Are the rumors true about China banning cryptocurrencies?

Received a few emails the last few days.  Here is one response I sent this morning to some friends:

This policy tightening, specifically based on this market-moving story from Caixin last week, comes amidst a larger shift: pressure from SOE incumbents that are concerned with the entire mobile payment / independent payment systems that have been setup over the past 3-4 years.  Quartz has a good overview on how the state-owned banks have essentially pressured policy makers into stymieing further growth of alternative services from Alipay & Tenpay.  Similarly three weeks ago the PBOC placed a “temporary” ban on payments made by scanning QR codes, mostly likely to protect UnionPay (an SOE) against the competition of Alipay & Tenpay.  In fact, this past week Chinese SOE banks posted their weakest annual profit growth, and they like those margins.

With respect to Bitcoin, I doubt it has anything to do with capital controls or flight.  Despite the fact that Bitcoin can be used as a vehicle to avoid capital controls, but have not seen any actual numbers on that so I could be wrong (maybe they all use RealityShares).  Yet even if it were the case, China is the 2nd largest source for remittances received ($60 billion in 2012), making it unlikely that the trend reversed and somehow China now exports more funds than receives during those 2 years (and I doubt that it is being used for domestic remittances for migrants to the inner provinces either).  For perspective, there are common ways to use UnionPay and art auctions to avoid capital controls (those links have interesting stats).

In addition, here is an updated summary of notices the different exchanges in China have received and their responses.  In addition, Rui Ma provided info on the most recent CoinDesk news piece on this issue yesterday.

Interestingly enough, I was told a couple days ago, in the event that the rumors of the PBOC clamp down on electronic deposits beginning 4/15 are true, one alternative is that Huobi (and others) would allow users to go to their office to deposit directly with them.  Bobby Lee from BTC China and others have said the same thing as well. Yet, what’s to prevent Alice from sending funds to some third party “cash delivery service” that then delivers them the cash?  And in any case, if the PBOC actually wanted to stop the business, it would be very simple – just (a) block the websites and (b) send in the PSB to close them down.

In any case, I can just imagine nerds with wheel barrows full of RMB lining the sidewalk of corporate offices…

That said, we (the public) probably will not know until we do.  Chinese regulators have used this strategy before: release or “leak” some information to test the reaction of the market.  If the reactions are severe, they may change the policy.  If you believe your investments will be impacted, aside from somehow “getting” some emergency guanxi, the best thing you can do is prepare for a Plan B, likely utilizing Hong Kong.

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What about English in China?

A director of studies (DoS) for a foreign education company in China contacted me today and we discussed the conundrum of college education, specifically English education, in China.  I devoted part of chapter 9 in GWON to this segment.

His view was that there are indeed opportunities and reasons for why English learning should be encouraged, that professions that interface with foreigners and foreign companies need to be proficient in English.  This is true, but the reality is that there are not that many positions that do this, perhaps just a few million such positions including notably the hospitality industry and IT off-shoring companies.  For comparison there are approximately 300 – 390 million English language learners in China and roughly 600,000 – 650,000 foreigners permanently residing in China.1

This is not to say that students in China should not have the option to learn or should not be encouraged to learn other languages, such as English.  Rather this is to say that learning English is no longer an end in itself.  It is not a “get rich quick scheme” yet much of the marketing done in the segment continues to promote this view.  Whereas 20 years ago being a fluent English speaker or an EFL company, may have been a very profitable profession and sub-industry, today it is quite competitive and very mature with salaries being arbitraged to international labor rates.  Instead, learning English is just another tool for high-skilled workers, to interface with their international peers and colleagues.  If you do not work in such a position or have such skills in the first place (e.g., semiconductor engineering) but instead interface solely with Chinese colleagues in China, you will likely have no additional monetary incentives for mastering a foreign language.

This ties in with the conversation with the DoS because he planned to give a presentation to several college groups about the utility of learning English.  I had previously given a presentation last December (video) (slides) and discussed some of the challenges that college students currently face, including a skill-set gap that exists.

For example, according to the Los Angeles Times:

By some accounts, the unemployment rate for Chinese college graduates age 21 to 25 is 16%, nearly four times that of blue-collar workers. An Education Ministry survey of 500 firms found that employers had trimmed the number of jobs available for new hires this year by about 15%. In Beijing, an estimated 98,000 jobs are available for the 229,000 new graduates, a city education committee study found.

“The manufacturing sector is still seeing labor shortages,” said Geoffrey Crothall of China Labour Bulletin, a Hong Kong-based research group. But many college graduates in major cities are ending up taking poorly paid jobs in areas such as telemarketing or real estate sales, he said, “and often these wages are lower than a factory worker in Shenzhen.”

I have written about this skill-set mismatch several times before.2 It is currently exacerbated by social promotion within institutions (e.g., degree inflation) and will likely continue into the near future.  One of the problems that the company the DoS represents is that the bulk of its operations is still geared towards traditional brick-and-mortar facilities.  While it was not mentioned in the conversation, two years ago the company had intended to grow and open several hundred training centers on the mainland.  This has not happened for several reasons:

  •  the EFL education tuition is unaffordable to most of the target audience (urban middle-class consumers)
  •  on top of inflation which erodes their purchasing power, a relatively “slow” economy has put pressure on wages of these working adults who have to cut back on services such as EFL education
  •  lack of a visible return-on-investment for most customers (i.e., after taking the courses it does not lead to instant seniority or new career opportunities)

However, there are other areas for businesses to expand, including the online sector, which is expected to grow by leaps and bounds.  In fact, TutorGroup (which the DoS does not work for) just closed its Series B round of financing last month, raising $100 million to build out its online language education platform that targets (among others) Chinese seeking to learn English.

According to its write-up of the funding announcement, TechCrunch noted that:

TutorGroup says that it expects the adult English language-learning market within China to grow 25% annually and reach more than $21 billion by 2015. In China alone, the company expects sales to experience a triple-digit annual growth rate in the next few years.

According to Ambient, a competitor:3

China is now the top buying country of digital English language learning products, not only in the Asia region, but in the world, according to a new Ambient Insight report called “The 2013-2018 China Digital English Language Learning Market.” The five-year compound annual growth rate (CAGR) for digital English language learning products in China is 23.6% and revenues will nearly triple over the forecast period. […] Revenues for these products will spike to a breathtaking $931.8 million in 2018, up from the $323.1 million reached in 2013.

