Let’s Talk Bitcoin Episode 70 - The $10,000,000 Noodle StandOriginal air date: December 27th, 2013

Participants:Adam B. Levine (ABL) – HostMarco Santori (MS) - Digital currency lawyer at Nesenoff & Miltenberg (“The Bitcoin Lawyer”)Michael Terpin (MT) - Co-founder of BitAngels; CEO of SocialRadiusBobby Lee (BL) - CEO of BTC ChinaMalcolm CasSelle (MC) - BTC China investor; former manager at Groupon/Tencent China

ABL: Hi, and welcome to episode 70 of Let’s Talk Bitcoin, a twice-weekly show about the ideas, people, and projects building the digital economy and the future of money. Visit us at letstalkbitcoin.com for our daily guest blog, all our past episodes, and of course, tipping addresses. My name is Adam B. Levine, and it’s another conference day. Mediabistro put on the first Inside Bitcoins West in Las Vegas, Nevada on December 10th and 11th. You’ve heard some of Stephanie’s interviews from that event, and today I’m pleased to share two of my favorite talks from Las Vegas, exclusively with you: [0:46]

1) Marco Santori is sometimes referred to as The Bitcoin Lawyer, and it’s not because he’s new to the game. We kick off today’s show with the legalities of Bitcoin, money transmission, and all the things you need to know but probably won’t be happy about. [1:00]

2) Then, if the Bull driving the recent price movements in bitcoin has been China, Bobby Lee and Malcolm CasSelle are probably some of the most interesting perspectives one can learn from. They talk China and virtual currencies, and what regulatory clarity can do to the 10 million renminbi noodle stand. [1:15]

And of course, as conference material, both of these talks include Q&A at the end. Thanks to Mediabistro for putting on another solid event. If you’re interested in being part of future Inside Bitcoin events, you can visit www.mediabistro.com/InsideBitcoins. So I hand it off to Marco. See you next time! [1:34]

MS: Hey there it is— bitcoin line, twenty minutes, flat. It took a little bit of time but now it’s up [transcriber’s note: this is in reference to the bitcoin price chart]. What I’d like to do today is get on my horse. I want to take us through Bitcoin law, at least the bit that I can fit into today’s meeting. I’m going to go a little quick. -But at the end I’m going to leave some time for questions, I promise. This is what we’re going to talk about today: 1) Money transmission on the federal level. 2) Money transmission on the state level, and 3) How to comply and avoid (sometimes avoid completely) the requirements. There’s more to Bitcoin law and digital currency law than just money transmission, but I only have a little bit of time today so this is what I’m going to talk about. [2:21]

You probably heard this quite a bit: FinCEN. You’ve heard about MSBs and regulation on the federal level. FinCEN is a bureau of the Department of the Treasury that regulates money services businesses. Their goal is to prevent money laundering, drug trafficking, and a word that you’re going to hear quite a bit of today and in the future if you’re in this business… are you ready for it? Narcoterrorism. (laughter) Narcoterrorism is the thing of the children of the 21st century, and you’re going to hear a lot of it from me, you’re going to hear a lot of it from your lawyers (if you ever hire one), and you’re going to hear a lot about it from the government whenever they talk about Bitcoin because they love talking about Narcoterrorism. -So, if you’re an MSB (a Money Services Business) you’re required to register with FinCEN. You just log onto the website, click a few buttons and you’re registered. But from that point on, you have to collect, verify, record, report customer information. Then you have to take that information and check the identities of your customers against watch lists for terrorists, criminals, enemies of the state. To some customers, you have to deny service outright. Interestingly enough, sometimes you have to continue servicing some customers and secretly report their activity to the federal government. And you have to undergo yearly audits. -But, really the upshot of this is that, as a money services business, you are deputized on the War on Terror, the war on narcoterrorism. You are the boots on the ground for the federal government. [3:59]

One kind of MSB is another word that you’ve absolutely heard before and you’re going to hear again— money transmitter. On March 18th, 2013, FinCEN published some regulatory guidance. It was not law, it didn’t have the force of law. It’s FinCEN telegraphing to the United States, and anybody who does business here, that this is how we interpret the law. But again, it’s close enough for most of us. If you’re a business, you’re in it to make money. You’re not in it to stand up to the government (for most people). You want that to be the other guy. You want the other guy to stand up to government, blaze the trail, and for you as a business, you’re looking to actually profit from these laws and how to get around them. [4:45]

So what did the guidance do? It introduced definitions and distinctions that weren’t present in the Bank Secrecy Act (and I’m going to talk about those in a second). Some people say it was vague, internally inconsistent, over-broad. And some people just plain said it misunderstood how digital currency works. I agree with that to some extent, but I think you’re all going to develop you’re own opinions if you’ve ever encountered with it. [5:09]

Let’s get to the meat of it. Are you a money transmitter? Well, if you accept value from Person A and give it to Person B, the guidance says (and historically) you’ve been a money transmitter. One example of that is a hosted wallet that permits you to export private keys. If you accept value from Person A and then give it back to Person A, not to a different person, you just give it right back to the same person at a different time or a different place, you’re also a money transmitter. If you exchange digital currency for government currency, you’re a money transmitter. If you exchange one digital currency for another and you never touch government currency, you’re still a money transmitter. And the last one, the one that really caught a lot of people off guard, is if you’re a Bitcoin miner and then you convert your mined coins to fiat currency (to government currency), you’re a money transmitter. You’re a money services businesses, even if you’re not acting as a business. You could be running a couple of ATI cards that you had left over from your last build in your basement. If you convert your mined coins to fiat currency, you’re a money transmitter that has to register with the federal government. [6:21]

The state level is a little bit different than the federal level. We’ve talked about the federal level. The state level… the states regulate money transmitters separately from the federal government. The states don’t require you to just register. In fact, you can’t just register in the states. You have to get a license, you have to seek a license. And it’s a privilege, it’s not a right.

You can’t just log onto a website and click a few buttons and become a money transmitter on the state level. You have to apply and there’s no guarantee that you’ll be awarded a license. And just because you get a license in one state doesn’t mean it’s okay to do business in any other state. [7:03]

So undergoing a state law analysis, you ask one question: First, must my business be licensed, do I really need to go out and get a license? So long as you service or solicit that state’s citizens, no matter where you are in the world, you probably need a license. This is a concept called extraterritorial jurisdiction. Historically, if you had a brick-and-mortar location in a state, you had to get a license in that state. But then businesses evolved past brick-and-mortar servicing customers. Now, like Bitcoin businesses, except for… you’ve seen the Lamassu ATM out there, except for businesses with a physical presence, mostly everything exists online anyway. Some states have explicitly said, New York and Texas are a couple, that have explicitly said, “Look, if you service our state’s customers wherever you are in the world, you have to register with us, you have to get a license from us.” Other states have not explicitly said it publicly; some have said it privately to some applicants that I have walked through the process. -But, the smart money says, for your planning purposes, you’re probably gonna need 48 different licenses. [8:16]

