In this episode Saifedean talks to Neil Woodfine, Head of Marketing at Unchained Capital. Neil got involved in the emerging bitcoin industry in China in 2014 through work at bitcoin exchange Okcoin and went on to co-found a remittance start-up, which used bitcoin to facilitate payments between overseas businesses and their Chinese suppliers. Neil talks about his experience navigating the unpredictable Chinese regulatory environment, how he views China’s recent ban on bitcoin mining, and how we might expect governments around the world to respond to the rise of bitcoin in years to come.
[00:03:40] Saifedean Ammous: Hello, and welcome to another Bitcoin Standard podcast seminar. Our guest today is Neil Woodfine. Neil is an old time Bitcoiner who spent a lot of time working in China. And he’s currently the marketing director of Unchained Capital and he started off first working in OKCoin in China, one of the show’s sponsors. And he then established Remitly, payments startup in China which got bought out. He’s worked for Blockstream as well. And now he’s recently joined Unchained Capital and has extensive experience in Bitcoin businesses and in particular in Bitcoin businesses in China.
So I thought this would be a great opportunity to talk to somebody with real world experience in the world of Bitcoin, about Bitcoin business in general, but Bitcoin businesses in China in particular, and the recent crackdown that happened in China on the Chinese miners and the state of mining and trading and [00:04:40] owning and selling and holding Bitcoin in China in general.
So Neil, thank you very much for joining.
Neil Woodfine: Thanks a lot for having me on.
Saifedean Ammous: So can you tell us a little bit about your background in starting up a business in China and starting up a Bitcoin business in China in particular? What got you into that? What got you into Bitcoin? What got you into China?
Neil Woodfine: So I studied Chinese, it was the obvious choice had benched around a few different jobs after graduating. I was working mostly around manufacturing, machinery, export industry in China. And my last job before jumping into Bitcoin was working in cement plant production. And during that time I bought my first Bitcoin, fell down the rabbit hole got the Bitcoin bug hard and started researching everything I could about it. And I decided that my current career at the time was probably not what I wanted to be doing. So I took a massive pay cut to get into the [00:05:40] industry and I joined OKCoin, which was the biggest exchange in the world at the time, actually.
I just started at a pretty entry level position, quickly moved on to business development. And it was a great entry into the system, OKCoin was such a liquid exchange at the time. A lot of foreign companies were also coming to OKCoin to get that Bitcoin liquidity.
I was running business development, I was getting to connect with a lot of different Bitcoin companies around the world. And a lot of those contacts I still have kept to this day. So that was an awesome experience. Another great thing from OKCoin was the people that I met there.
One of the people that I became very good friends with was a guy called Richard Bensberg. You’ve probably seen him floating around Twitter now and then. Excellent guy, he was running compliance. He has a traditional finance compliance background, and he’s running compliance at OKCoin.
So we became very good friends. Richard and I noticed that a lot of people were moving funds through OKCoin to deal with international trade transactions, because they were finding that they were getting a better rate for their currency exchange by doing it through Bitcoin [00:06:40] than just like transferring US dollars to China and converting into renminbi.
So we were like, aha okay, this is an opportunity. Clearly people are already using exchanges in a very kind of convoluted way. Let’s build a startup that does that for them. And so we we left OKCoin and we started Remitsy, and Remitsy was specifically for business payments to China. Basically anybody anywhere in the world using US dollars, pounds, euros, any kind of the major currencies could convert it to renminbi.
And we would deliver the renminbi payments to their clients or vendors or whoever in China. And so it was mainly B2B and B2C and actually B2C was probably our most successful area of our business. Individual businesses outside of China, making lots of individual renminbi payments into China.
And yeah that was essentially the model. There was a few of the businesses at the time doing a similar thing. So there was reBIT through out southeast Asia BitPay was doing Africa, bitspark was also a bit of Southeast Asia and Hong [00:07:40] Kong and then Wyre who were our competitor also doing China.
They grew a little bit faster than us and ultimately ended up acquiring our business. I think these days you also have Jack Mallers’ business Strike, also doing a similar thing. Basically using Bitcoin as the rails to do international transfers.