Thus, these two data points suggest that there may still be opportunities in the education and training segment, but likely in the online-only space an area that the DoS’ company is trying to rapidly expand (by opening up a new Boston office for freelance instructors).

What does this have to do with English-learning?  I suspect that the online segment will likely benefit and recoup the costs of the investment due to the always-on nature of the urban consumer willing to try out one of these new platforms.  Yet whether or not the language and educational knowledge transfers over and translates into higher productivity or more proficiency is another matter entirely.

The last example that ties into this is based on a conversation I had last November with a center manager at the same company that the DoS works at.  The manager explained that the ayi (阿姨), an “auntie” custodian, at the headquarters office he worked in paid 20,000 RMB (~$3,400) to learn English through the company’s internal program.  Less than six months later she was burned out due in part to the unrealistic expectations (i.e., “overpromised and underdelivered”) that is unfortunately the modus operandi that this segment in China still suffers from.  This will likely change as the industry continues to mature, yet it would be in the students best interest to hear the challenges — in addition to the opportunities — that a second language can provide.

Tangential coda: in a slight twist, while English tutoring has been a relatively low-barrier to entry position in China, it looks as if Shanghai is now exporting math instructors to England.4 The UK is spending $18 million to fly 60 Chinese math teachers (proficient in English communication) to help improve the math abilities and scores of learners in England.5

  1. A census was conducted and the results were published 3 years ago, see Almost 600,000 foreigners counted in China from China Daily.  Another unsourced estimate is that 80% of the approximately 650,000 foreigners in China work as teachers, see China Average Pay & Salaries For Expats & Foreign Teachers… from Salon []
  2. Are MOOCs a solution for the skillset mismatch? and The market for massive open online courses in China []
  3. China Digital English Language Learning Market Booming from PRNewswire []
  4. See English tutors in China — well-paid, not always qualified from UPI and Shanghai teachers flown in for maths from BBC []
  5. Chinese teachers sent into English schools to boost results from The Telegraph []
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Another Brick in the Wall: Link Edition #57

shanghai university of sport
Catching up with a couple non-crypto Chinese-related news that was on a hiatus since last December.

That last link is probably best viewable in Chrome, it is a write-up of my presentation I gave in December (see the video & slides below):

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Presentation covering Smart Contracts, Smart Property and Trustless Asset Management

Earlier tonight I gave a presentation at Hacker Dojo with the Ethereum project.  I would like to thank Chris Peel and Joel Dietz for organizing it.  Below is a video and accompanying slide deck.  In addition to the footnotes in the PPT, I recommend looking at the wiki on smart contracts and Nick Szabo’s writings (1 2 3).

Also, some quotes regarding synthetic assets in Szabos’ work:

Citation 1:  “Another area that might be considered in smart contract terms is synthetic assets[5]. These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways.”

Citation 2: “Creating synthetic assets or combinations that mimic the financial functionality of some other contract while avoiding its legal limitations”

Citation 3: “Reference to Perry H. Beaumont, Fixed Income Synthetic Assets”

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Is Bitcoin really a decentralized autonomous organization?

A friend asked me about the interview I did a couple days ago where I mentioned Roger Ver’s influence as an instance of how Bitcoin is not an example of a DAO.  My usage was not meant to disparage him — in fact, his sobering backstory helps explain his intense passion today.

I have a longer explanation regarding DAOs that will be published in a couple weeks.  In the meantime however, regarding changes to Bitcoin itself, I do think a fork of some kind is possible (not that it will happen) largely due to two different groups that would like to take the protocol different directions.  For example, in the face of the new CoinValidation route that the Foundation began promoting last fall, Roger Ver’s promoted Shared Coin as a way to work around potential white/black listing.

While it is unclear what direction the Foundation (and hence the protocol as most devs work through them) will ultimately take, the overall tone of regulators at the New York Department of Financial Services hearing this past week was not conducive to individual privacy.  In fact, Benjamin Lawsky, the Superintendent of the Financial Services department stated that, “It’s not worth it to society to allow money laundering and all of the things it facilitates to persist in order to permit 1,000 flowers to bloom on the innovation side.”

I am not sure if Lawsky realizes that Mao originally came up with that phrase or why (to “lure out the snakes from the cave”).  Perhaps projects like Dark Wallet and ZeroCoin will change that equilibrium.

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Interview covering China, smart contracts and trustless asset management

Earlier today I was interviewed by Donald McIntyre at Newfination.  We discussed a number of topics related to cryptocurrencies and trustless asset management including smart contracts and how they can be applied in China (see video below).

My current motivation and interest stems from the lack of clear property rights and contracts in China.  While some jurisdictions are better than others (like Shanghai), no one actually owns property for more than 70 years whereupon it is automatically reverted back to the state.1  In many cases, the actual property may only have a 40 or 50 year lease left because of the different staggered stages of post-Mao liberalization.

Furthermore, at any given time these titles can be revoked or modified by a 3rd party without recourse.  As a consequence, land confiscation is very common and is actually the leading cause for social unrest.  For example, each year approximately 4 million rural Chinese are evicted from their land.2 Why?  Because, according to an HSBC report, local governments generate 70% of their income from land sales much of which are ill-gotten gains for one ore more party (e.g., state owned firms have local leaders evict farmers from land).3  And there is no property tax, not because China is some hyper libertarian utopia but because corrupt officials — some of the same ones that confiscated the land — do not want to reveal their property holdings.

Potential cryptocurrency-related solutions

In 2004 a report from the OECD found that roughly half of all urban Chinese workers, primarily migrant workers from the provinces participated in the informal sector (this is between 120-150 million people).4 Could they benefit if their payroll and compensation was managed by a Decentralized Autonomous Corporation rather than a human laoban (boss) who could change their mind or otherwise abuse the relationship (e.g., change the contract ex post)?  For instance, without an urban hukou (household registration) most of these migrant workers are left without any legal recourse in the event that their contracts are tampered or ignored.

‘Trustless asset management’ tools built on top of a cryptoledger such as Bitcoin or Ethereum (which are tamper-evident) could empower not just those in the developed world, but also those in the developing world who are more easily marginalized without political guanxi.  Even if trustless asset management networks are not deemed legitimate or valid by the government or a Party apparatus, the goals of several decentralized smart contract based systems being developed could level the playing field and allow individuals from all walks of life to actually codify and manage scarce goods that they currently own.