But the good news is that the states have not adopted FinCEN’s very broad categories of money transmitter, all those examples I gave you earlier. For a money transmitter on the state level it’s typically just a couple of different requirements, and this is the traditional sense of what a money transmitter is— if you take value from one person and give it to another, if you take value from a person and give it back at a different place or time. Unfortunately, each state has its own (and, as I said, they’re often byzantine) laws. But what constitutes money? What does it mean to be money? And that’s relevant here, right? This is a new kind of money. [8:54]

There’s also an open question of what constitutes transmission. Most of the state laws don’t even define transmission because back when these state laws were written, we knew what money was and we knew what transmission was. But today, that’s not so clear. How do we answer that question? You conduct a survey of the states’ laws and you apply them to your business; you do the research. It’s a state-by-state analysis. You look at the prior guidance, sometimes there’s case law. And it’s relatively cheap. Unfortunately, it’s largely academic because what comes out of this is, your lawyer develops an opinion and says, “Look, this is what I think the state is going to say about your business. This is what I think your risks of being a regulated entity are.” And that’s largely academic, right? Who cares what your lawyer thinks? What matters, ultimately, is what the state thinks. -So there’s a second step you can take. You can request a ruling, called a no-action letter sometimes. You take that research that you did in the first step and put it into a letter. The letter says… usually it starts off with, “This is what Bitcoin is.” Second, “This is what my business is doing with Bitcoin.” Third, “This is what your state law says.” Fourth, “This is why under your state law, what I’m doing with Bitcoin shouldn’t be regulated.” And the state (and also the federal government, you can do the same thing with the federal government and FinCEN) will send you back a letter, sometimes. And that letter might say, “Hey, you’re right, we agreed. You don’t need a license.” Or it might say, “No, no, no, you need a license.” Either way, you’ll likely get some certainty. -But, it’s expensive. You have to pay a lawyer to put together a letter; you have to pay for some follow-up; letters have drafts. It can be pricey. But it permits people to sleep at night. [10:40]

The second question. Let’s say I need a license. Will I get one? Well again, licensing is a privilege, not a right. And some of the licensing requirement are onerous. Minimum capitalization requirements, six-figure bonding requirements (per state), personal financial

records of the individual owners. These are all things you have to submit to the state to see whether you’re worthy of the privilege of transmitting money in their state. This is affectionately known in the industry as the financial colonoscopy. If this sounds unappetizing to you, you’re not alone. You can comply by getting registered and licensed, but it’s a resource-intensive process. [11:33]

Or you can try to avoid these requirements, but it will take work, and there are different ways you can do it. People come to me and they say, “Ok, look, I want to access the U.S. market at some point, but I don’t want to do it now. I’m going to wait it out. I’m going to do business overseas. How can I do this without getting in trouble? Can I just geofilter IP addresses?” That’s a question I get literally every week. The answer is yes, absolutely, you need to geofilter IP addresses. But you should be doing more. And again, you don’t have to do all of this, it depends on your risk tolerance. If you do none of this… again it’s just what’s going to allow you to sleep at night. If you can geofilter IP addresses, that’s great. You want to detect the country of residence for your customer. Then, make them affirmatively state that yes, this country that you’ve detected (we’ll call it Canada) is [the customer’s] jurisdiction of residence. Then ask for a phone bill, ask for a utility bill. That’s a good start. But beyond that you should develop policies and procedures that actually help you gauge the probability that your customer is actually a U.S. customer (or is not a U.S. customer, to continue the example of a Canadian resident). Maybe they signed up with a Canadian IP and maybe they sent you an address from some… they sent you a utility bill from some property they own in Canada. But did they then go and register a U.S. bank account with your business? Maybe they didn’t register their own bank account but they ended up sending wire transfers to a U.S. bank account. Or maybe after registering with a Canadian IP, they started accessing your service from a U.S. IP address. These are all indicators that you are, in fact, dealing with a U.S. resident. You might want to consider terminating their account. -But beyond just setting up these policies, it’s important that they’re actually implemented. And I don’t mean you go through the motions. I mean that every once in a while you should catch someone, you should really catch someone. Because we all know that this is happening on our businesses, we know it’s happening. And in five years, if, God-forbid, you find yourself the subject of an enforcement action, what do you want your lawyer to say? “Your honor, look, we had these policies and procedures”? Or do you want to say, “You honor, we had these policies and procedures and they worked. We caught people. We actually did this stuff and proved that it was effective.” [14:06]

What’s another way? What’s another compliance or avoidance strategy? You could become the agent of a bank or an existing money transmitter. You could enter into an agency agreement or a service agreement that are titled to any number of things. But it’s easier said than done. Right now, money transmitters are a little hesitant to alienate their existing customer base. It’s because they have a good revenue flow already. They have to be, understandably, a little bit worried about getting into bed with a brand-new cryptocurrency that a lot of their customers have heard associated with the black market. Banks are even tougher. Banks haven’t even, as of now, as of today’s date (who knows what’s going to happen in a month?) but most banks haven’t really wrapped their arms around what risk strategies and risk-mitigation strategies they need to take. You can say, “Oh I’ll just become the agent of a bank or a money transmitter, and then I won’t have to register with the federal government, I won’t have to seek state licensure.” It’s easier said than done because even if you find a money transmitter or a bank who is willing to grant their license to you, you’re still going to lose a lot. When you enter into a service agreement or an agency agreement, it’s going to set forth the relative rights and obligations of you and the principal (we call the banks, or the money transmitters, the principal, and you’re their agent). Typically, the principal is going to have the bargaining leverage in that agreement. You’re going to lose some control over the operations of your business. And no matter what,

you’re going to have to implement and comply with the principal’s compliance requirements, and those might not be the same requirements you thought you had to satisfy or that you think are viable for your business to satisfy. [15:52]

What’s another option? Admittedly, this is the strategy that most people take— they restructure their business to fit into an exception or to avoid the requirements entirely. There are some exceptions under the federal regulation. You can say yes, maybe, or it sounds like you’re doing money transmission under the definitions I gave you earlier, but if you’re doing any of these things, you’re exempted. One of those things is merely providing network services to a money transmitter. We just talked about a service agreement, signing a service agreement, with your principal. One way to do that, one example, is white-labeling your Bitcoin exchange. If you want the bank to be the first bank to offer Bitcoin services, well, maybe you develop the exchange and you license it out to them. I’ll talk a little bit more about that in a second. There’s another exception— physically transporting value that substitutes for currency. That means armored cars aren’t money transmitters even though technically, physically, they’re actually transmitting money, right? They take money from one place, put in a car, take it to another. But they’re exempted from this. It’s tough to think about how that could apply to the digital currency world, but I took a stab at it. You guys know what Casascius coins are? You've seen those? -Little coins that have a private key on them and maybe they are value that substitutes for currency. That’s one example. Operating a settlement business between money services businesses is another exception. If you can restructure your business to operate merely as a settlement business between MSBs, you don’t have to register yourself. -Or if you perform payment processing services. If you have a contract with a merchant that permits that merchant to service its customers. Either BitPay does that, BitPagos is another company that’s doing that. These are exceptions from the money transmission regulations. [17:49]

