A few days before the People’s Bank of China’s (PBOC) critical date, May 10th, five exchanges stated they would regulate themselves. Will this save them? Weiwu Zhang is not very optimistic. He explains what happened previously, and what it means for the situation – and why he thinks that the attempt at self-regulation is not just an act of desperation but, more importantly, a fatal misinterpretation of the Lord’s intentions.
In ancient times the kingdom of Qi, the most powerful Kingdom in the land, invaded Lu. Lu was a small kingdom, but with a General destined to become legendary. General Wuqi 吴起 was a member of the fellowship of Confucius, and a master of the art of war – second only to the author of ‘The Art of War’ himself, Sunbin. The King of Lu, however, worried about the loyalty of his general, because his wife was from the enemy country, Qi. So the general killed his wife and served the king her head on a plate. The result? The king sent his general to the battlefield, and after he successfully fended off the mighty Qi, the general was sent to exile.
by Zhang Weiwu
In early May 2014, the five biggest Bitcoin exchanges in China – OKCoin, Huobi, CHBTC, BTCChina and BtcTrade – claimed they would regulate themselves. They promised to advise the public to invest carefully, obey all regulations and laws, stop all margin trading by 10th May,
charge a fee for high frequency trading to oppress exuberant speculative activities, and report to the regulatory authorities regularly about the latest developments and risks.
Some wondered at the exchanges’ offer to ‘self regulate’. Exchanges are expected to be regulated, so self-regulation is against the principle of ensuring the correct ‘checks and balances’. So I called Mr Hua Songxiu, CEO of CHBTC (one of the leading exchanges in China), and asked him if the exchanges had received an order from the PBOC. He said, ‘The 5 exchanges acted on our understanding of the best course of action. There was nothing from PBOC.’ Then I checked with the 2014 Global Bitcoin Summit in Beijing, organised by Bitcoin Foundation, about the statement that five top Chinese exchanges had vowed not to participate. Again, Mr Xu Yiji of the Summit told me, ‘We had nothing from PBOC. It was a voluntary move.’ Like Wuqi, the king’s general, they acted without being ordered to do so.
They say the world is a stage. If you live in China, you are in the front row. Things change quickly sometimes, and you can only speculate what’s happening for real. As of late 2013, the Bitcoin exchange market looked like one of the Chinese survival stories, with 0% transaction fees being the norm: a fight to the death producing one winner who takes all. It has happened repeatedly before. The most famous case is Alibaba driving eBay out of China with their 0% fee policy, and now we are expecting that winner to launch the world’s largest IPO.
But now it is becoming clear that policy risk is overshadowing that manic death-match. On May 10th another ultimatum from the PBOC passed. The five exchanges’ claim to self-regulation seems to me not just an act of desperation but, perhaps more importantly, a fatal misinterpretation of the Lord’s intention.
Creating an imaginary Lord to report to
Let’s look at one of the exchanges’ promises: ‘We will report to the regulatory authorities regularly about the latest developments and risks.’
This is both funny and interesting. Who is the regulatory authority? If you look for a regulatory authority, the number one candidate is the China Banking Regulatory Commission, a former division of PBOC tasked with regulating Peer-to-Peer and other online financial schemes. Are you going to report to this CBRC? They did absolutely nothing about Bitcoin. They weren’t even tasked with closing the bank accounts of Bitcoin exchanges – which is something they are good at and which is within their jurisdiction. Instead, the order comes directly from PBOC. Are you going to report to PBOC directly? The exchanges are far too small to report to PBOC.
In fact, the Lord never said ‘regulate’, despite the wishful thinking that understood it that way. They just made up an imaginary Lord they could report to and rely on. What really happened here is that PBOC delivered a clear message: they want Bitcoin out of the picture. I deciphered the message in an earlier article entitled ‘Truth and Rumour’, and re-emphasised it in ‘It’s not a survivor’s game, it’s a loser’s game.’
Readers who are familiar with Chinese culture know that it is customary for subjects to act in accordance with their Lord’s will, and to act without the command actually being given. Sometimes it is a matter of life or death. This self-regulation is an attempt to act in accordance with the Lord’s will, not in accordance with his orders. But will it work? Will the exchanges be pardoned and allowed to live? To view the situation from a Chinese perspective, a story or two helps.
→Are you a naughty child evading punishment, or you are an enemy?
Are you a naughty child evading punishment, or you are an enemy?
We already talked about the war between Qi and Lu. Qi was the most powerful kingdom for a long period in ancient Chinese history.
(cc) Romain Guy / flickr.com
One king of Qi was a gourmet. His chef, 易牙,Yiya, cooked and served his son to the king. (More specifically, according to Han Feizi, 韩非子, steamed.) The chef earned himself the role of a prominent official. There were two other prominent officials in King’s court – one who left his family responsibilities to serve the king, the other who castrated himself to show his loyalty to the king. Such is the benefit and necessity of acting without being ordered.
Around 300 hundred years later, Qi invaded Lu, and General Wuqi became a legend. The question is: Why did chef Yiya earn prominence and power after killing his son, and General Wuqi sent into exile after killing his wife?
The answer is simple: Yiya was a fellow countryman, Wuqi a foreigner. He was originally born in a third country, too small for the career of a general. The difference is whether or not you are ‘one of us’. The contemporary narrative, the way Hollywood tells the story, is of a man holding a smoking gun and giving the eulogy: ‘Thanks for licking my shoes but sorry, you are not one of us.’
