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Bitcoin and China: More than Meets the Eye?

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         Bitcoin and China: More than Meets the Eye?

This article is not the first time that I have covered the Chinese Bitcoin economy. Four months ago, China saw its first major interaction with the Bitcoin community when the One Foundation, the largest independent charity in China, started accepting Bitcoin donations for a disaster relief campaign, and received 230 BTC (then $30,000) within two days. Two weeks after that, China became the first country to overtake the US in BitcoinQt client downloads, and keeps a position of second place to this day. China also has an online discount store accepting bitcoins, a high level of Bitcoin activity on Taobao, the local equivalent of Ebay, and a large number of users eager to take up Bitcoin having already gone through the virtual currency experience with Q Coin in 2007. Most interestingly of all, however, was a half-hour broadcast on China Central television, a station described by Wikipedia as the “predominant state television broadcaster in mainland China”. Since then, the Chinese government has made no moves whatsoever with regard to Bitcoin. At first, the likely explanation of this was simple: the Chinese Communist Party is a complex beast, and the culture and entertainment-focused parts of it can easily have an attitude of curiosity and even excitement about Bitcoin while the more conservative, state security-focused parts of the party simply haven’t woken up yet. However, with every passing month that the Chinese government simply sits around and does nothing, even while the central bank of Thailand, a longtime political ally of China, recommends that Bitcoin be banned, that hypothesis gets slightly less likely, and an alternative possibility comes into play: Bitcoin might be becoming China’s newest special economic zone.

China’s special economic zone (SEZ) program was first created in the early 1980s as part of China’s economic modernization initiative, creating specific locations with business-friendly policies in order to attract foreign investment, as well as experiment with different ways of increasing economic freedom so as to determine which policies would be best to expand to China as a whole. By focusing foreign investment into a few parts of the country, the scheme also satisfies the more conservative members of the Chinese government, allowing China to benefit from large quantities of foreign investment and expertise while still keeping the bulk of the population under the firm grip of authoritarian rule. This balancing act – being free, and advertising its freedom, in ways that are useful to the government without actually being free in general, has been a core part of Chinese government policy for the past three decades, and many of the government’s various initiatives, ranging from the Democracy Wall to the Hundred Flowers campaign in the late 1950s to the special economic zones themselves, can be viewed as being facets of it.

Now, the question is, how does Bitcoin fit into this picture? First of all, just like a special economic zone, the Bitcoin economy is currently small and highly self-contained. The total value of all bitcoins in circulation currently stands at about $1.1 billion, making the Bitcoin economy of the entire world smaller than many cities. Many Bitcoin spenders are also Bitcoin earners, partially because of the community aspect and partially because decoupling from the fiat economy for many hops at a time is often the only way that the cost savings of Bitcoin can be truly realized. Bitcoin users are also a self-selecting, and highly technically skilled, audience, and understand the risks of dealing with untested markets and technologies better than the average person. Thus, for China, encouraging the growth of Bitcoin business is an opportunity to tread the waters with increased economic freedom without compromising its social and economic regulatory structure as a whole. If Bitcoin gets too big, the Chinese government can always strike it down in one fell swoop with a government edict, much like it did with the Democracy Wall and Tiananmen Square.

Second, Bitcoin has the potential to become a cause célèbre of the civil liberties front. When the US government ordered DEFCAD to take down the files for their 3D printed gun three months ago, the internet community was up in arms, seeing the link between DEFCAD’s right to tell people how to make 3D printed weapons with the general ideal of freedom of information. Given the right public relations spin, US governmental persecution of Bitcoin can easily be made to elicit the same response. More recently, Edward Snowden’s revelations regarding the National Security Agency’s surveillance activities have become a source of ammunition for the Chinese government itself; two months ago the overseas edition of the People’s Daily, the Chinese Communist Party’s official newspaper, strongly rebuked the US government for its actions, saying that “in a sense, the United States has gone from a ‘model of human rights’ to ‘an eavesdropper on personal privacy’, the ‘manipulator’ of the centralised power over the international internet, and the mad ‘invader’ of other countries’ networks”, and the Global Times, owned by the People’s Daily, praised Edward Snowden as “a young idealist who has exposed the sinister scandals of the US government”. Of course, this is by every means a case of “the pot calling the kettle black”; less than two months later the People’s Daily called for “restraint in online speech“, and in general censorship and surveillance in China remains rampant. However, anything that allows the Chinese government to honestly say “we’re better than the United States”, no matter how small, represents an opportunity to frame the debate in China’s favor and improve the country’s highly authoritarian reputation.

Third, China has an established, and government-supported, culture of establishing local alternatives to foreign businesses. Replacing Ebay, China has Taobao, replacing Paypal there is Alipay, replacing Google there is Baidu, and taking Google’s role of the “main internet corporation” is Tencent. The main reason for doing this is national security; by having key internet infrastructure locally controlled, the Chinese Communist Party gains increased control over its citizens’ online interaction and, perhaps more importantly, strongly limits the control of the United States. With the revelations around Edward Snowden, this argument just got a whole lot more powerful. However, just because the Chinese government wants technological independence, that does not mean that it is guaranteed to succeed. In the international sphere credit cards and Paypal are much more powerful and, lacking government intervention or fundamentally new alternatives, may well come to take over the rest of the world – leaving China the choice of either submitting to the US financial sector or subjecting its citizens to economic isolation. This is a situation that the Chinese government is desperate to avoid in general; notice its repeated efforts to trade with other countries without the US dollar. Arguably, Bitcoin is precisely the fundamentally new alternative that China needs; because it is politically neutral and international, it would be much easier to get India, Africa and the Middle East onboard, and China can still choose to eventually exercise a high degree of control over local Bitcoin exchanges once they are in place if it feels the need to increase regulation. At this point, the chance that Bitcoin will become anything like that remains slim. But, as part of a shotgun strategy of trying many things and seeing what works, supporting Bitcoin can be a very solid bet.

We know that the Chinese government certainly can heed the above arguments and continue to be a Bitcoin-friendly regime. The question is, will it? So far, there is still almost no evidence that the Chinese government actually intends to be lax on Bitcoin in the future, or that any high-level officials actually have any of the above ideas in mind. However, there are reasons to be optimistic. The Economist described China’s new cadre of economic officials selected in 2013 as “encouragingly long on reformers and short on ideologues”, suggesting the possibility of a further sea change in the Communist Party’s economic policies. As far as civil liberties go, China is still far from catching up to the Western world (and the Western world is, despite the NSA, still quite far from catching down to China), but on the economic front the situation is quite positive. In the past, China was able to attract business with low wages, but in the last ten years Chinese wages have been rising over 10% year over year, and the “copycat economy” of delivering low-cost functional lookalikes of Western-made products is nearing its limits. If the Chinese government intends to steer the country toward being an effective post-industrial economy, then offering increased economic freedom and, particularly importantly, a pro-innovation environment, is the way to go. Perhaps there is indeed an “avant garde” in the Chinese government, which sees Bitcoin as a place to make one of its first moves. Or, perhaps, China’s Bitcoin-friendliness is still simply the result of government blindness, and a crackdown is due to come in two or four months. We don’t know. But with every passing week the alternative hypothesis is becoming increasingly likely; perhaps China’s Bitcoin acceptance has more behind it than meets the eye.

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