Last example— white-labeling your product. White-labeling is probably something you’ve heard of. You develop your product, you bring it to the cusp of launch, then instead of launching it, you sell it to somebody else or you license it to somebody else. This is a time-honored tradition of passing the buck. Here you’re passing the regulatory burden, you’re passing it on to somebody else to satisfy. Or you’re passing it on to somebody else who doesn’t have the regulatory burden. This strategy means something different, functionally, for each different product but it can apply to both hardware and software. For hardware, you could manufacture the hardware as an OEM and sell it to another company who sticks their branding on it. You’ve seen that happen with the Bitcoin ATMs. You can do it with software, license the service as a SaaS (software as a service). This is what some exchanges are doing because they realize that this whole regulatory regime that we just described is not an appetizing thing. They would rather license it to someone else, take a monthly fee, take a revenue share, or something like that, and have somebody else deal with the regulatory requirements. [18:59]

So today, in the short time that I had, we talked about money transmission. That’s not all there is to Bitcoin law; that’s not all there is to digital currency law, but for the purposes of this talk, we’re time-limited. There are other considerations also on the payment side— check cashing, check selling, and currency exchange are other regimes on the state level with different statutory frameworks that you might have to deal with. Ultimately, that means more reasons why you might have to get a license. -But beyond the payments industry, what else exists? There’s securities. How many of you guys have heard of Trendon Shavers? Wow, okay, not that many. Trendon Shavers allegedly ran Bitcoin Savings and Trust (BTCST) which was allegedly a Ponzi scheme. A lot of people in this room have probably had some involvement one way or another on one end of this scheme. He was a well-known individual in the Bitcoin space. The SEC brought charges against Trendon Shavers and we’ve learned a little bit about this case. We

know that, from the SEC’s perspective, investments denominated in bitcoins are securities and they’re subject to the securities laws. For the purpose of the securities laws, bitcoin is money (the federal judge said this). This is an often-overblown development; this doesn’t mean that in the United States bitcoin is money, this means for the purposes of interpreting the Securities Act, bitcoin is money. -So, if you’re involved in using bitcoins as a security, or if you’re involved in issuing, dealing with securities that are denominated in bitcoins, you’re subject to the Securities Act. One interesting thing that the SEC said, not in its papers but in a press release, that they believe unlicensed Bitcoin equities exchanges are illegal. For those of you that have some familiarity with this - for a very long time, companies were issuing securities. They weren’t real securities, there was often times no real company backing them up. But these securities were offered on the Bitcointalk web board and then sold and traded on these unlicensed exchanges. Ultimately, these exchanges (most of them) have shut down and a lot of people lost a lot of money. [21:39]

What else beyond securities? The CFTC (the Commodities Futures Trade Commission) hasn’t officially spoken on bitcoins yet. FinCEN has and that’s what we were talking about, they regulate not futures and commodities, but currencies. It’s unlikely that buying and selling bitcoins are going to be regulated by CFTC, but trading bitcoin options, hash rate futures, the more exotic things that we’re starting to see now, may be regulated by the CFTC. [22:10]

I think I kept my promise. I spoke for twenty minutes which is about as long as anybody should have to hear a lawyer speak. I got on my horse and I ran through a whole bunch of topics. I realize there’s a lot I didn’t cover but if there’s any questions at all I’d be happy to take them and you get a little bit of free legal advice. [22:33]

MS: Hi. [22:34]

Audience member #1 (AM1): Hello, that was a great presentation. [22:37]

MS: Thank you. [22:38]

AM1: I have one thing you did not cover. You go to the state, you present your case, and they say nothing. Then what do you do? [22:51]

MS: That’s a very good question. [22:53]

AM1: And how often does it happen? [22:55]

MS: Yeah, that’s a very good question. We’re seeing that in a couple of states now. We’re seeing that from New York, we’re seeing that from California. Although New York is at least a little bit more communicative about it. They are (anecdotally, I’m hearing) just returning applications so they don’t have to deny them. The states are trying to figure this out. I met with a state regulator in August, which is ages ago in Bitcoin time. I spoke to her and I said, “So say we send a letter to you and I say, ‘this is my business. This is why I think it doesn’t apply. This is why I don’t think it’s a licensed entity, a licensed business.’ How long does that take for you to turn around that request?” (This is the request for ruling, the no-action letter.) “How long does it take to get a no-action letter?” And she said, “Look, a traditional money transmitter… a couple of weeks. But a Bitcoin business?” And this is what she said: [transcriber’s note: Marco Santori makes some gesture to the audience] (laughter). [23:58]

MS: Yeah, you’ve put your finger right on it. This is a tough time for digital currency businesses.

And the states are trying to figure it out. So what do we do? We wait. We put in our applications, and we wait. [24:16]

Audience member #2 (AM2): You mentioned that miners, if they sell their bitcoins for fiat, they might be an MSB. What would a miner actually have to report if they signed up? [24:30]

MS: That is a great question. Who do you KYC if you’re a miner? You’ve been mining coins using a homemade rig, or maybe you bought something from BFL (I think BFL is here) so maybe you bought something from Butterfly Labs. -And you’re not an institutional miner. It’s not like you end the day with a bunch of coins you have to block-trade on an exchange. What do you report to the federal government? What are you supposed to report? I gotta say it’s not very well understood because I don’t believe FinCEN really wrapped their arms around this particular part of the guidance and I’m happy to say that publicly, I’ve said it before. Presumably, you have to determine who is your customer. Your customer could be the person on the other side of you at the exchange but if you’re using a blind exchange, you don’t know who your counterparty is. And again, are they your counterparty or are they your customer? -So it’s a very good question and it’s something that as you can probably tell, I don’t have a very direct answer to. But these are the kind of problems that we’re struggling with that some people are coming up with creative solutions to. [25:39]

AM2: One more question. This doesn’t really apply to me but… You mentioned before that one way to avoid having to comply with the FinCEN regulations was to just completely avoid U.S. customers. So let’s say you do that but a couple of them get through the cracks. What would the consequences be for that if FinCEN found out? [26:02]

MS: It’s really a two-part answer. You have to think of the risk of enforcement and then you have to think of the risk of (we’ll call it) a successful prosecution. Those are two different things. I think the question there… you can give a long legal question as to what are your affirmative defenses to something like this. What can you say? “Oh, but your honor, I did this.” And that’s a very long answer that I’m happy to give offline. But I think you can answer that with the first question (and that is the risk of enforcement). [The risk is] probably pretty low, you’re probably a low-priority, you’re one of the good actors. If you’re really doing all these things, you’re probably one of the good actors. [26:44]

AM2: Thank you. [26:45]

Audience member #3 (AM3): Hi, I imagine this is going to be hard to answer, but I’ll ask it anyway. [26:50]

MS: Sure. [26:51]

AM3: How much does a colonoscopy cost? [26:53]

