Akin Fernandez, a software engineer and owner of the Bitcoin startup Azteco, predicts that China will not enjoy the benefits of Bitcoin.
“Beijing enforcing a thirty-day lock-down is suicidal and at the end of this period expect a shock exodus from Chinese exchanges as users move to businesses in better jurisdictions.”
His comments come in the wake of the People’s Bank of China’s Directive to Exchanges in China to close the two main exchanges for 30 days until they implement Anti-Money Laundering system to ensure they are in compliance with local financial and money transmission regulations.
China's two biggest Exchanges OKcoin and Huobi, therefore, disabled withdrawals for Bitcoin and Litecoin funds. The subsequent results have been the free fall of Bitcoin price and other cryptocurrencies' prices.
Running from friction
Cointelegraph: Why do you think the West will dominate Bitcoin while China will lose out?
Akin Fernandez: In all markets, no matter what the good being transacted is, regulation is a form of friction. In markets where there are less friction and lower barriers to entry, there are more participants, greater efficiencies, and lower costs.
In an Internet-mediated activity where moving your Bitcoin from one wallet to another that are two millimeters away from each other on your phone, the application runs from the jurisdiction with lower friction will absorb all the Bitcoin from the app in the higher friction jurisdiction.
“Switching Bitcoin wallets is a simple matter and any service that restricts your use of Bitcoin when there are alternatives that require zero effort to move to cannot survive in the market.”
Bitcoin is a pure market and it runs away from bad apps, bad services, restrictions and friction. It doesn't matter whether the people who run the apps are ethical and good men; if they are forced to cripple their services the Bitcoin will flee.
Already today, a Bitcoin trader tweeted that he removed his money from one of the affected exchanges.
Bitcoin community doesn’t exist
CT: OKcoin and Huobi alone holds 25 percent of the market. Won't it be a big blow to the community if China loses out?
AF: There is no such thing as "The Bitcoin Community." Those two innovative companies, both victims of these irrational measures, may hold 25 percent of the market now, but over time, their percentages will fall as an inevitable consequence of the spread of Bitcoin.
We must remember that Bitcoin has many years ahead of it and just as it was in the early days of the email and search explosion, there are companies that are big now that will not exist in as little as five years.
It's a safe bet that you have never done a search with HotBot, and yet, that search engine was huge at the start of the public Internet. The big names of today will be consigned to history eventually; it is a matter of when and how not if.
What these companies leave behind, however, will not go away. People's expectations are set with early companies and the ones that come after giving people more of what they didn't know they wanted. The iPhone is an example of this. Before glass screen phones, all mobiles were covered in buttons.
The idea of a buttonless phone wasn't even a fantasy until the iPhone was released. Now every phone is expected to be button free. The same will happen with Bitcoin.
The exchanges and businesses of today are the equivalents of mobile phones that have to be carried in briefcases. The next generation of Bitcoin companies will strip away the complexity of the customer facing surface, leaving only the equivalent of a flat surface that does what you need it to do only.
“The future of Bitcoin is not KYC/AML, restrictions, long confirmation times and friction. The future is restriction-free access, super low friction services, instant confirmation and transaction volumes that are inconceivable today. This is the future that Beijing is cutting its entrepreneurs off from, where the center of profit and development will be in western jurisdictions.”
Even if those companies do not fold under the pressure, they will spend vast resources on compliance, where western companies task their developers with innovation.
Also, with restrictions on who can do what with Bitcoin in place, certain business models and the software innovations that power them become impossible. Good ideas, even though they have no negative effects on profitability, usability or customer harm will not be implementable because the arbitrary law says they are not legal. Those same innovations will be possible and deployed in the West and the feedback from them will spur other ideas. This is how one country races away from another and becomes a leader.
Capitalists, apart from the moral superiority, have this purely practical superiority on their side.
In the wrong place
CT: Are these Chinese Bitcoin Entrepreneurs in the wrong place at the right time?
AF: Yes. They would have been far better off in Taiwan or any other country that would embrace them without question, or at least with fewer questions. The PBOC should have nothing to do with software, which is what Bitcoin is. If Beijing asserts that it has the power to control who writes what software, then their entire economy will be crippled.
Software is the fundamental basis of all interactions with technology today, from dishwashers to clothes dryers to cars. Up until now, the government has made no requirements of official standards in software development, despite Microsoft Windows costing consumers billions in losses since Windows 3.1. For some reason, the practice of writing and delivering software as an industry has escaped regulation.
