China’s Bitcoin Exchanges Survived the Crackdown and Did Battle in the Aftermath

Leon Li, CEO of China's leading bitcoin exchange Huobi, recently recalled how China's central bank ban sent shockwaves through the bitcoin world at a meet-up in Garage Café, Beijing.

Addressing an audience of around 300 people, Li (also known in China as Li Lin) recounted how his site's trading volume spiked so rapidly on the night of 16th December that the visiting traffic easily maxed out the exchange’s servers.

Even though Li and his colleagues pulled two all-nighters to process the large amount of requests for cash withdrawals, rumours abounded that Li was a scammer who had already run away with deposits that the exchange was trusted with.

Li went on to say that before he started Huobi, he initially believed a rumour that BTC China would sell its own bitcoin holdings first before processing traders’ orders, in times when there were clear signs the exchange rates would plunge. He didn't expect, though, that he would suffer the same false rumours himself so soon – Huobi replaced BTC China as China's biggest exchange before the end of the year.

Trust in the exchanges, it appears, remains a weak link in the Chinese bitcoin ecosystem.

The turmoil triggered by the Chinese central bank ban, in retrospect, was a watershed moment for China's bitcoin exchanges – those that responded quickly went on to prosper, while those who failed to live up to expectations lost ground.

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Huobi, despite frequent criticism over its slow loading speed and other glitches, won the top spot largely due to the fact it offered an alternative depositing solution when most of its competitors remained shell shocked. One of these depositing options involved Li's personal bank account. However, this option has reportedly been removed as of today.

The exchange also stuck to its commission-free policy when others like OKCoin and BTC China reinstated per-trade commission fees, which contributed to its popularity.

On the other hand, some lesser-known exchanges have closed shop or switched their focus to altcoins.

BTC China and OKCoin both suffered a substantial loss of users in the aftermath of the ban. The reason? The suspension of deposits and the introduction of unpopular trading commissions.

OKCoin, in particular, underwent a confidence crisis after its CEO Star Xu (Xu Mingxing) was accused of faking trading volume.

If the closure of Hong Kong-registered GBL is any indication, bitcoin exchanges with a shadowy, media-shy team must be shunned at all cost. When operating in a legal vacuum where regulation is gapingly absent, user confidence is hard won and easily lost.

Rumours of unethical practice, unfounded as they may be, can be damaging to both exchanges and users. The major exchanges are aware of this problem, and have been seeking to address it by bolstering communication. Most exchanges in China have begun to utilise social media, for example.

However, the exchanges’ customer service departments are usually understaffed and inefficient. On Huobi, for example, the waiting time for a reply from customer services can range from five to 30 minutes or longer. The website has recently offered dedicated customer service reps for its big traders, though this is well beyond the reach of most small investors.

The individual reputations of exchange founders can be a factor too. In cases of Li and Xu, long before they started their Bitcoin businesses, both were successful IT veterans and graduates from China’s most prestigious universities. Both are active on Weibo, China’s Twitter-like service, and other popular social media platforms.

Arguably, the benefit of maintaining a social media profile is to convey a sense of presence, constantly making announcements that “we are still here and well”. The importance of this is not to be underestimated, given that many Chinese bitcoin users still view the scenario of exchanges becoming illegal and founders being put in jail as a realistic one.

Xu, CEO of OKCoin, is a co-sponsor of the Garage Café meet-up too. During his talk, he made a plea to the audience not to use bitcoin as a speculative vehicle. Xu said:

Sponsoring bitcoin events like this certainly works well as a way to soften hard feelings and skepticism towards the exchange – putting human faces to the otherwise shadowy names. People want the assurance that their money is in safe hands, and such assurance can be afforded in no better way than knowing the people behind the exchanges personally.

Recently, Xu also started to host smaller, more private dinners with bitcoin enthusiasts and media professionals. At one such dinner on the 9th January, Li explained the rationale behind OKCoin’s decision to reinstate (and later revoke) the trading commission system.

When OKCoin introduced a per-trade commission fee system on 17th December last year, there was immediate backlash from users. The timing couldn’t have been worse. At a point when many people were rushing to cash out, imposing fees without advance notice gave the impression that the exchange was trying to get every last nickel from its customers while it still could.

Hardly anyone paid attention to the flip-side of Xu's argument. As counterintuitive as it may sound, Xu believes that a fee system is necessary to protect small traders from their larger counterparts who have the prowess to manipulate the rise and fall of exchange rates.

On 1st January, 13 days after the fee system was implemented, OKCoin held a user vote to decide whether the system should continue. However, this “by the people and for the people” ethic only attracted ridicule.

Users argued that the result of the vote would be too obvious – nobody would want to pay if they didn’t have to – and besides, OKCoin just wanted to use the vote to soften the embarrassment of backtracking from its previous stance.

Will the commission-free trend continue? Xu said that this should be decided by users themselves, and possibly, the government – if it will take a stance at all. If Xu’s attitude is ambivalent, Li Lin is a fervent supporter of the commission-free system. At the January meet-up, Li told the audience that as long as he was in charge of Huobi, there would never be a commission fee.

This, of course, made him the most popular speaker of the night.

Though China's central bank ban may have blocked some of the easier ways to make deposits, its ramifications are more psychological than technical.

Most exchanges have implemented systems that enable traders to charge accounts. There are, of course, drawbacks to a wire transfer approach, which involves manual processing, and can take a long time.

A more innovative approach has been taken by BTC China. It debuted a voucher system that enables users to turn their bitcoin or fiat money deposits into codes, which can be traded offline and redeemed on the exchange. If you are new to bitcoin and have just opened an account on BTC China, buying a voucher from another exchange user can be a much faster way of making deposits.

However, these vouchers often rely on online marketplaces. With Taobao having announced a ban on cryptocurrencies, the strength of the voucher system will surely be tested. As demonstrated by market response to last month’s central bank ban, as well as last week’s Taobao story, any reaction is bound to be an overreaction in the current market environment.

The lack of transparency and consistency on the side of the government serves only to increase bitcoiners' mistrust and bitcoin's market volatility.

A tempting hypothesis is that the government may try to maintain a balance. Something will be done if it deems that there is a tendency towards over-speculation, though trying to tell what the Chinese government has up its sleeve, with no reliable information coming to light, is no different from reading tea leaves.

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