While books and volumes could be written on this topic, one view is that even if there are stricter capital controls and regulations on cryptocurrencies in China (or elsewhere), that by using a couple different ‘colored’ coin chains (or Ethereum contracts, etc.) Bob from Beijing could still transfer assets worth X amount of money to Anhui Alice instead of X amount of money itself.  This according to the promoters, could create a sort of advanced barter system which may not be as efficient in terms of actually using a cryptocurrency as a medium of exchange but it could help those in an informal economy qualify and quantify asset value and clear up some of the confusion around contracts and property ownership.

See also: Chinese property law and Forced evictions in China

  1. See China’s Real Estate Riddle from Patrick Chovanec, You May Own your Apartment, but who Owns the Land Underneath Your Feet? by Thomas Rippel and If Beijing is your landlord, what happens when the lease is up? from China Economic Review []
  2. See China’s Land Grab Epidemic Is Causing More Wukan-Style Protests from The Atlantic and China Tackles Land Grabs, Key Source of Rural Anger from The Wall Street Journal []
  3. See China land price fall threatens local finances from Financial Times and China’s land-seizure problem from Chicago Tribune []
  4. Internal Migration in China and the Effects on Sending Regions from OECD []
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No, there is no (coming) collapse of China’s interbank system

Last week I spoke with Mark DeWeaver (video) and we touched on a number of issues related to China’s financial system but did not cover the liquidity issues that have arisen the past 6-9 months.

As a consequence, I highly recommend reading through this overview from Rhodium Group that does away with hyperbole or exaggeration to explain what is really happening: China’s Interbank Squeeze: Understanding the 2013 Drama and Anticipating 2014


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Interview with Mark DeWeaver, co-founder of Quantrarian Capital Management

Earlier today I had the opportunity to interview a friend, Mark DeWeaver.  Mark is the author of Animal Spirits with Chinese Characteristics and wrote a very kind foreword for my own book.  He worked in China for 9 years and later co-founded Quantrarian Capital Management which is fully invested in the Iraqi Stock Market.

We discussed a number of topics including the “rebalancing” of China’s economic model, the Soviet tech industry during Gorbachev1 , technological innovations with regards to the Great Firewall (GFW) and spent the last 15 minutes discussing cryptocurrencies, smart property, trustless asset management and specifically an article written by Mr. Sheng from the PBOC.2

Other stories mentioned:

  1. See “The Soviet Machine-Building Complex: Perestroyka’s Sputtering Engine” from the Office of Soviet Analysis published by the Directorate of Intelligence []
  2. Mr. Sheng’s article on Bitcoin and cryptocurrencies is “虚拟货币本质上不是货币” []
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SilverFish, a Chinese Scrypt-based ASIC mining company, has vapor-like attributes

[Note: This is a slightly updated version of a post I made on reddit yesterday]

A new ASIC service/product just hit Sina Weibo (though it is not currently trending on Baidu or Weibo). They have announced that their ASIC mining systems for Scrypt will be turned on around June 1, 2014. They estimate that their product is faster than GPU mining in terms of hash / power consumption (~300 kh/s at 5W versus 160W for a Radeon 7850).

SF are accepting pre-sales for shares into this company (similar to ASICMiner business model). For 0.5 BTC you can buy 1 share of stock (until January 20th, today, when it goes up to 0.7 BTC).

Very little is known about the company, there are no personal names (the laoban could be Li Jun, 李钧) or business addresses attached to it. If you create an account and log into the system the share availability fluctuates widely but it is not clear why.  Yesterday it went from 690 to 802 in about 10 minutes and it is currently, as of this writing, at 1022.

According to his Weibo account, the founder of SilverFish is purportedly the same guy who founded a large Chinese BTC and LTC mining pool, F2Pool and another major website  Both he and the operations are located in Beijing.

According to (a Chinese financial news site), the CEO of is 李钧 (Li Jun).  And according to a comment on reddit, this same mysterious CEO/COO also supposedly worked on Avalon / 阿瓦隆, the first successful ASIC mining machine for BTC.  Perhaps Guo Yifu (郭义夫) may know who if Li Jun is the mysterious CEO/COO since he also works on the Avalon project.

However, until they show a video of the actual chips with screenshots of the hashing results, do your due diligence.  For example, one other comment mentioned the boondoggle that was/is And another example, a couple weeks ago I wrote an in-depth article about similar credibility and claims issues with the Alpha Tech Scrypt ASIC.  I will update this post if I find anything new.

  1. A reddit comment says it is one of the biggest pools, it may be, at least as the hashrates could collectively be part of P2Pool. However if you look at the hashrate pool comparison charts LTC / BTC, F2Pool is not listed. Thus it is likely part of P2Pool. []
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Cautious odds and ends for the weekend

  • A friend pointed out that The Guardian relinked to my story on Huobi and the CEOs personal bank account.
  • Last week Wired ran a story about BTCChina and the various regulations that are quickly rearranging the marketplace in China.  They quote one of my friends, Scott Freeman, who I interviewed for my book (disclosure: I do not own any equity in any exchange).
  • There is a big discussion now on reddit about Huobi removing the option to deposit fiat through the bank account of the CEO.  My only comment is I have not heard or seen anything about indictments/arrests/etc mentioned in subthreads there.  Thus the rumors on that thread about prosecution/lawsuits are most likely just FUD.
  • On a few other reddit and BTCTalk threads there are comments by people saying how Alibaba-owned sites still have cryptocurrency-related wares available and this somehow disproves the new rule passed down by Taobao.  Again, the new rule (Chinese) won’t go into effect until January 14th.  Furthermore (and this is my own speculation) even if all of the wares listings are not purged immediately, that does not mean you should rely on these ecommerce sites for your business model in the face of such rules.  At best it is a short-term solution, part of the cat-and-mouse game.
  • Tech In Asia has a good year-end summary of events in China regarding Bitcoin noting that “smaller sites such as Bitfash and IWannaBuy still accept Bitcoins, even for payments.”  TIA also does a pretty good job breaking Asian-related cryptocurrency news and hasn’t fallen into permabull mode.

My last comment regarding all of the news is one of caution.  Do your own due diligence before investing in a particular asset.  And remember, despite what a bull (or bear) might contend are blue skies and lollipops, there are many risks that could swing price levels around, quickly.  Caveat emptor.