MS: (laughter) Okay, Stewart says that’s my last question, guys. I’m sorry. You can find me offline, but to address the colonoscopy issue, it can cost quite a bit. It depends on how many states you’re looking to apply to. Right now, I have clients that are looking to become licensed in just one or two states. That’s a manageable cost. The cost scales. Your bonding requirement, for example, I think you’ll see today there are some bonding agents making their way around and telling you, “We have underwriters for these bonds, they know your business. They’re willing to underwrite these bonds.” But those are cumulative requirements that are… when a bond is $50,000 up to $500,000 (depending on the state) and you have to pay 2% of that. You

pay 2% of that on a yearly recurring cost. That’s just one of the many costs. It’s a good question; it’s got a long answer. For a forty-eight state rollout you could escape with six figures. Not just for bonding, that’s sort of your all-in cost. I know you’re going to want to put a finger on it. [28:14]

MS: I hope I was helpful. I know I ran through it and we had a ton of questions that we couldn’t get to. Please feel free to come and speak to me offline. I’m happy to help however I can. [28:26]

ADVERTISEMENT:

Purse.io is a gift exchange that helps you shop on Amazon with bitcoins and at a 6% discount. How does it work? You create an Amazon wish list, share it with Purse.io and deposit bitcoin equivalent to the cost of your item. You’ll soon receive your item in the mail, purchased for you by someone who gets your bitcoin in return. You must try this new service. Let’s Talk Bitcoin listeners will even receive additional rewards. Visit www.purse.io [29:10]

ADVERTISEMENT:

When you shop with bitcoin on Gyft, you can get gift cards from over 200 retailers. Think of the possibilities. Not only is your holiday shopping taken care of in a snap, from your Android device or on the web, but now you have a way to purchase everyday items from stores like Target, CVS, Gap, and GameStop using your bitcoins. That’s not even the best part. When you shop with bitcoin on Gyft, you get 3% back. Ready to shop? Visit www.gyft.com today. [29:52]

MT: First of all, what an amazing conference that Stewart has put on. [Transcriber’s note: Stewart Quealy of Mediabistro Inc.] Give it up for Stewart! (applause) I was asked to speak at the first Inside Bitcoins which was, believe it or not, three months ago? Three months and a couple of weeks? Bitcoin was at this really high number called $104. Right now we’re talking about $1000. What’s been the difference between now and then? Largely, China. We literally have two of the most important people in the world in the Bitcoin industry right here in this room. Malcolm CasSelle is somebody that I’ve known and worked with and been friends with for almost twenty years going back to when he started a company with America Online called NetNoir. Since then, he’s an early investor in Facebook and has been doing [an] amazing amount of things in China, going back to the early build out of the internet. I like to always tell people that the early build out of Bitcoin, “I’ve seen this movie before.” -And of course when I saw Alan Meckler I was like, “Oh my God! Internet World. I’ve seen this movie before!” And when I saw BTC China and how fast it’s taken off it was just like we’ve now reached the… some of the people on Reddit call it the Bitcoin singularity where it’s just going up, up, up. Bobby I only just met at the dinner yesterday but certainly his reputation proceeds him. You look at people who are going and leaving amazing careers to then say, “Something’s bigger.” With CoinBase,

you basically had somebody who was on the starting team of AirBnB, from a little startup in an incubator to a $1 billion valuation— “Nah, that’s not big enough. I want to do Bitcoin.” Right? With Bobby, you’ve got somebody who’s running e-commerce for Walmart in China! How much of a bigger job can you get? Bitcoin. Without further ado, I’m going to hand it over to the rock stars, Malcolm CasSelle and Bobby Lee. [31:54]

BL: I’ll start. Thank you everyone. Who’s here to listen about Bitcoin in China? (applause) Alright! I have something to confess. Two months ago I thought about starting off this slide like this, talking about the all-time high price of bitcoin in China being almost 2,000 RMB (that would have been like $308), pointing out the fact that it’s much higher than Mt.Gox’s all-time high price. But I guess today this is all irrelevant, huh? I’m here to talk about… see that vertical line going up to the top? Who’s excited about that? -So the agenda, roughly: I’ll talk about BTC China, then I’ll talk about the user survey we conducted; it tells you a little bit about what our users are doing in terms of buying bitcoin. I’ll talk about the adoption of buying bitcoin in China. And also, most excitedly, the recent regulation that the People’s Bank of China just issued last week. Malcolm’s going to join us and share with us all the great future plans of Bitcoin in China. [32:55]

BL: A short history: BTC China was a website that was founded by my co-founders in June, 2011, so this came up about two and a half years ago. It’s been quite a little website, the very first Bitcoin exchange in China. It’s always been in first place. I joined on as CEO/co-founder earlier this year in April. At that time, we’d already become the world’s number five largest Bitcoin exchange according to Bitcoin Charts. By July, we’d obtained (we were going to make it a more formal company) a business license to operate in Shangahi (we’re based there) and we’d climbed to the number three position. By September, after we got the VC funding, we completely eliminated the trading commissions. That was a strategy to win market share and to basically build up the market in China. By November, all a sudden, we got vaulted up to the number one position worldwide. That’s when we decided to actually go ahead and announce our VC investment from Lightspeed. In a short seven to eight months we’ve expanded from just four people to over twenty-five people and bitcoin and the RMB volumes have increased ten-fold and one-hundred-fold, respectively. Just to give you an idea of the price increase: all summertime pretty much trading at this level [shown on my presentation slide]. The yellow line is the price, bars are the volume. Then, when we announced the free trading commission that’s where we really picked up China’s interest. So slowly right after this point the volumes have just gone up dramatically. We hit an all-time high, I think, last Thursday or Friday of 150,000 bitcoins in a twenty-four hour period. The bitcoin prices have also nicely increased alongside this volume increase. Even on the special day of November 18th, when we announced the VC funding, bitcoin prices in China actually doubled in that twenty-four hour period. We were just freaked out. In terms of the trading volume… risen 100x from 5 million RMB to 500 million RMB. Roughly a little over $80 million U.S. dollars equivalent. [35:00]

I’m gonna run through the slides as quickly as I can. That way, we leave some time for questions; I know you guys have a lot of questions. Essentially, we did a user survey. This is our methodology: this is over the course of two weeks in November. It was targeting our Chinese audience. Here’s the demographics information. [Mostly,] we still have a big group of male audience, young people under the age of 30 and 40 is over 90%. Education level, this is where it’s surprising. The national average is actually 27% for college education. However, in our user base we see over 90% of our users have a college degree (bachelor’s, master’s, and PhD-above), so this is quite impressive. It means that our user base are quite educated and really into the math-based cryptocurrency. Why do you buy bitcoin? One of the key reasons is for investment, long-term investment value preservation. Only a small portion is to buy bitcoins for

the purpose of purchasing other goods and services later. This is where China stands right now: vast majority (over 75%) are buying it for long-term value gain and short-term price increase. In terms of investment experience, we find out that the people with the more investment experience, so the bars on the right (five years or more experience), tend to better understand the long-term potential of Bitcoin whereas the newcomers are the ones who are maybe speculating a little bit more. I guess it’s logical as well. The more experienced the user, the more likely they’re buying it for long-term investment. [36:32]

