Episode 7: The People's Currency - Cryptocurrency in China

Episode 7: The People's Currency - Cryptocurrency in China


The history of Q-Coin, a digital currency that predated Bitcoin, in China. A profile of Li Xiaolai, China’s premier cryptocurrency investor. The Chinese government’s cautious relationship with crypto. And a translation of Confessions of Chinese Crypto Insiders read by Carylyne Chan.


Confessions of Chinese Crypto Insiders by Carylyne Chan

Li Xiaolai Leaked Audio 中文

Bitcoin’s Uncertain Future in China

Li Xiaolai Interview with Wang Feng 中文


In Episode 5 I talked about the history of the Chinese internet giant Tencent. One thing I neglected to mention, is that way back in 2002, Tencent launched its own digital currency, the Q-Coin.

Originally, Chinese could go to stores to buy prepaid Q-Coin cards. Q-Coins could then be used to purchase Tencent’s digital goods: weapons in role playing games, for example. This kind of pay-to-play business model is a standard practice by gaming companies. But unknown to Tencent, something extraordinary was going to happen with the Q-Coin.

Sometime in the mid-2000s, online vendors started accepting the Q-coin. And not just for digital items. Instead, Chinese could log onto an e-commerce site unaffiliated with Tencent and use Q-Coins to buy a shirt––a real cotton shirt. Or blue jeans. Or a stereo. Or whatever.

Online currency exchanges popped up where users could pay a transaction fee to swap massive amounts of Q-Coins for massive amounts of Renminbi.

The Chinese government expressed concern that criminals would start to use Q-Coins for prostitution, to launder money, or to traffic drugs. In other words, in the first years of the millennium, the Tencent Q-Coin sounded a lot like Bitcoin.

There was a critical difference, of course. Q-Coin was centralized. That means that at any given time, Pony Ma, CEO of Tencent, could print himself unlimited Q-Coin. Tencent was the Q-Coin Federal Reserve and Pony Ma was the Q-Coin Alan Greenspan.

Of course, the real Chinese central bankers didn’t like that. In addition to the nefarious uses of Q-Coin I already mentioned, demand for Q-Coin could also weaken the Renminbi. As more Chinese wanted Q-Coins, the demand for the renminbi declined. And Chinese central bankers, who hold a lot of renminbi do not like a weak renminbi.

As a result, in January 2007, Chinese policymakers announced that they would crackdown on virtual currencies. It took a few years. In 2008 there were as many as $2 billion worth of virtual currency transactions in China. But in 2009, China passed a law stating that virtual currency would only be allowed to trade in the virtual world. That effectively killed the Q-Coin. 

The only problem with that law is that around the same time, Satoshi Nakamoto launched Bitcoin. And unlike Q-Coin, Bitcoin is decentralized. Pony Ma is not the Alan Greenspan of Bitcoin. And it has proven to be trickier to regulate.

The title of today’s episode, “The People’s Currency,” comes from the name of the official Chinese currency. Renminbi is a relic of communist China. It literally translates to “The People’s Currency.” But the subject of today’s episode is the other people’s currency: Bitcoin in China.

And we’ve got something special today: I’ve invited Carylyne Chan, the Vice President of Marketing at CoinMarketCap to read an excerpt from a translation she did of an essay about the elite crypto-investing community in China, called “Confessions of a Crypto Insider.” 

But first, let me introduce you to Li Xiaolai.




Part 1: Li Xiaolai

Just as I was conceiving an episode about Bitcoin in China, a recorded conversation was leaked which featured China’s most prominent cryptocurrency investor, Li Xiaolai. Coming across an hour of unscripted, relevant audio content is something like divine intervention for podcasters. It contains completely candid statements, like this one, which I haven’t translated, but I have bleeped all profanity:

(0:50 of Li Xiaolai Recording. Bleep Cuss words.)

Isn’t it refreshing to hear a venture capitalist swear? Needless to say, I BLEEEP had to write about Li Xiaolai.

Li is in his forties. For years he was a teacher. 

That surprised me at first, since there are hardly any educators among Silicon Valley’s elite. But I learned that he was an English teacher for a giant for-profit education group called New Oriental. One of the founders of New Oriental is now one of China’s most famous venture capitalists, Bob Xu, of Zhenfund. Bob Xu is high profile enough that there’s actually a 2013 rags-to-riches feature film about his story called American Dreams in China.