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New Taobao rule banning the buying and selling of crypto currencies

Taobao is one of the largest ecommerce platforms in China (it is part of the Alibaba group that also own Tmall).  I have written about it in the past (1 2 3 4) and recommend readers peruse a good piece from The Economist detailing the ecommerce empire that is Alibaba.  In addition, I do not think the analogy that “Taobao is the ebay of China” is entirely accurate — the WSJ has a detailed explanation for why this is a poor analogy (different business model involving ads).

Earlier this week Taobao published a new rule (Chinese) which goes into effect on January 14th.  The new rule bans the buying and selling of bitcoin, litecoin and any other crypto currencies (it actually includes a long list of altcoins).  It also bans the buying and selling of any crypto currency mining tutorial and guide as well as any hardware and software related to mining.

There are a couple threads on reddit that discuss the potential impact for the exchanges and what kind of wiggle room they may have (1 2).

Again, while the word “voucher” is not mentioned, this new policy probably will not help the recently created voucher workaround that BTCChina just implemented.  Thus the cat-and-mouse game continues.

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Why are exchanges in China still allowed to operate?

I am asked this question frequently and currently I cannot give you a non-speculative answer.

My guesses are thusly:

1) That policy makers, despite knowing Bitcoin/Litecoin has the ability to bypass capital controls would still like to see if there are other potential “legitimate” uses for it.  Remember, this is a developing country that is trying to turn Shanghai into a real international financial center (pdf) through initiatives like the new Free Trade Zone.   So for example, maybe they have been briefed on the ‘smart property’ features of the crypto protocols (e.g.,  secure time-stampingproving ownership of tangible propertydecentralized DNS and new ways to sign contracts).  I doubt this is the case though.


2) Instead of being relegated to a paltry few options such as owning multiple apartments and/or sometimes sketchy wealth management products (WMPs) perhaps they would like to permit residents to diversify and try out new financial instruments.  And as happenstance cryptocurrencies are seen as a new alternative asset class.  While the PBOC officially stated that private ownership and public participation are okay for now, they do not seem to view cryptos as meeting their criteria as a “legitimate” asset class, withholding their stamp of approval.12

Remember, because of strict capital controls [pdf], PRC nationals cannot transfer more than $50,000 in foreign currency abroad each year, the domestic banking system has a very large captive consumer base from which to essentially extract rents from (e.g., no need to innovate as the market is essentially walled off from outside competition).  Again, these limitations are expected to change over the next decade, though officials and analysts have been saying that since at least 2008 when I first arrived in China.3


3) Perhaps I am an incorrect in my assessment of the PBOC which has been based on the stern comments from Sheng Songcheng, head official of investigation and statistics at the PBOC (see his recent essay “虚拟货币本质上不是货币” as well as my commentary here).  In contrast, my friend over at Aha Moments wrote this past week:

Of course, to a certain extent this merely reflects the general laissez-faire approach which characterizes the Chinese government’s approach to private wealth, an aspect of Chinese reality which understandably attracts little coverage in countries with more voracious governments. The reality on the ground is in fact almost unimaginable to younger inhabitants of, say, the United States or Western Europe. Not only is there is no capital gains tax in China, but C2C bank transfers are for the most part instantaneous and unlimited. I can send 50000 yuan to my buddy in Xinjiang and he will have it in seconds, all for a token transmission fee. You can also walk into any bank in China with the equivalent of one million euro in cash and deposit it with no questions asked. Simply put, the government’s policy is to leave people and their money alone. While they do endeavor to tax some income at the source, for the most part that’s about as far as they go.

Aha does have a valid point in terms of the C2C transfers, it was always easy for me to transmit this specific type of transaction nearly instantaneously (assuming you are using ebanking or an ATM — face-to-face service is still quite slow and tedious).  So perhaps there is a liberalizing strain within the PBOC policy making that has remained in the background regarding cryptocurrencies.  I don’t buy that though either.4


4) That policy makers are biding their time to see what, if any, international consensus is built around the regulation and management of exchanges.  There is no global standard yet, Singapore’s government is taking a hands off approach towards cryptocurrency right now whereas Denmark plans to regulate and oversee its use.  In the US, all fiat exchanges have shut down with the exception of Coinbase and that is because its founders had previous business relationships with Silicon Valley Bank (the partner bank).5 And even with this exception, Coinbase technically is not an exchange per se, but rather receives its coins through other sources like

I think this is the most likely, as regulators can put a squeeze on the industry as a whole, forcing artificial consolidation and/or bankruptcies quickly.6 Then the PBOC and other peer organs will only have to worry about a handful or participants instead of 20+.  We already see the verification process being rolled out as customers at large exchanges such as BTCChina and OKCoin require national ID names and numbers in order to register and conduct transactions.  This will likely allow the PBOC and other departments to track capital flows to specific individuals.

A sell signal?

Yesterday the Financial Times published a report detailing the Chinese regulatory environment for cryptocurrencies.  It reconfirmed what I discussed a couple weeks ago, that fiat deposits at several exchanges, notably Huobi, are being transmitted through the CEOs personal account.

What struck me however was how several entrepreneurs went on record with FT, using their own identities to explain how they were bypassing regulations and/or finding loopholes.  Of course the inner libertarian in me cheers for a liberalized, self-organized world but a couple of their viewpoints seemed naive, short-sighted and wishful thinking.  And will likely end bad for them.  In fact, yesterday I was corresponding with Vijay Boyapati (who incidentally is the same person who convinced me of the long-term merits of cryptocurrencies and their protocols) and he asked me about the recent rise in price levels and if had to do with liquidity from China.

Here was my response:

I do think that the added liquidity (or at least the appearance of liquidity, who knows how deep it is on the Chinese exchanges) is helping buoy the price levels.  I don’t think it will last on the Chinese side, especially with articles like that from the FT.  PBOC staff read that newspaper, those comments are just going to make the officials want to close all the loopholes even more — at least that’s my guess.