Saifedean Ammous: Okay. And how does that work exactly? You receive the Bitcoin in China from somebody who wants to send it from outside of China.
Neil Woodfine: Basically the business outside of China would deliver US dollars or euros or pounds to one of our international bank accounts. We would go to a Bitcoin exchange or another liquidity provider and convert that into Bitcoin, move the Bitcoin to China convert that into renminbi through one of the providers there, and then deliver the renminbi to their recipients.
Saifedean Ammous: And was that really economical given the transaction costs on both ends? How successful has that model been?
Neil Woodfine: It was very economical because [00:08:40] typically, especially at the time there was a premium for Bitcoin in China. So you actually got an amazing exchange rate. We were just doing it to them at a 0% when most of the companies were charging like two or 3%.
And then there was obviously a little bit of a spread there available for profit on our side. But yeah, it was very successful. What made it more difficult was regulations, which were constantly shifting both on the traditional fiat payment side and then also on the Bitcoin side.
Saifedean Ammous: Okay. Then tell us, how has Bitcoin business in China evolved over the years? So at that time, 20, 15, 26. Chinese businesses, Chinese Bitcoin businesses were by far the most dominant in the world. So the biggest exchanges, I think there was a point at which the 10 biggest exchanges in the world were all in China.
And there was huge progress in Bitcoin technologies and Bitcoin products and services in China. And then things changed and regulations [00:09:40] started to clamp down on it. What has happened now?
Neil Woodfine: So Bitcoin became massive in China as well as the cryptocurrency industry in general.
I think it was killed a little bit by its success. There was, everybody’s heard about the China bans, right? There was this kind of constant series of government interventions, not outright bands. And each one of them was like targeted or different secondary or implemented in a different way.
And it just made life very difficult for anybody buying or trading Bitcoin and any businesses running there. And for us running Remitsy it has pretty hard when finally they did close down the exchanges and I think the exchanges were closed down for two or three months for some investigations.
It was just a temporary closure. But during that time, we had to very quickly switch our systems over to OTC providers in the country, which were still allowed to operate. And then the exchanges came back online, but then a few months later they were closed again and that was permanent.
And that we were just permanently stuck in the OTC system. But that was all right, cause we’d already moved our [00:10:40] systems across. But in China, the entrepeneurs there are pretty resourceful and adaptable and life always finds a way. Immediately there was like new platforms popping up.
Government officials, the central bank officials, have made statements saying that it is legal for individuals to trade Bitcoin and to hold Bitcoin. But the problem was if you want to run an exchange, you have to have a license. And they’re not going to give out any licenses for any Bitcoin exchanges.
So that kind of like fucked them out, but what it did mean is OTC is technically legal. And immediately, aside from just personal connection OTC, traditional OTC businesses popping up, there was all sorts of platforms popping up for doing P2P OTC trading. So basically individuals with Bitcoin can connect with people that want to buy Bitcoin and trade that way.
And a lot of it was handled over the instant messages, which are WeChat and stuff which are very popular in China. Also I think, there was a lot of larger businesses, perhaps even the exchanges behind some of those [00:11:40] OTC vendors on some of those platforms. They even developed voucher and token systems.
A little bit like Azteco, where you would buy a voucher and then redeem it on the exchange for some Bitcoin. And that helped get around into the restrictions for awhile. But these days all of the exchanges are not officially operating in China, so their official HQs and stuff like that, they all operate outside of China. Places like Singapore and elsewhere.
And they’ve still left, some of their staff in China. So there’s still people developing the business there, but officially, they’re not there. The way people go and buy Bitcoin these days is they go to OTC vendors, and rather than buying Bitcoin directly, typically they’re buying USDT with their renminbi.
So they’d go to an OTC provider, buy some you USDT and then they go to the exchanges and it’s still, the two main ones are OKCoin and Huobi and then also there’s a third contender these days, which is Binance, which wasn’t around when I was there.
And they start buying the Bitcoin and other cryptocurrencies. And that’s pretty much the [00:12:40] situation at the moment, there’s still OTC going on there. But I think, buy USDT and then trade on the exchange is probably accounts for the majority of the volume now. And unfortunately, for whatever cultural reasons, in China there is very little Bitcoin maximalism.