The stories have a simple moral. Not that the Chinese are horribly cruel (I did try to find a fairytale, but cruel stories from history always come in handy). The simple moral is this: acting on the Lord’s will without being ordered to is a good strategy, but whether or not it works depends on what you are. Are you one of us, or a foreigner? Are you a naughty child evading punishment, or you are an enemy?
Margin trading, which the exchanges vowed to stop, is vital to their competition – it is the next battlefield after the 0% trading fees. To say that these are the ‘son’ and ‘wife’ of the business is not exaggerating. ‘Self-regulation’ harms business. The exchanges are serving their Lord their business on a plate – but will it work? Are they the chef of Qi or the general of Lu? Is Bitcoin, or the exchanges, a disturbance to our harmony, a little wonton that our lord doesn’t bother to destroy, or is it an enemy of the state?
The answer makes a big difference. In the former case, you can play all those tricks: self-regulation, sacrificing your son and wife, and the Lord will judge you fit to survive. In the latter case, the Lord wants you to quit the business, out of the country for good.
→So what is the Lord’s real intention?
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Brief interlude: This text was written by our Chinese guest author, translated and edited. If you enjoy reading it, please take a few seconds to open your wallet, copy the address below and donate whatever you think you can. Thank you.
18UxEagCEpnb4MZ9t9BvW3fTMwzVudtoQ3
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→So what is the Lord’s real intention?
So what is the Lord’s real intention?
Back in October 2013, when Bitcoin was in the sub-$200 range, I predicted the coming bubble on Bitcointalk. In that very article I also predicted the government’s attitude:
‘In China we have highly centralised political power. The odds of the Chinese government allowing Bitcoin to remain on the markets when it has caught their attention are like the odds of the US government raising debt in Bitcoins.’
(cc) Jason Wesley Upton / flickr.com
The unfriendly attitude from government entities is to be expected. The exchanges used to think along these lines, too. The now-closed FxBTC, one of the first Bitcoin exchanges in China, operated its business without stating the company’s name, nor listing any address or phone number on their homepage. I wrote to them to ask for legal information back in 2013, and their reply was: ‘You don’t ask, we don’t tell. If you trust us, we can do business. You know what we mean.’ The other exchanges were cautious, too. BtcTrade, one of the five Bitcoin exchanges that announced self-regulation, was registered in Canada to begin with.
By the end of October 2013, zeal overcame fear. Bitcoin exchanges moved out of the shadows and started to date venture capital. The star was BTCChina.
Would China’s government see Bitcoin as the enemy of the state, or as a naughty kid to be tamed? BTCChina, by conducting business the way they did, bet the latter. They weighed the risk, and they did two things:
1. BTCChina provided suggestions for industry regulation, in case the authorities wanted to see them. They also sought to speak to the authorities.
2. In a pre-emptive move, they decided they could single-handedly influence market fluctuation and tame the market. Their new action was to implement a liquidity rebate.
Liquidity Rebate is a measure designed to remove the upward bias of the value of securities. Every time a security is traded, its cost is higher, thanks to the transaction fees. This creates an upward bias in security prices, and the more frequent the trading, the higher the price. BTCChina decided to charge those traders who created price volatility by their market orders, and give the fees to those traders who stabilised the price with limit orders. This method is professionally called a liquidity rebate, and it can help to calm an exuberant market.
BTCChina made no profit through their new feature. Indeed, every Yuan charged to traders was given to other traders. However, this method was too complicated for the traders, and soon it was considered a device to charge users for the service provided. The effect of the liquidity rebate on the whole Chinese market is not known, because the market share was soon given away to Huobi, and volatility continued. It is fair to say that in order to win favour from their Lord, BTCChina gave away their competitive edge to Huobi. Due to this competition, a single exchange cannot calm the market. But if all the exchanges banded together, perhaps it could be achieved?
This was the backdrop of the recent self-regulation announcement by the five major exchanges. If the Lord wants harmony, the Lord gets harmony. Can we live now?
If our Lord wanted to see the market calmed, regulated, he would say so. It has been four months and our Lord could have said this at any time. But he ignored BTCChina’s attempts to self-regulate the market. Read the news report – the word ‘regulation’ is never spoken by PBOC. In fact, in order to avoid misinterpretation, PBOC directly gave the order to shut down accounts, instead of tasking a regulatory entity (CBRC) with this, despite them being much better suited to the task. PBOC’s direct order has a clear meaning: This is final, because it’s from the top. Someone very high up wants Bitcoin to cease to exist. PBOC’s governor Zhou Xiaochuan¹ is the top candidate (for that one high-above), as the vice Chairman of CPPCC he is the one in PBOC who can deliver a decision signed by five ministries, such as the one deliverred in last December.
Whether or not this trick to obey the Lord’s will without obeying his order will succeed depends on what you are. Bitcoin is based on the ideal of decentralisation. It challenges the national control of money. Bitcoin is not a naughty child that must be tamed. It should never have been born in the first place.
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The author is a Chinese entrepreneur. He has been doing IT business with German customers in China for 10 years. He believes bitcoin is the greatest invention in this decade, and is actively looking for opportunities and partners to establish new types of business with bitcoin. He can be reached via linkedin
Read more from Zhang:
Chinese Banks don’t know how to act appropriately, because Bitcoin is too tiny
China: If Bitcoin remains small, it will be allowed to live
‘It’s not a survivor’s game. It’s a loser’s game.’
Truth and Rumor