Now that software is imitating money, a function that used to be the sole reserve of the State, the matter of Software development is on the table as an activity to be regulated. Of course, such an idea is insanity and anathema to any sane or ethical man but as it begins to dawn on the State exactly what is happening and that software is everywhere they will have two choices.
- Allow software development to continue as it has, bringing unprecedented prosperity in a completely unregulated market for the code.
- Try to regulate software through mandatory standards, mandatory inspection of source code and other impractical measures.
Of course, number two is impossible. Software is just too huge to control now and the free market in code cannot be altered in any way. There is just too much software out there, too many developers and too many channels over which it can flow. It's exactly like the law being made an ass as everyone ignores it. If smoking indoors is banned and everyone to a man refuses to obey, what can the State do? Nothing. It's the same with Software development.
“Any EU apparatchik wanting to control the development and mandatory certification of software, if they could get everyone to obey, which they would not, would immediately stem the flow of all software as it queues up to be certified. It would take literally years for new software to get government "license to execute." The entire idea is absurd, but this is EXACTLY what the New York BitLicense tried to do.”
Beijing is de facto preparing to write software control laws, where new Bitcoin software, services and tools will have to be inspected and licensed by the State before they are released to the public, even for free. This will kill Bitcoin in China if they do not abandon the course they are on. The code must flow. And in a global society with an unrestricted Internet, it will flow and the money will flow back to the jurisdiction where all the entrepreneurs and coders have settled as the best place to work.
CT: What do you mean when you say China will become a vassal state?
AF: When Bitcoin is everywhere, the countries that captured the entrepreneurs who built the successful businesses will be processing all the transactions. If China's businesses do all the processing, the other countries will be vassal states. That means the populations in those countries will be spending their money in service to the Chinese government, who will be taxing the Bitcoin businesses. The other countries will not be able to tax Bitcoin transactions because they have no way of intercepting them. Only the country that has the processing centers will be able to tax Bitcoin transactions as they flow from device to device and are mined in between.
“Countries that do not have Bitcoin businesses in them are literally vassals: "a person or country in a subordinate position to another.” It simply is not the case that every country will have equivalent processing centers. There will be a massive concentration of businesses in a handful of jurisdictions at best.”
Because Bitcoin is a pure market function and all suitable countries have the equivalent infrastructure, the jurisdiction with the best law will win. That means no KYC/AML, or application of banking or financial law to Bitcoin, just as those laws do not apply to software development in general. Bitcoin is software, and the country that recognizes this and adopts it as their position will "Win Bitcoin." The way Beijing is going, they are writing themselves out of history, which is a shame because they have pole position now. It's theirs to lose.
When the Chinese market sneezes, people in the West go insane. They have the entire world by the short hairs and if played right an unassailable lead. This is why it's so perplexing. The government in Beijing must see that they have a dominant position and that Bitcoin is growing exponentially. If it fails, they have lost nothing. If it succeeds, they gain the global Swift 2.0 network as the beginning and end points, gaining them hundreds of billions year after year for the foreseeable future.
“With the experience of Hong Kong in recent memory, they should know better than to interfere in an emerging market. Hong Kong was built for them over decades and handed to them on a plate as a shining scepter. The same model should be applied to Bitcoin; let it grow unrestricted.”
Let the market sift out the business models, best practices and the good and bad actors. When it's all finished and polished in 20 years, they will be the undisputed kings of Bitcoin, with a position and momentum that will make them unchallengeable. Or, they can hand it all to the US.
Either way, the public wins this fight between the Nation States. Entrepreneurs will go wherever the market is best and the users will follow with their money. We are the winners in this epic struggle and the only loser will be the State that refuses to adapt to the reality of The Transformation; the software-mediated world
The US ready to absorb
CT: Does it make sense when governments like the Chinese government tag Bitcoin as a tool for money laundering?
AF: No. Bitcoin is a software and not money. If the logic of these ruling is extended, then any message on the Internet that someone is willing to exchange for money could be called money and then "money laundering" could be applied to it if it is done without monitoring. If you accept that there is such a thing as "money laundering" and this is a modern invention, not a real crime then literally any exchange of any kind where there is no record kept, any barter, gift giving, tip or swap could be called "money laundering." I predict that as the State begins to shrink, these fake laws will start to fade away. Already in the US, many States are abandoning the unethical and pointless, "War on Drugs" and other laws, as Trump's "Two laws out for every new law in" comes into effect. Once again, the US will begin to absorb businesses of all kinds, not just Bitcoin, as the regulatory maze is dismantled and the free market allowed to assert its power.