Unfortunately it’s very difficult to find anybody that is driving that narrative. And we used to run the Bitcoin meetup in Beijing and everybody wants to talk about anything but Bitcoin. So yeah, it’s it’s very altcoin, shitcoin heavy community there.
Saifedean Ammous: Well, to go back to the Bitcoin Standard, this wouldn’t be the first time for China where they make this kind of historical mistake.
As I mentioned in the Bitcoin Standard, China was the last country to go off the silver standard. It was China or India. I’m not sure which, but the price of silver was declining slowly for most of the 19th century. And then by in 1870, Germany switched from a silver standard to a gold standard.
And then silver essentially went into freefall. Freefall by analog rock [00:13:40] standard, not freefall by a modern digital shitcoin standard. It didn’t get (???) 99% over a weekend, it lost a lot of its value over many decades. But by the 1930s I think is when China finally switched from a silver standard to a gold standard and during that time, the silver had lost, I think I mentioned it in the Bitcoin Standard and I don’t remember the exact number, but it was something like 70 or 80% of its value. Nobody really mentions this when discussing Chinese history and Chinese politics, but I think it’s an enormously consequential fact that very few people like to talk about.
But think about it this way, if you’re Chinese, all of the savings you have are losing value and foreigners on the other hand, they have savings that are appreciating value. Think about the late 19th century and the early 20th century and the problems that China faced during that time and how much they were intertwined with the fact that they chose the wrong monetary medium.
Perhaps there’s a [00:14:40] thing there for choosing altcoins over the dominant monetary metal, but going back to the situation right now. What is the legality of these OTC desks, they’re completely legal, there’s nothing, it’s not black market.
Neil Woodfine: I wouldn’t say legal, I wouldn’t say completely legal they operate in a gray space, and this is definitely more common, people that live in the UK in the US are probably not as used to legal gray spaces, but it’s a lot more common in China. One of the reasons why the payment industry in China is so much more developed than the US is because regulations weren’t as clear, and the payment companies were able to develop very fast in a kind of low regulation environment until they became very big and then regulations started coming in. There was also the P2P lending industry, which exploded in China for a while, it was huge.
It was even supported by the government for a while. They wanted to drive innovation and stuff like that. But then very soon it turned out that a lot of these P2P lending platforms were complete [00:15:40] scams and they were going bust left right and center, operating in some very kind of like regulatory gray space.
And the Bitcoin OTC providers, I think are basically in the same place it’s not strictly legal and it’s not strictly illegal either. I think they themselves probably don’t even fully know and they just wing it and keep an eye on what what’s happening to the people around them and what’s happening with announcements from the central government.
Saifedean Ammous: I guess fact that the OTCs are just not as conspicuous as exchanges is probably what helps them fly under the radar. When exchanges are there, anybody can look at the exchange and anybody can see the numbers and anybody can see, you can go in and you can trade and it looks like a little casino online and everybody wants to play with it. But OTCs are a little bit more you call a guy and you speak to them. So perhaps that helps.
But it’s interesting now because over the last month, China seems to have completely banned mining on its territory, which I think is an enormous development. Many years in which we’ve heard China has [00:16:40] banned Bitcoin, China has banned Bitcoin, there’s was definitely an element of a boy who cried wolf about this story this time. I’ve, I remember many cases when people said that China bans Bitcoin to the point where now many people didn’t pay attention when this first came out. But it looks like it was real. And I think in fairness, a lot of the earlier stuff, it wasn’t exactly China, banning Bitcoin.
It was China passing some directive or some law related to Bitcoin which in the heat of the moment gets quickly translated into China bans Bitcoin, but then it’s actually much more sophisticated. But now we’ve seen the ban on mine. Before we discuss that, I’m wondering how likely do you think it is that you could see a ban on OTC desks in China or more drastic rules against holding Bitcoin in China? What do you think?
Neil Woodfine: I think anything’s possible. I’m generally fairly bearish as far as global regulations go, but I would never had imagined that they would have 100% kicked Bitcoin mining [00:17:40] out of the country. And as well, I think when we were running Remitsy, we never imagined they would just fully close down the exchanges as well.
