Bitcoin comes to China?

CNC report from Beijing
Added On July 1, 2013

Bitcoin has appreciated markedly since the Cyprus crisis.

In April, its exchange rate to U.S. dollars even surged to 266 dollars.

That's attracted the attention of a number of companies and investors.

Over the last three years, Bitcoin's value has skyrocketed. Now it's worth about 5,000 times its original value.

It's a digital currency that's accepted in an increasing number of stores around the world.

So what is Bicoin, and how's it doing in China -- a country with the most Internet users in world?

Let's have a look.

The rise of virtual currencies has been exemplified by Bitcoin.

In Cyprus, funds were withdrawn from banks and converted into bitcoins as the government planned to prop up their failing banks by seizing a portion of all deposits.

And more people are using Bitcoin to buy things in the real world.

Now, for example, people can use use bitcoins in an East London pub to buy drinks. It's Britain's first such pub.

And in California,  the first so called“Bitcoin baby” was born thanks to a frozen embryo transfer-cycle paid for with bitcoins.

But what is bitcoin exactly?

Bitcoin is a peer-to-peer electronic system, and that means it doesn't have central authority controlling it.

A person can get bitcoins by solving complex math problems online.

More bitcoins are created periodically.

The number of new bitcoins created in each update is halved every 4 years until 2140 when the total number will be 21 million. That's the limit.

Some think Bitcoin will keep its high value as it can’t be produced limitlessly.

Due to demand for the virtual currency, people have started setting up bitcoin exchange platforms online.

Launched in 2009, the currency's value has increased thousands of times since then.

In China, some regulators have said that people are not allowed to use virtual currency to buy real goods.

There are various kinds of virtual cash floating around on the Internet, such as Q coin, Baidu coin and of course Bitcoin.

What are some of the major features of virtual currencies?

Virtual currencies are generated by computer technology. A user may get them if he or she, for instance, reaches a higher level in an online game or solves a complex mathematical problem.

The virtual cash gained can be saved in a person's virtual wallet.

Virtual currencies like bitcoin are exchanged between people directly. Such a transaction doesn’t require a bank. And the transaction cost is very low.

Because it is stateless, it cannot be taxed, frozen or easily traced. It also can be used by criminals for gambling and anonymously transferring illegally gained money.

That's the reason virtual money trading has been drawing the attention of Chinese officials since 2007.

According to a joint circular from the Ministry of Culture and the Ministry of Commerce in 2009, virtual cash is only allowed to be traded in virtual goods and services provided by its issuer.

But in Beijing, a small group of computer programmers have found a way to "buy coffee" by using bitcoins.

STANDUP(ENGLISH) HENRY ACLAND 00:29:30-00:29:45
“China prohibits the use of virtual currency to buy real-world goods, but here at the Garage Cafe in Beijing’s IT district, you can kind of buy coffee using bitcoin. And you won’t be breaking the law. Here’s how it works… Firstly, the customer transfers the bitcoin to the tech guy here at the Garage Cafe. The tech guy then coverts the bitcoin to RMB, and buys the coffee for the customer…According to today’s Bitcoin-RMB exchange rate, one bitcoin equals 700RMB, and that’s 25 what I’m drinking, we just do the math here, and it comes to 0.036 of a bitcoin.”

Bitcoin at the start of the year, it was just above 10 dollars. Then in April it peaked at 266 dollars.

And that has attracted much media attention.

Like that of this guy we met, just by chance, at a cafe. He uses a computer device to 'mine' bitcoins.

There are two ways to get bitcoins: you can buy it through the Bitcoin exchange platform, or you buy a mining machine to mine them.

Eveyone can produce Bitcoin if they have the know how and there is no central authority, which is the biggest diffence from the traditional currency.

SOUNDBITE(CHINESE):  Anonymous Bitcoin Miner
“This mining machine can produce 2.8 to 2.9 bitcoins a day. It's the most efficient mining machine in the world. It’s manufactured by Chinese. This one machine was sold at 8,000 RMB at the beginning… Now, they've stopped selling it. The second-hand machine’s price could be up to 300,000 RMB.”

Introduced by a friend, he started to mine bitcoins three months ago. He says it's a great way to make money.

SOUNDBITE(CHINESE):  Anonymous Bitcoin Miner
“My friend earned money through investing in bitcoins and bought a mining machine. I heard its efficiency is high, so I thought I could try too, so I bought this machine with my friends to start mining.”

Now he holds 51 bitcoins, that's around 40 thousand RMB (or around 6,500 U.S. dollars) at today's exchange rate.

SOUNDBITE(CHINESE):  Anonymous Bitcoin Miner
“The investment choices in China are limited. So I think that’s why China will likely to be a country which has many bitcoin users…China has the most mining points in the world, accounting for 20 to 30 percent.”

IS BITCOIN GOING TO THRIVE IN CHINA?

Bitcoin is not only attracting smart investors, but also garnering the attention of the wider business community.

We talked to BitInstant's CEO Charlie Shrem.

The firm has created a way to quickly transfer funds into customers' online exchange accounts.

SOUNDBITE(ENGLISH): CHARLIE SHREM, CEO of BitInstant
(Q: How your company operates? )
“…Actually we did a presentation at a conference one time and we had someone in China on skype live. And we sent him a million dollars in one second. And we showed him getting the money on his phone live on Skype. And because sending him to China takes, you have paperwork, bureaucracy, government, fees. That has to take a week to do it.”

