebi, 比特币 in Chinese) is a virtual currency that is not regulated by any central authority; its value is its security and ease of use. Anyone can safely send Bitcoin all over the world in less than 15 minutes, while traditional banking services can take hours to process an international transaction. After its launch in 2009 by an unknown developer who uses the pseudonym Satoshi Nakamoto, Bitcoin were traded for just a few cents, mostly between a handful of hobbyists. Currently, one Bitcoin trades for about US$320 and its value has been relatively stable throughout 2015. Almost 15 million coins are in circulation, so we are talking about a combined worth of over US$4 billion.

Bitcoin is supported by a technology called the blockchain. The blockchain can be thought of as a massive distributed ledger. It is a file that records all transactions and is maintained by a network of computers. So if I want to send you a Bitcoin, what happens is that a swarm of servers all record that my account now has one coin less and yours has one more. This information spreads through the network, and the fact that the ledger is kept in check by thousands of bookkeepers makes it impossible for me to spend one coin a second time. The fact that the blockchain is overseen by the community has made it a very interesting technology for Chinese libertarians with anti-government sentiments. Every transaction that is added to the blockchain involves calculations, and no central authority is taking a cut, so how is this system supported?

As a reward for their efforts the computers that process these transactions and maintain the ledger receive Bitcoin. Every ten minutes, 25 new Bitcoin are distributed. The more you contribute to the network by processing transactions the more likely you are to win. It is like a lottery in which you put tickets for every calculation that you make. This is called mining. In principle, you could contribute to the ledger and mine Bitcoin with your laptop in a cafe in Sinchon. But, of course, this costs energy, bandwidth and storage space; the ledger is at 47 GB and growing. Many amateur miners have stopped their operations because the energy and equipment costs have become too high.

China played a large role in the specialisation of mining. An application-specific integrated circuit (ASIC) is a chip designed to only mine Bitcoin. The first ASICs were developed in China in 2013. This made it easier to get more tickets in the lottery box and started an arms race among miners. Additionally, in some Chinese provinces like Inner Mongolia the cost of energy is cheap to the point that it fosters mining businesses. The beauty of the blockchain is that there is no central authority. However, if one party were to control 51% of all mining computers, there is the potential that he could overtake the system and control all bookkeeping. This has never been the case while miners were just a dispersed group of hobbyists, but it could become an issue in the future due to the emergence of Bitcoin data centres in China.

Currently Bitcoin is still legal, but its usage is limited if compared to European countries due to the Chinese ban on the processing of payments. So what explains its popularity? Sometimes the rise in popularity of Bitcoin in China is linked to Xi Jinping’s crackdown on corruption, presented with stories of corrupt party officials jumping on the opportunity to secure their ill-gotten gains. Sending Bitcoin is extremely fast, but there are still fees to pay to convert Renminbi into Bitebi. It turns out that the fees at a Bitcoin exchange are not cheaper than the usual black market currency traders, known as huangniu (黄牛), who can help with the whitewashing of assets for a cut of only half a percent.

For Chinese people who want to invest, there are not many options. The housing market requires massive investments that many people have no access to and the Chinese stock market has been lagging since its growth years during the 2000s. The fear that the government takes your land for a development project and then cheats you out of a fair compensation is very real for many Chinese. Bitcoin is attractive because it is the only kind of investment that local governments cannot interfere with.

By Laurens Bistervels

 

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