Since Li Xiaolai was an early New Oriental employee, he was able to purchase some stock before the company’s IPO in 2006. Being somewhat pessimistic about New Oriental’s future, Li sold his stock in favor of other investments. He started to work on cryptocurrency projects in 2011. 

At the time crypto markets in China were still quiet. Li was a relatively early adopter. It wasn’t until 2013 that the Chinese public started paying attention to Bitcoin in any serious way. Li was there for the moment.

The spark was the catastrophic 2013 Lushan earthquake. A few people realized that Bitcoin donations could circumvent Chinese regulations on charitable contributions. Li Xiaolai was among those people and he quietly raised a handful of Bitcoin for charity. 

Jet Li’s One Foundation received more press though, the foundation raised 260 Bitcoin: around $30,000 in 2013 money. Of course, in July 2018 that’s about $1.5 million. I wonder if they held.

At almost the exact same time, Li Xiaolai started an investment fund called BitFund. And only a year later, Li revealed that he held over 100,000 Bitcoin, which was about 1/100th of all circulating Bitcoin in 2014. Today, 100,000 Bitcoin would trade for––screw it, I’m not even going to say it.

Li’s business has evolved with the times. In 2013, he was working primarily on Bitcoin lending. 

When people want to buy or sell large amounts of Bitcoin, they have do so without using an exchange, what financiers call “over the counter”... This is to avoid price fluctuations. You can imagine that the appearance a large-volume seller on a public exchange could spook the market and cause a large fluctuation in the price of a volatile cryptocurrency. Li would act as a guarantor in over-the-counter trade, and receive a fee for his service.

Today Li is the director of his current partnership, inBlockchain, which is a more diverse business. In addition to consulting services, inBlockchain lists 38 portfolio companies around the world. On its website, inBlockchain calls itself “the most influential investment group in the Chinese blockchain space.”

Maybe this is a good time to play you some of that leaked recording of Li.

Translation: Overseas there’s a special word, “spin doctor.” What does this kind of person do? When the president faces a public opinion crisis, the spin doctor hurries over, and resolves it.

But all of the outstanding projects, that are getting 100x or 1000x, go look at their founders. They’re definitely spin doctors. 

Let me explain just a little bit about state of the cryptocurrency industry, and why a spin doctor is such a critical asset.

There are thousands of cryptocurrencies in the world besides Bitcoin. The most famous are probably Ethereum and Bitcoin Cash. As I was writing this episode, I was constantly distracted by unfamiliar Chinese crypto startups. I actually compiled a list of over 150 of them. Each already has its own token or is planning to launch a token sometime in the future. 

To give you a sense of how dubious some of these companies are, here’s a brief audio montage of blockchain startup explainer videos.

[Audio Montage]

Etcetera, indeed.

Crypto-startups like these issue tokens which are generally launched through an ICO, or initial coin offering. Where anyone in the world can buy them through an online exchange. The majority of tokens are valueless within a few months of their ICO. But speculators still have an appetite for ICOs, because successful tokens can deliver returns that are unprecedented in all of human history. Seriously.

Take, for example, EOS, which had its ICO in July of 2017, trading for about $1 per EOS token. Less than a year later, an EOS token was trading for nearly $23 per token. Making the market capitalization around 15 billion dollars. And Li Xiaolai holds at least 5% of EOS. 

Li Xiaolai has been a leading advocate of EOS. His reputation is so tied to it, that some Chinese call EOS the “Li Xiaolai coin.” He’s been so noisy about EOS that he ultimately had to put out a press release clarifying that he wasn’t one of the founders.

Li Xiaolai might just be the best spin doctor in the world.

Because remember the 100,000 Bitcoins that Li claimed to have in 2014? Well, Li never actually had to prove that he had it. We just took his word for it. That may strike you as similar to the claims of another world-class “spin doctor”:

*Insert quote of Donald talking about his $$$*

I don’t mean to bias you for or against Li by bringing President Trump into the picture. Instead, what I’m trying to illustrate is a certain dismal similarity between crypto markets and American politics.

Li understood the critical role of the crypto spin doctor from the beginning. And though he may not admit it––it’s kind of his personal expertise.

From the earliest days of Li’s investment fund, for example, he hired an American to do English-language press for him. Even today, his investment group inBlockchain, is an international partnership. In the world of Chinese business, which is rife with illegible Chinglish, Li’s work stands out. He made it into the English language press as early as 2013. And he’s still here.

Let’s revisit Li’s teaching days for a second. Li once explained that teaching English in China is basically sales. You’re selling dreams. On his blog he has a 2016 post that features a mathematical formula: “English + Computer Skills = Freedom.”

