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I recently interviewed Leo Weese, President of the HK Bitcoin Association, and Alex Gladstein, chief strategy officer of the Human Rights Foundation on the political, economic and humanitarian aspect of Bitcoin and blockchain in China and Hong Kong.

In the interview, we talk about Chinese officials’ thoughts on Bitcoin, China’s parallel economy and capital control, and how China’s bans on Bitcoin is an attempt for the regulators to control the narrative of crypto. 

Here are some highlights and quotes from Leo (interview is slightly edited for readability):

About Leo Weese and the HK Bitcoin Association

Leo Weese is the president of the Bitcoin Association of Hong Kong. a not-for-profit that aims to bring the community together to get people to learn about Bitcoin, learn from each other, learn from guests. The association has been around since 2012 and it holds meet-ups and talks, panel discussion, seminars, an annual conference hackathon, and developer meetup.

What is Bitcoin used for in China?

I believe in China, Bitcoin is mainly seen as a speculative tool, partly because people do see some kind of potential and they believe this could one day be very big, but probably more relevant as people not having access to the stock market in the same way as people in the US and Europe might have.

And even then, the stock market has not been as trusted. It’s seen as rigged and kind of a playground. People are not used to cryptocurrency exchanges, which operate globally, which can be very liquid and where people essentially gamble. And for them, with cryptocurrency, it’s just a medium of exchange and they would be willing to bet on anything on the platform.

So we also see people moving to sports betting or to regular gambling that is facilitated with Bitcoin, but the actual Bitcoin trading which probably is by far the most popular is the type of gambling tool, as a type of investment gambling.

And that’s probably not as favorable or charming to what Bitcoin is or what it could be, but it’s certainly giving a lot of people exposure and the feeling for how to behave and people then turn to Bitcoin for other things, for example, for making a payment that they otherwise couldn’t easily make or for transferring money abroad. Yeah, I think we’ve been seeing that experience of how Bitcoin transactions function, and by simply being available for them when other options are not.

Why don’t the regulators ban Bitcoin?

I think Chinese laws are always meant to be very ambiguous. There’s rarely like a clear ban on something and that’s partly because the government doesn’t really want to ban something that they cannot ban. They know that there will always be some people circumventing their control, but by making something like strictly illegal, that will simply demonstrate their inability to control something. So instead, these existing laws are applied or quite ambiguous restrictions are being applied where it might not always be very clear what’s exactly legal or not. For example, we do know that Bitcoin is recognized as some kind of virtual commodity, and that’s generally legal to transact, but it’s illegal to use it for payments and it’s illegal to use Bitcoin to of course violate any other law, for example, circumvent capital control.

Using cryptocurrencies to circumvent capital control can only go so far in China

The other part is when people use cryptocurrencies to circumvent capital control. I think on a small scale, that works relatively well because there’s a liquid OTC market where people can find each other and chat through with Telegram, or the local ones like WeChat and people can find somebody else who receives a wire transfer or through an Alipay or a WeChat transaction and give you Bitcoin.

And you can then spend these Bitcoin online or send these Bitcoins overseas, but I think on a very large level, this doesn’t work. If a lot of people were to use Bitcoin to circumvent capital controls and there are no other means of supplementing capital control, then people would start buying Bitcoin in China and sell them overseas and the Bitcoin’s price in China would rise. And without anybody able to circumvent capital control into traditional means, the cost of making this illegal transaction would rise pretty much infinitely. So I think the people who control capital control know about this and that Bitcoin to circumvent of capital controls might only be acceptable to very large transfers.

If China cracks down on capital control, there will be arbitrage opportunities for Bitcoin

If they [the regulators] were to crack down on other means of evading capital control such as illegal invoicing, then we would see that in a rising arbitrage opportunity between Bitcoin CNY and Bitcoin and US dollars. It has also happened in Korea… it’s really fascinating how this will or already does change the way capital flows around.