So why is Bitcoin so popular in China - what do you guys think? It’s not what you guys think, but I’ll give you an idea of how big it’s become. When I first joined BTC China in April, the vast majority of bitcoin trading worldwide was denominated in U.S. dollars. This is the pie you see on the left, over 75%. Six months later, by November, we think over 50% of the worldwide trading in bitcoin now is denominated in the Chinese RMB currency. This is a huge difference. Whether it stays that way, I don’t know, but this is a big improvement, or a big change, from just a half a year ago. [37:22]

Our theories about the fast adoption— we have four theories. Number one is China is a nation of savers. Number two [PR note: -and three] is that China is a nation of engineers, and people there are really eager to participate in new phenomenons, sort of the “it” factor. And lastly, China has always been known as a place of innovators. I’ll talk about that in terms of bitcoin mining being ground-zero for that. [37:45]

As we know, in the U.S. the savings rate is under 10%. Probably 90% of you spend more than your paycheck every month, right? Taking home equity loans and maxing out your credit cards. In China, apparently, they don’t do that as often. People save for the rainy day - it’s just a habit in their culture. The savings rate is between 35-50%. Various theories about that— probably underdeveloped financial sector; the changes in income outpacing their changes in consumption habits (their incomes are increasing at a much faster pace than they’re spending money); and lastly, we think that RMB currency is undervalued so they’re holding it and investing the money. As a digital asset/virtual commodity, Bitcoin really represents a significant opportunity to save money and to preserve spending power, preserve purchasing power. The Chinese people really get that; that’s very important to the people in China. [38:42]

Next topic is “A Nation of Engineers.” The Chinese people, there’s a reputation for them to be really good at math and science. Actually, it’s true because education-wise people emphasize on math and science. Even political and business leaders, it’s very often you’ll find them with backgrounds in engineering and it’s much more likely for a scientific/engineering background. This happens at all levels of government. I’ll show you, for example, these are the three most recent Presidents of China, and they all have engineering degrees. From Mr. Jiang Zemin with an electrical engineering degree; Hu Jintao with a hydraulic engineering degree; and the current leader Chairman Xi Jinping with a chemical engineering degree. This happens at the national level, at the provincial level, at city government level. All around, you’ll find people with engineering backgrounds. As compared to the U.S., I guess they’re all lawyers, right? (laughter) So that explains the [inaudible] differences. [39:42]

In China, people are eager to participate in something new (this is the “it” factor). Almost 20% of people say they’re buying bitcoin because of the novelty and to participate in a trend. I guess this is the herd mentality a little bit, but one of the reasons for that is that they like supporting new technologies. Chinese are really open to trying on new things, supporting new technologies, so that’s also contributed to the recent popularity of Bitcoin. [40:09]

The fourth one was talking about the bitcoin mining. We think China is indeed probably ground-zero for bitcoin mining. It’s very hard to say how much of the mining happens in China but certainly it’s a big market. A lot of hobbyists, lot of professionals, lot of people using idle computing power for mining. The professionals really build mining centers all over China. A lot of ASIC designers are in China, a lot of the whole supply chain for ASICs mining is all in China. We also think that Litecoin mining is coming next as a huge, huge trend. [40:44]

Let’s get to the fun stuff. This is probably what you guys are most interested in. How many of you here to learn about the regulatory environment in China? Are you guys interested in that? Did you guys hear about the news last Thursday? Yes? Did anyone panic? No? -But from the price charts, it looks like people all panicked! Actually, the funny story was that I was on a plane, so literally they were waiting for me to get on the plane and fly out and then they make the announcement. (laughter) And when I landed I got all these text messages like— panic, panic, call me back! Let me tell you some of the history. Two weeks ago in mid-November, this is Yi Gang (Vice Minister of the People’s Bank of China, which is the Central Bank of China). He made the following comments. He’s actually the most suitable person to be talking about the regulation of Bitcoin. He’s also the head of the state administration for foreign exchange (that’s the department under the Central Bank that controls all foreign currencies, and so on and so forth). So he’s the most knowledgeable person, he’s educated in the West, in the U.S. Essentially, he said three things at the time (this was three weeks ago). He said, “the Central Bank is not going to be able to recognize Bitcoin and give it legal currency status in any near term.” That’s to be expected, right? Anything above that would have been extraordinary. Secondly, he actually commented two weeks ago that bitcoin trading is legitimate - this is a legitimate virtual good, virtual asset or digital asset, so people should be allowed to buy and sell. That’s actually very good, both for Bitcoin, for China, as well as for my company (BTC China). Lastly, he noted that Bitcoin is very unique so he’s going to keep abreast of its development. He reads English, so I’m sure he’s been following all the news about Bitcoin. So that’s very exciting to find that someone is able to understand the complexities of Bitcoin and to appreciate the importance or the innovative features of Bitcoin. He’s going to personally stay involved and pay attention to it. [42:54]

And then what happened last week is that the government… previously it was all his off-the-cuff remarks as his opinion. Last week, the government actually made official statements and this was led by the People’s Bank of China. It was also represented by the Securities Regulatory Commission, the Banking Regulatory Commission, also the Insurance Regulatory Commission, as well as the Ministry of Information and Industry Technologies. They released the first formal guidance. Many International users, due to mistranslation of the regulation, were unsure of how to interpret it. Some people wrongly believed, and some of the press wrongly believed that bitcoin was banned or that all bitcoin is illegal. That’s actually not the case; it’s quite the contrary. By the way, the government regulation that was announced last Thursday is actually completely independent from what Hong Kong, Macau, and Taiwan will do. Hong Kong, Macau, and Taiwan will do things separately. It could be the same, it could be different, but at least it’s going to be separate from what the People’s Republic of China [will do]. Okay? [44:04]

So here we go - key points. Number one: bitcoin is not a currency and will not be regulated as a currency. Again, this just formalizes what Yi Gang said two weeks ago that as far as China is concerned: bitcoin is not a currency. I know in this audience, many of us (I don’t want to put myself in it) but many of you may think that bitcoin is a currency or is money and all that stuff. Legally speaking, China has clarified bitcoin is not a currency. There’re a lot of implications of that. Secondly, on the top right you’ll see that bitcoin will be treated as a virtual good, virtual commodity, so like a digital asset. That’s been now clarified; bitcoin is now recognized identity

as a digital good, virtual asset, okay? It also says buying and selling of these online commodities - it’s okay, people are free to do that. -So this legitimizes the whole bitcoin exchange concept; people can freely buy and sell bitcoin either person-to-person or through a bitcoin exchange like BTC China. Obviously, it’s a speculative asset, so make sure people are well-educated and they can assume the risks involved with trading bitcoins. On the bottom-right you’ll see that companies and websites like ours will have to register with a telecommunications authority. I don’t know whether that sounds weird but essentially all Internet companies have to register with a telecommunications authority. This is in relation to registering to get Internet content provider registration. This is very common in China. It relegates our companies doing bitcoin exchanges to under the Internet sector. [45:47]