24 hours later and the price for BTC token has dropped from ~5800 RMB to 4900 RMB and LTC token from 180 RMB to 145 RMB.  Who knows why, perhaps it will jump back up to those heights again tomorrow.  Self-reported volume on OKCoin and Huobi are still roughly the same as they have been the last few days.  Perhaps it is just the typical volatility.7

Yet the longer term issue still remains unresolved for several of these exchanges named in the FT piece: how to legally keep fiat liquidity flowing in both directions.  Are investors at exchanges prepared for the possibility of yet another December panic sale or hedged against a possible lower liquidity environment?  What about the personal liability issues that someone like Li Lin is now potentially facing in the event that a future audit takes place?  Perhaps now is the time to contact a risk management attorney to see if there other upsides (or downsides) to this nebulous guidance.8

  1. Getting an official seal, or chop, is very important for tax purposes in China.  See Chinese Chops Or Seals from and What is a Chinese “Chop” or Seal? from Yahoo! []
  2. For more specifics and commentary about the PBOC notice on December 5th readers are encouraged to view: China’s Statement on Bitcoin is Open to Interpretation from CoinDesk and Despite panic, China’s regulation of Bitcoin leaves room for optimism from Tech In Asia []
  3. HNWI and financially savvy individuals can bypass some of these regulations by sending RMB-denominated funds through Hong Kong.  See This issue was directly discussed in Getting Money Out Of China. That’s Illegal. from ChinaLawBlog and In Reversal, Cash Leaks Out of China from The Wall Street Journal []
  4. This current stance by the PBOC seems to have taken many by surprise.  For example, back in October 2013 Bobby Lee was interviewed on a local station called International Channel Shanghai (video).  At the 12:38 minute mark Bobby says: “I hope personally to see more government regulation on bitcoin to clarify what businesses can and cannot do with bitcoin, to clarify how individuals can and cannot buy and sell bitcoins.”  Again, I have not spoken with him, but I doubt what he had in mind was what the PBOC and other organs announced/enforced last month regarding banning 3rd party payment processors. []
  5. See Regulatory risks, challenges and opportunities of cryptocurrencies in China and elsewhere []
  6. This is all speculative but there may still be time for new market entrants to enter the industry and merge/acquire with competitors. []
  7. One new story that came out today is that Taobao has a new rule (Chinese) that will ban the buying and selling of crypto coins.  Thus it will purportedly impact vouchers such as those being offered by BTCChina. []
  8. I do not know if law firm Harris & Moure has any particular advice on these issues at this time, but Dan Harris publishes a popular site: China Law Blog that discusses many legal issues regarding the mainland. []
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Cryptocurrency Cat-and-Mouse games in China

btcc voucherSeveral updates to this ongoing cryptocurrency story in China and elsewhere (each subheading below is a slightly different topic).

Yesterday Bill Bishop linked to a story posted at Sina, “虚拟货币本质上不是货币” written by Sheng Songcheng.  Mr. Sheng is the head official of investigation and statistics at the PBOC (the central bank).

Bishop’s quick comment of the article was that, “No reason the belie[f] there will be any positive news from PRC regulators about bitcoin, or that somehow the recent crackdown was good, as some of the bitcoin bulls have been trying to spin.”

Too long; didn’t read

In addition to Bishop’s nutshell, another tl;dr comment that I would add is this, because Mr. Sheng works for the PBOC, his essay pretty much encapsulates what that important organ of the government thinks. Based on his essay, they do not recognize Bitcoin’s legality (although there is no clear indicator that they see a difference between protocol and token) and according to his own words, without government oversight or backing by any country, the token itself has no value.  Mr. Sheng uses the example of the recent 60% price drop of the bitcoin token on BTCChina last month as proof that without government approval, it has little value (a correlation-causation fallacy).  Furthermore, he thinks that if there is a developing country (such as China) that does begin using it, the deflationary aspect (the fixed ‘money’ / token supply) would actually present an obstacle and hinder the country’s economy to grow.  In fact, he says that Bitcoin and other cryptocurrencies will never become a country’s major currency and as a consequence, will not be a “real” currency.  And that it could only become so in the “utopian view of technocrats and libertarians” (技术至上主义和绝对自由主义者的乌托邦).  Yes, he uses the Chinese word for idyllic libertarian  (绝对自由主义者).

From a technical viewpoint, he states all cryptocurrencies do not have a unique origin, nor are its token generation, exchange and storage methods particularly special.  Any currency that has Bitcoin’s features could replace it such as Litecoin, which the public has become familiar with.  And continuing, he states that Bitcoin does not have any physical attributes found in gold and silver nor exclusivity enforced by the law so it will be really easy to replace.  Therefore it cannot replace the role of general currency which is the medium of trading. Thus his overall attitude (and that of the PBOC) is that the central government does not recognize any specific values of the token; that it is illegal to use (though he does not specifically say who or what timeframe) and it doesn’t justify its own existence.

Again, while we can argue over the epistemological, economic and technical problems with this essay (e.g., why do economies grow, deflation versus inflation [pdf], the economics of Bitcoin [pdf], what utility cryptocurrencies have, how the protocol works, etc.) all of which have been discussed elsewhere, as Bishop noted above, this essay is hardly a positive sign for the crytpocurrency segment in China.  Thus, while speculative, after reading the article the impression readers are left with is that the PBOC will crack down on cryptocurrencies on the mainland for the foreseeable future.


There have been discussions over the past weeks as to how mainland exchanges could bypass the current hurdles.  One idea was to create yet another type of virtual token that could then be exchanged on exchanges.

Over the past couple of hours on reddit, users have posted a new method that BTCChina is using to get around the current depository predicament the mainland industry is currently in (e.g., all payment processors are barred from providing fiat liquidity to crypto exchanges).  However, the small stop-gap solution is for BTCChina customers internally (this is not the same thing as the online vouchers like BTCe has).  BTCC code is to allow one customer with CNY on the site to sell the CNY to another customer.  The medium is the BTCC code which is in two parts: one is for the customer the other is for the site.

Imaginary Capital Markets has a few more details and screenshots, but let me just emphasize once more that this is not a complete workaround (yet) but just a way for BTCC users to exchange CNY with one another.  My speculation: if the CEO role as sole depositor is still active, perhaps this could be a way for him/her to distribute funds to friends & family who can then exchange the fund to the wider customer base.  If this is the case, perhaps other exchanges will follow suit (assuming that the CEO can still deposit funds into the exchange through their personal account, see the explanation here for more).