Because normally when you move capital between Korea and China or Hong Kong, you would deal with large institutions like banks or an insurance company or industrial manufacturer. But suddenly as the counterparty, you might find cryptocurrency traders a lot more attractive. And I think the biggest impact that Bitcoin currently has on these financial networks is that it removes the need for coordination in circumventing capital controls. Normally when you circumvent capital control and you do that through a couple of million US dollars per transaction and you would need to specifically find somebody who wants to circumvent capital controls and then find a counter transaction and that is very difficult to coordinate.

But with Bitcoin, you will simply have a difference in Bitcoin prices between two countries as a signal, for this is profitable to move money between here and there. And so the main challenge or even the main opportunity is that if people communicate less with each other as they circumvent capital controls, they become a lot harder to catch because you cannot find a trail of emails or a WeChat chat anymore. Because people are simply acting on the price and the signal.

Chinese officials don’t believe in the potential of Bitcoin

They’re certainly uncomfortable with it. I don’t know how much they realize the threat to their power; I am under the impression that regulators or people in government don’t believe in this at all. They don’t believe in the success of Bitcoin. They don’t believe in the potential and so they see it as something that they can simply wait out. Something that’s going to go away by its self. That is much to the advances of Bitcoin, but also speak to a larger skepticism that Bitcoin has yet to really prove itself as an efficient way of, for example, facilitating transactions

[…]

I do think that Bitcoin still flies under the radar and that people dismiss Bitcoin so systematically that they don’t see what’s happening. And some people believe there will be like a black market phase where Bitcoin has to prove itself in an environment where governments are openly hostile to users of cryptocurrencies. I am more of the position that they are going to ignore this and they’re going to pretend this is not happening for so long until they can no longer ignore it and they can no longer fight it.

The announcements from the regulators thus far is a way to control the narrative

I’m always under the impression that what they’re trying to control here is not the Bitcoin trading, but the narrative, and this has already been the case since 2013 when it first appeared on their radar when Bitcoin prices reached the price of $1000 and Bitcoin exchanges like BTC China became very large and prominent when there was a big arbitrage opportunity and people in China were buying Bitcoin.

What they were afraid of and what they’re still afraid of is somebody having the impression that there’s something the party cannot control or there’s something that could undermine the party and they heavily crackdown on that. So they will enact whatever a measure they need to get the international press to report on Bitcoin is now illegal China or the party is cracking down on Bitcoin. What they really love to read is somebody repeating the narrative that the party is in control of something.

I don’t worry too much about like how much people are gambling on these platforms or how much people are trading there. For example, the fact that the OTC market is very well functional and the process for how people trade on Bitcoin exchanges haven’t really changed much in the last 5 years. People would go to a website maybe nowadays, they need a VPN, but that’s accessible to a surprisingly large portion of the population and then they would interact with their customer service representative, which would be a Mandarin-speaking person maybe in China, maybe in Taiwan or in Thailand, and the person would instruct them to deposit money into some type of account that could be a bank account of an affiliate that could be an Alipay account of an OTC trader and they would then deposit the Bitcoin directly into the exchange or via the wallet of the user, but that process hasn’t really changed much.

The number of people who are using this probably increased quite a lot, but if I go around and repeat too often that the OTC market in China is very liquid and alive and people are using this en masse to trade Bitcoin and to send, the international narrative changes then. The party stresses out on the narrative and I don’t think so much on people using Bitcoin.

 Wechat censorship and control has tightened 

China, the rise of digital money has also been quite… WeChat and Alipay in the beginning didn’t really care so much about what happens on their platform. There’re far fewer censors than PayPal would be or Venmo would be. People still quite openly trade drugs on WeChat for example because the communications might be better, but the payment usually are not and this very much helped these platforms to become very big. 

But now that they[chinese government] have the ability to control people’s funds, we do see more censorship, we do see more accounts being closed down. Not just because of drugs, but also because of cryptocurrency transactions or because of any kind of suspicious activity including fraud.

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