So what are the implications? There are some implications. Because it is not a currency, existing financial institutions - banks and third-party payment systems - what do they deal with? They deal with currencies, right? Banks, and financial institutions, and third-party payment systems. Right now, because bitcoin is not a currency, they therefore themselves are not allowed to engage in bitcoin business. They’re not allowed to take bitcoin deposits, to make bitcoin insurance policies, or to make bitcoin buy/sell kinda thing. Also, insurance companies are not allowed to provide insurance services for bitcoin companies like exchanges and so on. Separately, bitcoin exchanges (which are now legitimized) have to comply with relevant anti-money laundering and KYC laws. Some of these are still being worked out. The communication from last Thursday was just to set the high-level tone. All the details will be clarified over the next few weeks and months. We’re really happy to see these results. As an exchange, I’ve always wanted the government to give us more clarity on regulation and so on, so we’re really excited about this news. That’s why we see the price crash from (I think of RMB terms) it was like 7,000, down to like 4,500, and then recovered to 6,000, and then over the weekend it was zig-zagging. I think in the last few days it’s recovered up to 80% of what it was before, so it’s a pretty healthy situation right now. The last implication is that goods and services cannot be priced and cannot be paid for by bitcoin. This is the part where people are a little bit surprised. But if bitcoin is not a currency and China, as a state, only recognizes one single currency (which is the RMB), therefore all merchants, stores, and services can only accept RMB. Since bitcoin is not a currency (it’s not a recognized currency), it’s actually a logical conclusion that China for now will not allow goods and services to be sold and paid for by bitcoin. Certainly, some of the Bitcoin business models will not work in China because of that implication. [PR note: You may know those models as everything except those bound exclusively to money transmission, investing, and gambling.) [48:03]

So what’s the immediate impact? As a company, we’re going to proactively implement additional KYC measures. The People’s Bank of China - they want to better educate the public about Bitcoin. That’s a very positive attitude. This is essentially a first step in the long process of crafting a effective and efficient regulation for the Bitcoin community and Bitcoin market in China. As a company we hope to be an active participant and contributor through this process, so we’re very, very excited by this recent announcement. Okay, so that’s it for regulation, I’ll pass it over to Malcolm to talk about the future of Bitcoin, and then we’ll open up for Q&A. Thank you. [48:46]

ADVERTISEMENT:

Purse.io is a gift exchange that lets you get bitcoins at only a 6% premium and with a credit card. How does it work? You purchase items for other Purse.io members from their Amazon wish lists. In return, you get bitcoins in the amount of the Amazon purchase. The more people participate, the more bitcoins will be available. -So, tell your friends. Get exclusive access today at www.purse.io. [49:55]

ADVERTISEMENT:

EasyDNS is the Swiss Army knife for your domain names, helping meet their customers’ individual needs since 1998. EasyDNS has been an outspoken critic of SOPA and CISPA. EasyDNS was an early supporter of Bitcoin and now they are proud to sponsor this show. Do business with a company that shares your values. Get a 13% discount when you pay with bitcoin. Go to bitcoin.easyDNS.com and be sure to use the discount code LTB. [50:28]

Malcolm CasSelle (MC): Thanks, Bobby, that was a good clarification. One thing I did want to make another point about was that a lot of people were concerned — “Hey if banks are not allowed to operate in the Bitcoin ecosystem, does that mean that companies like BTC China will have problems making deposits and withdrawing money from banks?” Not a problem at all because, from the banks’ perspective, they’re just touching currency (renminbi). They don’t touch bitcoin; that’s Bobby’s business, so there’s no problem with deposits and withdrawals. We’re hoping that the regulation makes it even easier for Bobby to do deposits and withdrawals. We were sitting in the office the other day and I said, because there is no regulation particularly applied to Bobby’s business, he’s basically the equivalent of a noodle stand, right? So when he shows up with 10 million renminbi to deposit they’re like— “Why do you have 10 million renminbi to deposit?” You’re a noodle stand as far as they’re concerned, right? -So the regulation will hopefully make it easier because obviously if you’re a commodities broker or you’re an insurance company, making large deposits and large withdrawals would make sense. That’s one of the things we’re really hoping will open up and make doing that easier. There’s a lot of things we’re looking for in the future. [51:44]

The other thing I wanted to clarify was that I think that this ruling that we’ve seen in China is very similar to what they did with virtual goods and virtual goods trading. Brock, who you saw earlier - we co-invest together and we invested in BTC-China (we knew you’d be number one, Bobby). (laughter) Basically, because we saw that in the early days of virtual goods when people started trading their disaster for some pot of virtual gold, the governments basically said, “Hey, look. You, as game companies, cannot operate in the trading business.” By doing that, it allowed for lots of little guys to basically build exchanges and say, “Hey I can trade this virtual good/gold for money, or I can change this particular weapon for money,” and so forth. That’s where it all really began. There’s a long, great story about how that evolved in China. A lot of people in China actually ended up farming gold and supplying the entire world for that within large games. -But what that did was it made the field completely wide open for little guys to operate, kept the big players out (the game companies themselves) and then the ecosystem unfolded and it’s now a multibillion dollar industry. That’s good because that means that

companies like BTC China and other Bitcoin companies in China have an opportunity to really build a multibillion dollar industry, and then regulation that applies specifically to them will unfold as appropriate. It means that the banks and the insurance companies and so forth can’t just come in and gobble it up. So we all see that as a good thing. [53:20]

We’re disappointed about payments not being a viable business right now. But I believe, and many conversations I’ve had sort of come from the same standpoint, that as currency regulation begins to loosen up and currency is freely tradeable, payments may become an interesting possibility later, because at that point, then, there isn’t worry about currency control, which is currently the policy in China. [53:46]

-So a couple of things. As you’ve seen, the market has grown and so has BTC China, so that’s been a really good thing for the future, but let’s talk about some of the threats. There’s a couple to keep in mind. First are bad actors. We really, really do not want those people doing things that would bring regulatory reaction. That’s people doing all kinds of bad things, whether it’s illegal activity or things that just aren’t good for society. China has a strong policy against pornography and other things that may be acceptable in other countries but China has strong policies around that. We certainly don’t want to see bitcoin being used for things within China that would cause them to want to clamp down on it and make it harder for us to do business. So we call those bad actors. Some of it would be illegal and some of it would basically just be moral standards. Second is cryptocurrency fragmentation. As there is more and more currencies, we think that creates more confusion in the marketplace. Things need to be easier, not harder. There’s just a lot to work on from the industry standpoint to make it easier for consumers. Because we’re really, really at the early adopter phase. I’m sure many of you have seen the adoption curves that show where we are in the adoption phase. China I would say, is a little bit ahead of the rest of the world in some respects because the adoption has just gone like crazy. Part of that is because of the speculation: people see it as an investment, and I think when you have so many engineers running around they’re quite happy to spend an evening of leisurely reading understanding how cryptocurrency works, right Bobby? [55:22]

BL: Yeah. [55:23]