[Update: Taobao has a new rule (Chinese) that will ban the buying and selling of crypto coins.  Thus it will purportedly impact vouchers such as those being offered by BTCChina]

Also regarding the CEO bank accounts I discussed the past two weeks, Eric Meng, an American attorney friend of mine currently in China explained to me that the use of personal bank accounts to do business is a huge red flag in general.   It does not mean that anything is being done illegally, but it’s something that investigators watch out for.1

Bots again

Regarding the purported fudged numbers on Chinese exchanges (discussed here), another friend (in Europe) recently wrote to me explaining that someone could easily write a bot and test the liquidity to see whether it is real or not.  It could be that some exchanges on the global stage act as a market maker (similar to the NYSE which employs “specialists” [pdf explanation] who always make sure that there is a reasonable bid and ask available and who take short term positions in order to provide liquidity).

This same friend who has both mined and then built proprietary HFT arb software on BTCe is reasonably sure that BTCe runs their own arbitrage bots with zero fees but sometimes turns them off (or they have certain limits, he is not sure).  Again, arbitrage is not bad per se and basically makes sure that you can execute your orders at a ‘fair price’ all time.  Of course it would be better if the exchanges are more forthcoming about what they do behind the scenes but as long as there are no regulations they can do whatever they want and earn some extra money.  Yet again, no one is forced to use a particular exchange so people can easily vote with their feet or open their own (transparent) exchange.

Notes in the margin

One last comment I received is from Mark DeWeaver (author of Animal Spirits with Chinese Characteristics and GWON’s Foreword) is that,

It occurred to me that the argument about bitcoin having a big “carbon footprint” is really poorly thought out.  Is the footprint really bigger than that of paper currency, which has to be transported from countless businesses to bank’s safe deposit boxes at the end of each day.  And think of all the gas people must burn on trips to ATM’s!

This is in response to my explanation of Charles Stross’ contention that cryptocurrencies are more of a burden on the environment than fiat currencies are (they are not).  Mark’s comments are empirically valid because these up-armored vehicles (typically Ford 550 chassis or similar classes from competitors) are frequently used to move fiat currencies to and from distribution centers to branch banks and ATMs.  For example, The Armored Group currently lists many used armor transportation cars for sale.  And a quick search on Fuelly gives you an idea of how much fuel the average F550 consumes in the city (~9 mpg).  This also ignores the supply chain needed to build the vehicles in the first place which is an entire logistical segment that cryptocurrencies do not need.  Nor does it include the carbon consumption of the driver and guards ferried around in the vehicles (e.g., eating, sleeping, shelter, etc.).  One can only imagine the sheer number of vehicles in developing countries where digital fiat are not nearly as common and thus paper/metal is transported more frequently.

Again, this is not to say that cryptocurrencies are mana from heaven, that they won’t be replaced or will somehow axiomatically usher in a world of milk and honey.  But these specific claims by detractors need to be backed up with real numbers as they are positive claims (e.g., burden of proof).  If you do think that the Bitcoin transaction network (the most computationally powerful, public distributed system currently)2 consumes more carbon than all ~200 fiat currencies right now, you need to prove that.  And from my quick research I detailed in my article, that does not seem to be the case (today).

Also, for other occasional commentary on crypto in China I recommend visiting my friend’s site, Aha Moments (specifically this recent post).  Drop him a note and tell him to update more.

  1. Eric also suggested I link to the following guide that potential investors conducting due diligence pay attention to in the aftermath of Madoff: Six Red Flags and Tips for Investment Risks from CAMICO. []
  2. See Global Bitcoin Computing Power Now 256 Times Faster Than Top 500 Supercomputers, Combined! from Forbes []
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How to detect if a cryptocurrency exchange is fudging numbers

Huobi versus incumbents

Crypto volumes in China

This picture has been making the rounds.  The top section is the volume of LTC at OKCoin.  The middle of BTC volume at BTCChina and the bottom is the BTC volume at Huobi.  The yellow line is when the PBOC stepped in and told 3rd party payment processors / intermediaries they could no longer transfer RMB into crypto exchanges.

In the last post I mentioned that there are speculative reports that exchanges in China (and probably globally) are fudging their volume numbers (e.g., why the sudden dramatic drop-off at certain sites relative to others).

Why is this done?  Before answering that I should point out that it is quite simple to create a server-side app that dynamically reports a volume number during specific periods of the day (e.g., higher during the work day to mimic traditional stock exchange peaks and troughs).  Exchanges currently have an incentive to fudge these numbers in an effort to attract eyeballs by claiming they have the biggest volume.  This then becomes a self-fulfilling prophecy as market participants (e.g., speculators, day traders, etc.) discover this volume number through a news source and then setup accounts to begin trading on the exchange.

How can you tell whether or not this is the case in China or elsewhere?   Merely looking at would be pointless because the transactions at exchanges are internal and do not affect the blockchain until there is a deposit or withdrawal.  And after all, lots of investors like day traders never actually withdraw their bitcoins each and every day due to transaction fees.  Thus the only verifiable way is to actually go inside an exchange and look at their accounting / exchange database to see the true turnover.

How to fake (some) numbers

Because exchanges merely self-report whatever they want to, ultimately this kind of fakery is easy to spot if you publicly expose your market depth.

Another way is if you, the exchange operator, run your own bots which arbitrage to make extra profit yet your bots do not pay any fees.  Whether that is actually fake is arguable (see below), however since the trades are actually conducted this kind of activity is typically not practiced in many “real” securities exchanges (e.g., akin to NASDAQ operating the exchange and yet maintaining an internal trading desk whereupon it does not have to pay fees).

And another way is to simply mirror other exchanges and if you are mirroring, you may be fudging the numbers to disguise it, or not. You might execute the mirrored trades or just have them for show.  In fact, you do not copy all the orders exactly, you randomize the quantities and prices slightly.  The trick is to randomize the numbers, but keep your risk low by minimizing arbitrage opportunities (this can all be done via an HFT system).

So again, sites like aggregate Chinese volume numbers and assume that the self-reported numbers are valid.  Maybe they are, but there is no real transparency currently.  And I’m not sure how you can add transparency either.  And more seriously, how can you (the exchange) going forward publish accurate information and get the same audience that has been misinformed in the past to believe you once again?

It should also be noted, it is not always clear what is or is ethical / fake with this speculation.  As suggested above with the NASDAQ example, the lines between the trading exchange and the banking institutions that utilize it may be blurry (e.g., conflict of fiduciary responsibilities in the event you have duties at both).1.

Blatantly lying about your volume is obviously fraud.  But is trading in your own exchange (with bots or otherwise) wrong?  Is mirroring (as long as you are willing to execute the mirrored trades) wrong?  It is not clear whether that is wrong / fake, perhaps at some point a guideline of best-practices will become adopted industry wide that clarifies this.