In a typical currency transaction, there can be several parties.

Bitcoin is supported by person-to-person payment systems, with no middlemen taking a cut.

For Shrem, using bitcoin is the fastest and most cost-effective way of transferring money.

Currently there's hundreds of thousands of bitcoin users in the U.S.

But in China, the number is comparatively small.

Some entrepreneurs say China may be a future bull market for bitcoin-related businesses.  

STANDUP(ENGLISH): HENRY ACLAND
Can you imagine buying a tie like this without going through banks, you don't use a credit card, debit card or cash. All you do is transfer a few bits to the retailer. And there you have it! It's perfectly simple. We are talking with Chris Woods of Bitfash, and why he bought Bitfash to Beijing. And why he thinks bitcoin, which is a virtual currency, is going to be such a big hit around the world."

For this businessman, Beijing is one of his favorite cities, and he is upbeat about China's future.

SOUNDBITE(ENGLISH): CHRIS WOODS, Co-founder of Bitfash
"China has ingredients for digital currency take off. One it's got digital penetration. Two is it's got huge amounts of, huge population has access to the Internet and mobile devices. Three, it also has familiarity with digital currency. "

Bitfash was established this year and its website allows customers to use bitcoins to purchase clothes and accessories from their favorite fashion retailers.

SOUNDBITE(ENGLISH): CHRIS WOODS, Co-founder of Bitfash
"There are many places where by whom can buy and sell bitcoins, but there was no place where they can spend them. So we look around, we saw most retailers were selling electronics. So we thought, OK, what’s another huge area of online retail, and that’s clothing? to mainstream adoption? And that’s how Bitfash came around."

Over half a billion people in China have Internet access.

That's the most in the world and user numbers are still increasing rapidly.

SOUNDBITE(ENGLISH): CHRIS WOODS, Co-founder of Bitfash
"We have a huge amount of interests from Chinese netizens on Bitfash. Latest statistics shows us currently visitors on the site of over 230 cities in China."

Although bitcoin brings commercial opportunities to China, a recent case may dent its development.

About a month ago, U.S. federal prosecutors shut down Liberty Reserve, a Costa Rica company that provided a "virtual currency" system to move money without using traditional banking.

The organization is accused of making digital currency to launder around 6 billion U.S. dollars.

This is a case that anyone holding bitcoins is going to want to watch very closely.

Experts say that the authority’s rising concern about virtual currencies has sent a warning to those with bitcoins.

SOUNDBITE(CHINESE): LIU XIAO, Anbound Consulting
“Not just the Liberty Reserve is under monitoring, before this, we've seen U.S. Department of Homeland Security closed two exchanged account of Mt.Gox, which is the biggest Bitcoin exchange platform. That shows U.S. is trying to put Bitcoin under supervision. The case of Liberty Reserve is a kind of warning.”

Anonymity may be one reason why virtual currencies are attractive to criminals. Also user anonymity is a headache for regulators.

SOUNDBITE (ENGLISH) ARUN SUNDARARAJAN, NYU Stern School of Business:
 “These are going to be outside the scope of regulators beyond the point, because people who want to engage in criminal activity sort of within a closed network can potentially create their own digital currency so long as they have one or two points where they can actually do the exchange from their virtual currency to real money. And so we can?ˉt expect, we have to give up on the idea that financial transactions are going to be non-anonymous online. ”

Sundararajan says a number of digital currencies exist in the world, and their security and anonymity are attracting more and more people.

SOUNDBITE (ENGLISH) ARUN SUNDARARAJAN, NYU Stern School of Business:
“I think that there is a growing sense among the public that they have lost control over their digital data trails, over this information generated on Facebook, on Google through our credit card transactions. And I think a vast majority of people even in the United States where credit card usages has been going on for two or three decades don’t realize the extent to which credit card companies and banks sell that information, sell the information about their transactions. So as this awareness grows, the demand for secure and anonymous digital currencies will grow. ”

With the rise in popularity of virtual currencies globally, there are risks that criminals will take advantage of them and then governments would act to regulate or ban the currencies.  

But according to The New York Times, Bitcoin, unlike Liberty Reserve, operates with greater transparency, as its transactions are traceable.

Each transaction is recorded in a public ledger, called a “block chain,” to keep people from writing the digital equivalent of a bad check.

That public block chain makes it possible to trace transactions. So that means Bitcoin trading can be regulated more easily than compared to anonymous payments systems like Liberty Reserve.

In the world, Bitcoin has no central authority controlling the price, flow and supply of the currency.

SOUNDBITE(ENGLISH): CHRIS WOODS, Co-founder of Bitfash
"  think if there was a so-called ban on bitcoin being used in China for the purchase in real world goods and services, it is my understanding that would come from the Central Bank ."

Will Bitcoin become an established currency in China and the world? Here's what Liu Xiao of Anbound Consulting thinks.

SOUNDBITE(CHINESE): LIU XIAO, Anbound Consulting
"The total number of bitcoins are too small compared to any major currency in the world. It's hard to imagine 21mln bitcoins will have a big impact on the real currency system."

Liu also says that bitcoins' exchange rate is volatile. It's hard for people to use it in their daily life.

Finally, one simple question: what decides bitcoin's value?

It's simply supply and demand says Charlie Shrem.

A continuation of the Bitcoin boom really depends on more people trusting it, coupled with them losing confidence in traditional currencies.

Whether or not Bitcoin survives is moot point。 We can just imagine...

Be prepared for this brave new world.