Bitcoin Scandal Reflects Popularity of Virtual Currency in China

November 18, 2013 Leave a comment

NOVEMBER 17, 2013, 5:05 PM

Bitcoin Scandal Reflects Popularity of Virtual Currency in China

By ADAM CENTURY

On Oct. 26, the website of Global Bond Limited, a Chinese exchange platform for bitcoins, the booming digital currency, suddenly went dead. Then, without warning, GBL’s roughly 500 remaining investors were kicked out of the company’s official QQ group, a social media platform that the company was using for investor relations. By nightfall, the scale of the swindle was made public – 25 million renminbi, or $4.1 million – making it one of the largest bitcoin fraud cases since the currency’s inception four years ago.“We want to find the culprits and make then return our hard-earned, sweat-stained money!” read one post by a victim on Sina Weibo, China’s most popular Twitter-like microblog. “Help us find the criminals!”

In hindsight, there were numerous red flags that should have alerted GBL’s bamboozled investors. On May 27, just days after GBL was founded, a popular Chinese bitcoin forum pointed out that the company claimed to be based in Hong Kong, but in fact was using servers located in Beijing. In addition, GBL lacked an official company email address and did not have a license to provide financial services.

The willingness to invest in GBL despite its shortcomings demonstrates just how popular “crypto-currency” has become in China. In early November, BTC China overtook Mt. Gox and Bistamp to become the largest bitcoin exchange site in the world, handling 34 percent of global bitcoin transactions over the previous seven days, according to data from Bitcoinity.org, a website that tracks bitcoin exchanges.

Bitcoin’s appeal to Chinese investors is manifold. The currency experienced a major spike in value in July shortly after being the subject of overwhelmingly favorable reports on CCTV, China’s state-run television station, and People’s Daily, the main Communist Party newspaper. The currency received a further boost in October when the Chinese search engine Baidu, which commands more than 80 percent of the Chinese search market, announced a plan to accept bitcoins as payment for its online security and firewall services.

Last week, a real estate developer in Shanghai declared that it would accept bitcoins as payment for housing units in the city’s Pudong district. The company, Shanda Tiandi, posts bitcoin exchange values daily outside its office. This raises the possibility that China’s high-net-worth investors could try to use bitcoins to circumvent strict investment caps on the property market.

Analysts say that there is a deeper and more contentious reason for China’s bitcoin boom. The popularity of the digital currency has been linked to the fact that China’s citizens are unable to trade the renminbi as freely as people in other countries trade their own currencies. Beijing keeps a close grip on the renminbi, concerned about potential disruptions to the economy that could result from sudden outflows or inflows of funds.

Should the government decide to crack down on the bitcoin, which some experts say is possible in the aftermath of such a major fraud case, it has the legal grounds to do so. In 2009, the Ministry of Commerce and the Ministry of Culture issued a rule prohibiting the exchange of virtual currency for renminbi, as well as the purchase of real-world goods and services with virtual currency.

According to sources within the tech industry, the 2009 rule was aimed mainly at companies like Tencent Holdings – the parent company of the above-mentioned QQ platform – that allow online game players to use virtual currency to purchase virtual items. But the backbone of the rule is clear: Virtual currencies must stay out of the real economy.

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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