Part of selling dreams for Li was publishing books. He started with modest test preparation titles like “Breakthrough TOEFL vocabulary in 21 days.” But the titles morphed into broader self-help. He published a book called “Everyone Can Speak English,” and another called “Make Friends With Time.” He even published what’s probably the most ambitious title ever written by a technology investor: a guide to the female orgasm. I told you it’s ambitious.

Along the way, Li also started a blog that grew to 170,000 subscribers. Which you can imagine would be useful for a crypto evangelist. His most recent book was published in 2017. It’s called “Financial Freedom.” Which I hope Li has by now achieved.

But as with the United States president, that’s not so obviously the case. 

A Baidu search for Li Xiaolai’s name returns disparate results.

One headline says that Li is a gambler with a debt of 30,000 Bitcoin.

In another article, a young woman calls Li her teacher and mentor.
Another author calls Li a fraud.

But most just call him China’s wealthiest Bitcoin millionaire.

Whatever the truth, I believe that Li has a definite genius. After all, he managed to leak an audio recording of him badmouthing his competitors while I was writing this episode. I had to write about him. That’s kind of genius.

I’ll finish this profile with an anecdote about Li Xiaolai told by the tech blogger Huo4 Ju4.

Chinese food is normally eaten “family style,” so if you go out to eat with friends, the host of the dinner will order a handful of dishes for everyone to share. A fish dish, a beef, a pork, maybe a few vegetables, a chicken, and so on.

Once when Li took a group of friends out to dinner at a famous restaurant, he order eight plates of the exact same fish.

When asked about the story, Li explained the logic behind it. 

“Every restaurant has its signature dish, which is usually affordable. So only ordering the signature dish is the most cost-effective.

Moreover, this way of ordering, the restaurant staff will instantly remember you.”


Part 2: Government Regulations

There has been a lot of anticipation around how the Chinese government will deal with bitcoin and blockchain.

On the most fundamental level, it’s hard to imagine a highly centralized government being excited about a decentralized technology like blockchain. Blockchain seems like the ultimate test: The Chinese government wants to be a global leader in decentralized blockchain innovation. But they also want be a highly centralized government.

Another concern the government might have is that speculation on unestablished cryptocurrencies could bankrupt its poorest citizens. A common saying in the world of Chinese bitcoin is ge jiucai. I’ve seen it translated literally into “cutting chives” or “cutting amaranths.” But its used to describe “taking advantage of unsophisticated investors.”

So I wanted to take a couple minutes here and just talk a little bit about the recent history of Chinese government intervention in cryptocurrency markets.

I’m about to play you a clip from the documentary that introduced China to bitcoin. It aired on China’s state-run television station, CCTV, just after the April 2013 Lushan earthquake I mentioned in Part 1.

The camera focuses on a man sitting alone at his computer.

For most of the Chinese public, that was their very first exposure to Bitcoin. And the prospect of getting something for doing nothing spurred a rush of Chinese interest in Bitcoin and blockchain technology. 

By October of the same year, Bitcoin was popular enough that technology companies including Baidu were allowing users to pay for services using bitcoin. Thanks to a wave of new Chinese traders, Bitcoin reached a 2013 high of around $1,200USD.

Perhaps realizing that it was dealing with the second coming of Q-Coin, the Chinese government tried to slow Bitcoin down. In December the government issued a notice that financial and payment institutions would not be allowed to accept bitcoins for products or services. 

In reaction to the regulation, Bitcoin’s price on international exchanges plummeted by 50%. A precedent was set: unilateral action by China could cause a massive change in the price of Bitcoin worldwide.

Though Bitcoin was no longer allowed to be used as a payment in China, Chinese were still trading Bitcoin. At the beginning of 2013–-before the Lushan Earthquake––just 1% of Bitcoin being traded world-wide was trading in renminbi. By the end of 2014, that 1% had grown to 80%.

I should mention that that 80% figure is misleading. The enormous figures coming out of China are the result of perverse incentives and by something called “wash trading.” 

First, the perverse incentive: One of the ways that exchanges become ranked as “China’s Number One Exchange” is by increasing its “trade volume,” or executing more trades than its competitors.

And now wash trading: The Chinese crypto landscape is different from most of the world’s in that Chinese exchanges tend not to charge transaction fees.  