At the end of the day, what counts is whether or not I can get a fill at or close to market price.  Thus, as a trader, I care if you just make up the ticker numbers.  But I may not care about mirrored trades, as long as I can still trade against them.  One last point: using bots and/or mirroring trades enough to have large volume is expensive and risky.  It takes millions of dollars to copy the same volume as the major exchanges and increases as the price of tokens increases.  And in all likelihood, many investors only have accounts with one exchange.  Otherwise the arb opportunities could not be so relatively frequent as they have been the past 6 months.

Market makers

Perhaps the only other individuals who have the ability to test and audit volume numbers are market makers.  This could be a HNWI or a coordinated group of day traders consisting of as little as a few bored housewives who have money to burn (e.g., xiaosan).  What a market maker could do is video tape the entire buying and selling of chunks of 30-50 or more BTC to see whether or not the buy and sell orders are filled (e.g., if the liquidity does not exist, the orders could not be filled).  Note: this type of empirical activity can only be done going forward in time.  Unless you have access to a Psychohistory device, there is no way to verify who was fibbing in the past.

If you are willing and able to fulfill this pro bono role, you could test out volume claims at the three exchanges listed above throughout the forthcoming days and weeks and report your findings which would either way qualify one variable known unknown.

In fact, it would be in the exchange owners best interest to implore investigative journalists to  randomly place and fill buy / sell orders throughout a series of video taped interviews.  Specifically, large orders at several random hours each day (that are unannounced to anyone at the exchange).  This then could be repeated over a period of weeks to prevent any kind of rigging (e.g., exchange owners depositing and withdrawing cash simultaneously as known trades occur).

Finding volunteers for such a task would be difficult but it would likely work with roughly $100,000 based on current token prices (~$750).  Any large trader (who is willing to show you the their trades) could tell you whether the market volume is legitimate.  And ultimately, if you can fill a $100,000 trade, it is legit to you, regardless of what fakery the exchange operator may be doing.

[Special thanks to David Veksler and Scott Freeman for their thoughts and comments constructing this post.]

  1. To clarify, this activity is not related to the actions of Bernie Madoff.  He committed fraud and violated his fiduciary responsibilities but not by using an internal desk at an exchange.  On the other hand, if the exchange utilizes its knowledge of customers book orders to front run, this could bring legal liabilites to the exchange.  Nor does this imply that HFT systems (small or large like the new one built by the NYSE in New Jersey) tied into cryptotrading are axiomatically front-running as they are unable to see other customer buy/sell orders. []
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Why Huobi purportedly has higher volume than BTCChina and OKCoin

[Note: I posted an earlier draft at reddit, below is a revised and expanded edition]

For those unfamiliar with Huobi, it is now the largest BTC exchange in China doing roughly 40,000-80,000 in volume a day (versus 4,000 at OKCoin) – though these numbers could be suspect (see the last section below).  Earlier today I spoke with my friend who is building an exchange in Shanghai who explained the volume discrepancy.

The way the current exchanges in China are nearly all set up is that all of the trading is actually conducted using the CEO’s personal bank account.  That is to say, none of the exchanges (at first) utilized a corporate account.  At some point this past year the big exchanges managed to switch to corporate accounts in some form or fashion.  So on top of the 3rd party payment provider ban issues last week, the CEOs at the big exchanges (probably) expect some kind of crackdown on personal accounts so they are trying to go completely legitimate and avoid the risks associated with personal liability.1

Thus Li Lin (CEO of Huobi) is shouldering a great deal of risk that neither Bobby Lee (BTCChina) nor Xu Mingxing (OKCoin) no longer are willing to do any longer (see below for several reasons why).

The other reason for Lin’s success is that he has an individual account with each bank (ICBC, BoC, ABC, CCB, SPD, etc.) so his system does not utilize an interbank transfer (other exchanges may have used that same method as well, I do not know). Again this is largely due to the current legal policy (which has existed for as long as I lived there) in which you cannot just move money from a corporate account to a personal account without a fapiao.2

Note: if you are a big trader, right now you would want to use Huobi to buy BTC (as it is the easiest/fastest way to do so) but use BTCChina for actual trading (due to its API/bot functionality and features).  Why?  Because ceteris parebus as the big exchanges get closer to zero liquidity then there will likely be larger arbitrage spread opportunities.3

Personal and commercial accounts

A reddit user asked, “so the government restriction doesn’t apply to deposits sent through a CEO’s personal bank account?”

As of right now, it does not. But the CEO part is not necessarily the linchpin as outlined by some specific bank policy. The exchanges use the CEOs personal account due to liability issues, how bank transactions take place (personal versus corporate) and how corporate structures work in China (e.g., you do not ask the intern to use their personal account even though it is roughly the same as the one the CEO uses). The People’s Bank of China (PBOC) could restrict that directly if it chose to irrespective of whether or not you have a fapiao (invoice).

Which brings up another overlooked issue entirely, why is a fapiao necessary? Basically if you want to move money from a corporate account to your personal account, you need to have a “chopped” (印章) invoice for each transaction.4 Even if you own the corporate account, in China you have to present this fapiao for each exchange. You can imagine the logistical and paperwork burden that would place on say a bitcoin exchange that processes tens of thousands of transactions a day.  China Briefing has a good a explanation of how a fapiao works.

And as mentioned earlier, one of the speculations right now is that Bobby Lee and others believe that there will be a crackdown on personal accounts and that is the reason why they stopped doing it (you would have to ask them though).

I personally would never allow my account to be used like that as it really puts you in a bad legal liability position if someone you sent/received money from ends up doing something illegal. You could be held liable as accessory to whatever crime or even more directly, enabled money laundering to take place (depending on jurisdiction).5  But again, this is a personal preference and there are obvious huge financial rewards for taking that risk right now.

Outright banning

Another reddit user asked, “why would the government not try to close personal accounts used for BTC exchanges?”

The answers are completely speculative (unless the person you talk to works for the PBOC).

Ultimately the PBOC has the authority to ban cryptocurrency exchanges on the mainland and even ban the commercial use of it. But they have (so far) chosen not to. This is not an accident and again let there be no doubt that they can ban nearly the entire ecosystem within China immediately (e.g., exchanges, merchants, POS, even large ASIC facilities).