MC: Ultimately, I think fragmentation is going to be good. Like as we were talking about Mastercoin yesterday, I think there’s a lot of great applications, but I think, right now, until things are easier for consumers, fragmentation will make it more confusing. I think that a lot of the smaller currencies are going to have weird volatility and not as much support and have more risk associated with them. Obviously, people lose money (that goes to the third point), that can be bad, the volatility aspect causing bad publicity— Grandma thought she was going to be able to retire, put all of her money in bitcoin and lost it all… that’s not good. Obviously, we’re worried about that happening - we don’t want to go there. I think, right now, it’s almost impossible for grandma to figure out how to buy bitcoins so we’re probably safe. -But you never know. My mom plays Farmville and buys virtual gold. [56:11]

The next thing is the future of Bitcoin in China. We believe, ultimately, it looks very, very positive. More speculation is coming. There’s tons of money flowing into the market and obviously because of the returns you can get relative to, say, real estate or stocks. I think there’s also a libertarian component. I think that Chinese investors feel really safe because bitcoin can’t really be manipulated the way fiat currency or other kinds of industries can. I think there’s a real desire for self-determination and I think that drives part of it as well as the technical aspects of it. The other thing is that because the BTC/renminbi now represents over

50% of the transactions globally, we don’t see that trend changing. But what is interesting is Litecoin. Now, many of you may know that, actually, Bobby’s brother was the inventor of Litecoin, and so we refer to their dad as “BitDad.” (laughter) He’s sitting here in the audience. We’re like— “Did your wife know that you were gonna have two kids who literally changed the course of cryptocurrency on the planet?” Probably not at the time. [57:15]

Here’s the other businesses we think are really interesting: exchanges and trading. So what’s happening in exchanges? The general ecosystem… generally, when tech businesses come to China, they mirror this exact same pattern, and that is a lot of companies will jump in, usually the first guy will make all of the money (we’re excited that that’s going to be Bobby and BTC China) but there will be ten thousand followers and then they will completely beat each other up on price and then it’s basically a war of attrition. Whoever has the most resources and the most efficient business model, serves customers the best, will typically win. And we’ve seen this over, and over, and over. I used to run Groupon for China in the joint venture with Groupon and Tencent, and it was exactly the same thing. The day we announced we were going into China, there were three thousand group-buying competitors; the day we launched, there were six thousand. Nine months later, we were in the top ten and they were just dying off like crazy because everybody drove the margins to zero and only the guys who had enough resources survived. This is, I think, going to be a similar model. They’ve implemented a zero fee. I think there’s still a fee for withdrawal, so there’s still a little bit of money to be made in the meantime. -But a lot of guys are not going to survive and maybe a year or two from now we’ll see massive consolidation, and the winners will be winners. The trading business is still very strong. How many competitors are there now do you think in the trading business? [58:39]

BL: About half a dozen. [58:40]

MC: Yeah, so like six or so? I think that number will just continue to proliferate, and then we’ll see consolidation. The payment space, as we talked about, is unfortunate. I think, for now, it’s kind of a no-go. As I mentioned earlier, I think the future is interesting and we’ll wait to see how currency rules open up and then maybe Bitcoin can join. But today it’s not viable. [59:04]

Now, mining. Mining is insane in China - insane. The first big mining companies we’ve seen were 65 nanometer technology. Just monster machines, people cranking out these ASICs and just loving it. It was like literally a geek’s dream because you could just play with these things and money would come out the other side. I can’t tell you how many Bitcoin millionaires I’ve met in China these days. They’re very funny characters because these are guys who were doing it in their basement and they really love the idea that they have this machine that spits out money. I think we all have this dream of having a printing press in our basement - these guys actually do and they love it, and so mining is just insane, I think it is ground-zero. They’re just insane for it. Something is about to happen. In the next 90 days you’re going to see serious ASIC mining technologies run on blank-coin. If you think bitcoin is popular in China, you have no idea how popular Litecoin is. Part of the reason is because one Litecoin is in an earlier phase of its lifecycle relative to Bitcoin. There’s a four-year mark when things change and there’s this deceleration in terms of the amount you can make in mining. That phase has not yet occurred (we’re only like two and a half years in) in Litecoin. So there’s still a lot of legs left and the ASIC entry is going to really, really make… a lot of people are going to make a ton of money. ASIC mining for Litecoin is about to kick in. Probably the next time there’s an Inside Bitcoin conference, it will have already opened up and really changed things there, so that’s huge. Then, of course, there’s a ton of other cryptocurrencies behind it. I can’t tell you which ones are going to be awesome in China next after that, but Litecoin has got a lot of legs left in it. That’s a

really huge trend. [1:00:54]

-And then ATMs and kiosks. I think, because of the desire for people to actually physically take their cash and turning it into bitcoin, I believe this is going to be a massive trend. I think that the levels of exchange that we’re seeing now digitally online, I think we could see a multiple of that with the kiosks. We’re really, really excited about that because guys love to stand in line with stacks of cash and turn it into something else. It’s just the culture there. If you’ve ever been to China and you’ve seen how people like to carry around cash, the largest note is equivalent to about fifteen dollars. -So if you want to carry around any significant amount of money, it definitely puts a bulge in your pocket. People are used to that, they’re used to carrying around big wads of cash to do things, so we think there’s going to be a lot of opportunity to take advantage in that space. [1:01:42]

There’s a ton of other businesses. There’s wallets, there’s payment mechanisms, purchase mechanisms, a ton of other businesses. But these [the businesses of exchanges, trading, mining, and ATM/kiosks] are, I think, the four biggest that there’re trends [for]. I would love to answer questions about China. We can talk to you ad nauseam about the opportunities there and so forth. [1:02:04]

Audience member #1: Hi, is there a conflict here between… the Chinese government has been generally positively, so it seems, about Bitcoin, right? We see that business is flourishing and your business is flourishing, but on the other hand, what about capital controls? Isn’t the government worried about Chinese people buying bitcoins and sending them abroad or moving abroad with them carrying large amounts of money, smuggling them? [1:02:40]

BL: The question is about capital controls in China, right? As of the ruling from last week, bitcoin is not a currency. Capital controls pertain to currency. Bitcoin is just a virtual good. At this point, I think people will be allowed to buy and sell bitcoin and it’s unrelated to foreign currency. Now, things may be clarified more in the coming weeks, so at this point, that’s the answer. It’s similar to gold. People in China can buy gold. They can put it under their mattress or can take it on an airplane and go to Hong Kong. It’s similar to that. [1:03:00]