No one will bother incorporating and operating in any State where the fictitious "Money Laundering" laws are in force and all it takes is one jurisdiction on earth where software can be written and deployed freely for all the money on earth to essentially disappear from sight, while it is still in everyone's hands.
This is the inevitable future of Bitcoin. All of these ridiculous superstitions about money, these anti-human laws and regulations, absurd ideas like "Money Laundering" will all be swept aside by the market, which does not tolerate anything harmful.
This does not mean that people will not have money stolen and that the proceeds of crime will never vanish into the ether again. The market will find ways of mitigating the harm, and in any case, the number of good people compared to criminals is orders of magnitude in difference. Crime only seems big because the state has created so many crimes. The end of Prohibition in the US and eventually globally will cause all the "Drug Money" to suddenly just become money.
Much of the money laundering hysteria and fad comes from the need of the State to trace the money the modern day illegal beer brewers are accumulating. It has nothing to do with the actual crime where money is stolen. The profits of beer brewing are legitimate because a market need for cold drinks is being served. Prohibition is unethical and anti-man, and thankfully, America and some European countries are leading the world in decriminalization. Once prohibition falls, Money Laundering Laws will soon follow.
CT: Is Beijing violating the economic freedom rights of its people?
AF: Yes. So is New York. They are both as bad as each other, absolutely equivalent in nature.
How China can make it
CT: Finally, Has China lost it forever?
AF: Not necessarily. And I wrote how here and here.
They will have a good guide to direct them going forward. It will mean backing down entirely from KYC/AML and all regulation of Bitcoin businesses, treating them just like any other software service, with a window of at least 25 years during which it is guaranteed that there will be no Bitcoin-specific regulation.
In an environment like that, I would strongly consider moving the headquarters of Azteco to Beijing. As it is, Hong Kong has made a completely correct assessment of Bitcoin, and its a very attractive potential destination. China has not lost this at all, but it is theirs to lose. Once again, to the entrepreneurs and Bitcoin users, it is us who will benefit from the Jurisdiction Wars. Eventually, a winner will emerge in them and that winner will absorb all the businesses.
Azteco can issue its vouchers from any jurisdiction; it is a simple matter of transmitting 16 digits through any channel. There is no technical reason for us to locate in one place rather than another and this is true for many Bitcoin businesses that are solely software based. Miners, on the other hand, have a bigger problem because of the huge installations that are set in place. They really are captives of the jurisdictions where they started, and this is a problem for them. It appears however, that Beijing is only interested in fiat interfaces, so the miners have time to organize their "plan B" in case someone figures out that miners wield a lot of power that is unregulated and which can be put to the use of the State, for a raft of nefarious and destructive purposes. If I had $100,000,000 dollars to hand, I would invest in building a powerful, large capacity mining facility that runs on solar power or some other renewable cheap energy source. Going forward, that is going to be a good business for years, and it also allows ethical men to guard the shape of Bitcoin and protect it from bad actors, whatever their motivation.
In the end, it is completely intolerable that a major part of the Bitcoin ecosystem is held hostage to the State. The market will not tolerate it and will route around it. It is unthinkable that say, the NYSE suspends trading for a whole month. This is what Beijing has mandated, out of the blue. This sort of uncertainty is toxic, its anti-Bitcoin, and intolerable. If this can happen at any time, anything and any action are possible. We could wake up one morning and read that all Bitcoin CEOS in China, who are perfectly innocent and pleasant chaps, have been arrested and locked up, the businesses shuttered and the Bitcoin confiscated. This is nothing more ridiculous than a thirty-day ban on Bitcoin moving. It's not the way to regulate anything, let alone Bitcoin, but it's important to stress that what happens in China is the business of the people who live there, and it isn't the place for foreigners to tell the Chinese how they should run their own country. If they determine that Bitcoin is not suitable for them, then everyone must accept that determination and move on to other shores.
National sovereignty is very important and so is the national identity that people express. Their ways are not our ways, and our ways and vice versa. I make all my comments with this in mind and with an air of perplexed fascination and curiosity about a land that is foreign to me, a culture that I have deep respect for in many aspects and people from there whom I have called "friend".
“I really wish them luck, and that they find a way to adapt to Bitcoin that allows their genius programmers and entrepreneurs to prosper and win. On a personal level, I want to see them thrive; we are all better off for it in the long run.”