Why haven’t they?  Perhaps they want to control it which is significantly easier if there are just a couple of big exchanges and not many small ones (there were ~20 about 2 months ago, it is unclear how many there are today).

Perhaps connected members in the PBOC and its peer organs in the Party appartus are indeed making money off of BTC as some have speculated, but this is impossible to tell unless an address is verified.  For example, on a small, distributed 1-1 scale, bitcoin exchanges are essentially untraceable (e.g., act as massive “tumblers“) and the Chinese personal banking system makes 1-1 transfers very easy.

Obviously Chinese policy makers cannot afford to undermine their dollar assets, but they more than likely want a multi-currency world and by creating this additional uncertainty in the FOREX market it encourages currency plurality. That is to say if you are unsure about the USD, you will also hold Euro and RMB.  However, the RMB cannot replace USD now because of capital controls and if that is their goal, the road to adoption is extremely long as RMB settlements account for ~2% globally.6

Padded numbers

According to some news accounts, OKCoin (and likely others) may have been fudging its volume numbers which could explain part of the large drop in recent volume.  This of course is disconcerting in that it hurts the credibility of all exchanges and only adds ammo for critics who claim that exchange operators can do a lot of front running since there is currently little transparency (e.g., who is to say anyone besides the exchange itself is actually trading on exchange X or Y?).

As a consequence, this same friend recently told me how Xu Mingxing may have brought unwanted attention to his own account because of those huge posted volume numbers.

And again, my point about the CEO account link above was to illustrate the operational risks involved with creating financial startups on the mainland.  Prior to the Bobby Lee inauguration, all of BTCChina’s deposits purportedly went to the co-founder Yang Linke.  Perhaps there will be another personal account method used there in the future.  We will find out shortly.  And as long as the customers are fine with it, it is/was apparently much easier in terms of accounting to try this method.  Thus it will be interesting to see how the industry hedges those risks/liabilities in the future and to see what areas the Chinese policy makers restrict next.

  1. The PBOC issued guidelines prohibiting 3rd party intermediaries and payment processors such as Alipay and Tenpay from transferring CNY (renminbi) to and from cryptocurrency exchanges.  This effectively put an end to all mainland based CNY deposits for BTC exchanges.  See Bitcoin Value Sinks After Chinese Exchange Move from The New York Times and Doubling down, China bans transactions between Bitcoin exchanges and 3rd-party payment companies from Tech In Asia []
  2. Again while speculative, the “new” exchange system implemented at Huobi and others may be very low tech and simply involve a person using internet banking to manually transfer and approve all funds.  This is much slower than the automation previously used. []
  3. If you want to cut your teeth programming HFT bot software, you can use the open source cryptrade libraries at git and join the community at []
  4. See Chinese Chops Or Seals from and What is a Chinese “Chop” or Seal? from Yahoo! []
  5. There is no global standard yet, Singapore’s government is taking a hands off approach towards cryptocurrency right now whereas Denmark plans to regulate and oversee its use. []
  6. For an explanation as to why the RMB will not replace the USD anytime soon see this overview with Patrick Chovanec from earlier this year.  I also recommend reading the Debt and Reserves section from Michael Pettis’ note in October.  In addition readers are encouraged to read the highlights of this Bloomberg report on the hypothetical issue of Chinese institutions “dumping” the USD en masse. []
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Another Brick in the Wall: Link Edition #56

The air this past month in China and in particular, the Yangtze River Delta area (which includes Shanghai, Suzhou, Wuxi and Nanjing) has been incredibly bad.  The worst in 50 years.  I remember 2 weeks ago I couldn’t see the top of my apartment building in Changning district.  While the air pollution is actually created outside of the city (sometimes by coal-fueled power plants, others from farmers burning left over crops), it has lingered over the eastern coast creating misery for millions.  For a real-time view of the air quality indices in China visit AQICN.

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Futureproofing your English with Technology: Getting the most return-on-investment in an automated world

A week ago I gave a guest lecture at a local college discussing three high growth areas in China: artificial intelligence, robotics and elderly care.

I also explained to the college students majoring in foreign languages such as English they should continue learning other skills, instead of merely mastering English proficiency. This was given on December 4, 2013 at Shanghai University of Sport. All citations are included in the notes (the PPT is up over here at Note: about 5 minutes are missing in the middle of the video due to technical issues. [Here is the same video on Youtube]

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Another Brick in the Wall: Link Edition #55

That’s a lot of cars sold last month and those Android numbers are huge (though misleading too).  The air pollution has been pretty horribad this past week, had to stay indoors nearly everyday.

Thanks to James M for some links.

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Another Brick in the Wall: Link Edition #54

The biggest news this past week has been the huge rise in cryptocurrency prices (BTC & LTC) pushed in part by the Chinese exchanges.  Both BTCChina and OKcoin now have higher volume/liquidity than any other market and region on the globe.  To give you an idea of what that competitive niche is like, check out BTC123 and Hao123 (both in Chinese).

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Another Brick in the Wall: Link Edition #53

No big business news again this past week, but several interesting stories and anecdotes.  Thanks to James M, Suzanne F and Sinocism for a couple links.

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Another Brick in the Wall: Link Edition #52

Bitcoin was the hot topic this past week, hitting an all-time high at around 7,000 RMB two days ago which is more than $1,100.  It has since dropped by more than half.

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Stat of the day: animation in China

Apparently animation companies receive lots of preferential treatment and subsidies which had unintended consequences, from HuXiu:

In 2011, China produced more than 260,000-minutes-long tv episodes of animation, which is 180,000 minutes more than Japan, the second biggest animation-output country of the world. In 2012, a total of 117-thousand-hours-long animation was aired in China.


As a result, fake companies and fake projects arise in the animation industry, taking advantage of the favorable policies by enjoying the generous subsidies while contribute nothing. More than 30 animation festivals were planned in eight months, and more than 20 cities claim they are working on becoming “the City of Animation (动漫之都)”.

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Another Brick in the Wall: Link Edition #51

No big business stories (since nothing changed during the Plenum) but the one-child policy is officially being reformed and several foreign sites have been blocked (the Chinese version of Reuters and the Wall Street Journal).  Only official criticism allowed…

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Another Brick in the Wall: Link Edition #50

The story about LEGO below is very interesting, I briefly mention them in my book but their growth has even surprised my optimism in that segment.  The censorship posts about Weibo are very sobering too.

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