Whereas an American exchange like CoinBase will charge a transaction fee every time a user executes a trade, its Chinese equivalent will not. Instead, Chinese exchanges make money by charging withdrawal fees. They charge a fee when their customers want to withdraw renminbi [yuan?] from their accounts. 

It’s not a stretch to imagine how an exchange owner might exploit this system: He could artificially increase his exchange’s transaction volume by opening up a handful of accounts on his own exchange, and then trading the same Bitcoin back and forth to himself. Before long he would own China’s Number One Exchange. Unless, of course, his competitors were doing it, too. In which case, you might just see China being responsible for 80 or 90% of global transaction volume.

2015 and 2016 were quiet years for Bitcoin regulation in China. Chinese entrepreneurs responded to the silence by taking action: They started new blockchain startups and launched ICOs. In the first half of 2017, 65 China-based ICOs raised about $400 million. I guess that was too much, because in September of 2017, China put an end to it, banning ICOs in China.

If you’re paying meticulous attention, you remember that earlier I said that I made a list of 150 Chinese blockchain startups that want to do ICOs. How do they exist if China banned ICOs? The answer is that they all pretend to be Singaporean, even if the whole development team is based in Beijing.

In February 2018 the Chinese government cracked down once again by banning citizens  from cryptocurrency trading. By July 2018, trading of Bitcoin with Chinese currency is less than 1% of global market share.

Part 3: Confessions of Chinese Crypto Insiders

As promised, we’re going to conclude today’s episode with an excerpt from an essay translated by Carylyne Chan, a blogger and VP of marketing at CoinMarketCap. It is read by the author.


A Chinese commentator once wrote: “After interacting with many investors who jumped from stock investing to crypto investing, in 2017, 10x return is just the beginning. 30x return is barely meaningful. Only 100x return is worthy of praise.”

As the saying goes, “One day in crypto world is one year in the real world”. With the wild swings in crypto, it is incomparable to any other asset class in history — and as such, it has also created untold stories of loss.

Dakongyi, or Wings, is a legend in the community. According to rumors, Wings, who was born in the 1990s, has already made billions playing in the crypto markets.

“Billions?” Wings barked out a laugh. “There must be people in China who have made that much.” He quickly follows up with, “Half of me knows people who already did.”

He says the total size of his original investment was just 20,000 yuan. In 2013, during his sophomore year in college, he returned to China from the UK. He went on Taobao, an e-commerce site, and carefully scrounged around for parts that he eventually put together as a mining rig; the total cost to fix up that rig was 20,000 yuan. At that point, the computing power of GPUs wasn’t enough to mine bitcoin, hence he mined all kinds of random altcoins like WDC and FeatherCoin. By the time his summer break ended, he had mined enough to trade for 80 BTC. At that point, BTC was worth 4,000 yuan, and that was how Wings made his first 10,000 yuan profit in crypto.

“At first, I joined this market because I wanted to make money,” Wings said, but as time went by, he realized his attitude started changing. “I became a true believer.”

His initial belief came from admiration of the exceptional people in the community. Wings believed that the world’s top talent and thinkers were all in the Chinese crypto community. These talents were pushing the concept of decentralization hard, working tirelessly on the underlying protocols. But they always shared the spoils of their work with the community. Based on Wings’s understanding, the reason for the meteoric rise in the market was a recognition of the community’s efforts, and in validation of the technology.

The early culture of the crypto community in China was reminiscent of the “hippy movement” in the Bay Area in the 1970s. Its members championed anarchism and liberalism, and rejected overt supervision and restraint.

The wrinkle is that an anarchist utopia has never come to pass in the history of humankind. It used to be that, in the early days of the Internet, the same promises were made in the name of anonymity and decentralization. After decades of development, however, the promised land of the Internet has now evolved into the reality that we recognize today: monopolies, centralization and regulations. And so, from the shadows, blockchain has surged forward to take the place as the flag-bearer in the revolution for these causes; it is here to serve the original believers of the Internet, where the current state of the Internet has failed them and broken their hearts.

Unfortunately, nothing under the sun is ever really new; Bitcoin, which heralded the resurgence of a decentralized ideal, has now become increasingly centralized. According to Credit Suisse’s analysis of trading addresses, 97% of the world’s supply of bitcoin is owned by 4% of participants.


You can find the Carylyne’s full translation, in addition to some other great writings, at Hackernoon. I’ll also put a link in the episode notes at ChinaBytesPodcast.com

Thanks for listening. 

Special thanks to Carylyne Chan for her contribution and to Christian Buckholdt for voiceover. 

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