MC: I think the issue of using bitcoin as a proxy to do currency exchange and so forth… Technically, of course, people can do that all they want, but I think the policy is you’re not supposed to use it for foreign exchange. People will do whatever they want. If they go and buy gold, they put it in their pocket and they go across the border and then they turn that gold into another currency. Technically, you’re not supposed to do it, but I would say that it’s in effect now, and there’s a lot of things in China like that. There’s a lot of things that are – technically, you’re not supposed to do but are very loosely policed. -And then once in a while some guy gets policed. (laughter) Usually, it’s because somebody else doesn’t like him and it’s like— “Hey there’s corruption in the government!” And it’s like— “Well, actually, yeah, we know.” “But this guy is really bad.” “But what about…?” Well, whatever. Just to give an example, there was a big corruption scandal in the pharmaceutical industry. This one Western company got singled out and everybody knew that everybody else was like ten times worse. These guys were like giving people golf trips. And the other guys were basically like — “Hey cocaine and hookers.” They were like, whatever, they just did whatever. The point is that the guys who got nabbed, the guys who got basically called out (a lot of people think it was more political than it was anything else), but that’s just the reality of it. Things are illegal, people do them, and when it gets policed, everyone says “okay somebody got caught,” but that’s just the reality of the situation. I think it’s similar here, a lot of, us speed but it’s only wrong if you get caught, right? [1:04:52]

Audience member #2 (AM2): We’ve all seen what happens when an exchange can’t handle volume. I wanted to see if you could comment on the infrastructure you’ve built, and what strategy… and perhaps how much bandwidth do you still have at this time? [1:05:12]

BL: We’re constantly revamping the backend to support more and more throughput. We’ve seen volumes go up 100x. Thankfully, we scaled our system in the summertime to handle this volume. We’ve reached 150,000 coins a day. It’s much more significant than 150,000 back in April because of the increased price which means many more transactions per second. For the next year, we’re targeting another 100x increase in transactions and volume. [1:05:41]

AM2: Are you practicing a multiple location strategy? [1:05:45]

BL: Yeah, we do use a distributed cloud infrastructure for our backend. Yes. [1:05:48]

Audience member #3: Basically, BTC China has reached the point where if something bad happens to BTC China, it would be bad for Bitcoin. Can you summarize a bit the security precautions you take with theft and so on? [1:05:59]

BL: Yes, yes, we have good security in place. I think either close to or over 99% of our bitcoins held on behalf of our customers are in cold storage, so there’s essentially a very, very small hot wallet [for] which we also have multiple levels of precaution to make sure it doesn’t get hacked and doesn’t get stolen. In terms of a fiat currency - it’s all held by third-party payment systems. It’s all held outside our reach, if you will. We have our operating funds segregated from customer deposits. [1:06:29]

Audience member #4: Hello, Cody here from Austin. Two questions for you. First question: has the bitcoin payment option been removed from Baidu already? -And I think there was a Chinese telecom company that was accepting [bitcoins]. Does all that stop immediately? [1:06:44]

BL: It was sensational news. Baidu had a small division for a small service. They started accepting bitcoin. It doesn’t represent Baidu the corporate, but since the regulation got announced last Thursday, several of these higher-profile companies have withdrawn their verbal intent to accept bitcoin. I think it covered Baidu and China Telecom. It’s just to comply with the wishes of the government. [1:07:08]

AM4: Thank you. Second question was around arbitrage. I’ve noticed that the China price can fluctuate up to 30% higher than the price you see here in America. Have you any comments on that? Or what is the opportunity for buying in America, transferring to BTC China, selling? [1:07:26]

BL: There’s a lot of arbitrage going on. There’s people all around the world doing arbitrage, people here left and right doing arbitrage, across multiple exchanges. The reality is even if prices are higher on one exchange, the arbitrage process takes longer and is more complex than you think it is. The reason of the complexity is because of fiat currencies that limits the delays and transfers of funds. It would be common to see prices differ across exchanges in different countries by up to 10, 20, 30%. It’s a way of life. People can go in and try to make the money, but it’s certainly harder than it looks. [1:08:03]

MC: Yeah, but the biggest problem is if you, for example, generated a gain on one exchange and you only have a certain amount of cash you’re working with in terms of float, you have to be

able to move the cash from one place to another. And moving that money in and out of China, there’s no regulatory framework that allows you to do that right now, so it’s not easy. [1:08:26]

BL: Yeah. Next question? [1:08:28]

Audience member #5 (AM5): First of all, I just want to thank you for providing this service. I bought my first bitcoins from BTC China about a year and a half ago. [1:08:35]

BL: Well, congrats. [1:08:37]

AM5: Yeah, thanks, so keep up the good work. My question was about the rulings on Thursday. It mentioned that goods and services cannot be sold in bitcoin. I’m wondering if most investors in China - are they expecting that to change, or are they expecting the value to come from the international community? -Or what are they expecting? [1:08:52]

BL: That’s not going to change anytime soon. The government has made it clear that goods and services cannot be priced in bitcoin and cannot be sold and paid for by bitcoin. That’s the current stance. All companies under the China law will follow that. What happens in the future… we’ll wait and see what happens. [1:09:11]

AM5: So are the investors then, are they expecting bitcoin to have value just because of the international community? Is that what they’re betting on? [1:09:19]

BL: Bitcoin has value for many other reasons, not just the fact that you can… remember, person-to-person payments and also buying and selling on exchanges – that’s still legitimate, so there’s still a lot of reason… and also, Bitcoin is a worldwide phenomenon. Just because [in] some countries you can do things with it, some countries you cannot, it doesn’t mean the whole Bitcoin is shut down or anything. [1:09:39]

MC: Just because you can’t buy a car in China with your bitcoin, you could still buy a Tesla and then come pick it up. (laughter) [1:09:45]

Audience member #6 (AM6): I wanted to follow on his heels and clarify. There seems to be some discrepancy as to whether the memo that was put out applied to financial instruments being priced in bitcoin, or all goods and services? Can you clarify as to whether all merchants are not allowed to accept bitcoin, or is it only for existing financial instruments? [1:10:05]

MC: It’s both. Financial institutions can’t touch it, and goods and services are not allowed to be sold or priced in bitcoin. Two different points, and they both apply. [1:10:18]

BL: Bitcoin is not a currency. Think of bitcoin as eggs in the supermarket. If you buy a dozen eggs, you can’t buy stock or gold with your eggs. You buy it at the supermarket and you do what you want with it. [1:10:29]

AM6: The reason I ask is - the United States has a provision for bartering, and I was wondering if it might fall under that headline, or if a very clear line has been drawn at goods and services. [1:10:39]

BL: Bartering is a known concept in China. However, the memo did not touch specifically on bartering, so we’ll see how that develops. Thank you. [1:10:50]

MT: Alright, you guys rocked it. Give them a big round of applause! [1:10:52]

CREDITS:

ABL: Thanks for listening to episode 70 of Let’s Talk Bitcoin.

• Content from this episode was provided courtesy of Mediabistro, captured and edited by Adam B. Levine, and featured Michael Turpin, Marco Santori, Bobby Lee, and Malcolm CasSelle.

• Music was provided by Jared Rubens and Calvin Henderson.

Questions or comments? Email adam@letstalkbitcoin.com. -And hey, if you’re still listening to this… do you have any predictions about the next twelve months? What do you think is going to happen for Bitcoin over the next year? We’re doing a New Year’s Eve show. First time we’ll be recording, actually, in December at all and it will be happening, I believe, the day before the end of the year. So if you’d like to get anything in for that show, we’ll be reading mail on it. Have a good one! [1:11:44]