Yeah, I think anything is possible. It depends on how bad a financial and economic situation gets in China. I think if things get worse, any kind of moves could be taken. And even without that, some people in the central government, they decide that okay, we don’t want this thing around here anymore and go with an even more all out ban. It’s a little bit more difficult for them to do that. though because they have got statements on record from the highest of high officials saying that holding Bitcoin is legal trading Bitcoin is legal, for an individual. I think they would have a little bit of narrative management around that if they decided to ban it.
But yeah, I think it’s more likely to happen. We talk about China bans almost every year now. I think it’s probably just going to be a more incremental thing rather than something sudden. There’ll be individual instances of smaller regulation that just makes dealing with [00:18:40] Bitcoin in the country harder and harder.
And I don’t see any reason for that trend to reverse. Not unless some country proves that it can be in the central government’s interest that Bitcoin flourishes.
Saifedean Ammous: Do you have any ideas about what may have motivated the ban on mining? It seems pretty surprising because I think a majority of Bitcoin mining happens in isolated and excess energy locations, hydroelectric dams or places where they built extra capacity, because obviously there’s a lot of central planning there.
You do have cities that get built with big capacity power plants, but then the cities don’t quite work out as well as you had expected. So you have a lot of idle capacity running and then you could hook it up to a Bitcoin miner and help defray some of the losses from over investing in this.
And yet it seems like they’ve banned this option for everybody. So it doesn’t matter where you’re getting your electricity from, just no more mining in China.
Neil Woodfine: I’m not a hundred percent. I don’t think anybody’s a hundred percent. Like I have friends and contacts in China and you speak to them and they’re not [00:19:40] 100% sure either.
It looks like it’s 100% out though, that’s the best assessment at the moment. And in terms of what motivated it, it’s difficult to tell like you say that most of the energy that was being used was getting wasted anyway. It was excess energy production. But maybe in the areas where it wasn’t, maybe it was creating competition and shortages.
Places like Xinjiang and stuff, I don’t think we’re using a lot of hydro electricity. I think there was probably a lot of coal involved there. So maybe that was causing competition with local uses and causing a little bit of resentment from people there and any kind of social unrest is generally dealt with very quickly, that can’t be allowed to happen.
But that’s all just 100% speculation. Somebody may have decided that they got out the wrong side of bed. They got out of bed on the wrong side one day and just decided they didn’t like Bitcoin mining and decided to get rid of it, so it could be as much as that.
But from a geo-strategic point of view, allowing mining to continue in China makes more sense to me, even if you don’t like Bitcoin, like it’s better to have the [00:20:40] mining closer to you to do something with it later. But knocking it out, maybe that’s better in the long run for everybody else.
Saifedean Ammous: Yeah. What do you think are the implications of this for China and for Bitcoin? How do you think of it?
Neil Woodfine: So first of all, I think it’s not a good thing. Chinese miners deserve the position that they’re in. China doesn’t produce the best wallets or anything like that in the Bitcoin space, but they do the best Bitcoin mining hardware the best mining pools and stuff like that.
So it’s really sad to see all of these guys that have thrown their lives, years and years of work into these businesses, just having them completely trashed. A few of them have managed to get out, continue operations elsewhere, but a lot of people have lost a lot of work and they were very profitable businesses.
So I think from that perspective, it’s really bad. But the thing is think it’s good to have global distribution, it’s good to have multiple different cultures and multiple different legal systems making home to Bitcoin mining. Like for instance, I’ve already mentioned how Chinese entrepreneurs as are a bit more adaptable and flexible and adventurous then their western counterparts.
And one instance I was [00:21:40] hearing in the tail end of this mining ban, a lot of the binding operators were loading their Bitcoin mines into containers and putting them on the backs of trucks and reversing the trucks onto these power production sites, hooking them up and then generating some hashes, and then when these police were spotted coming down mountain roads by dedicated spotters, they would just disconnect and drive away. And then even if they were caught on the road, what are you doing, oh we’re just shipping the miners out. There’s no evidence of them operating.
Now I just cannot imagine mining companies having the balls to do stuff like that. And I think actually that’s a benefit to the industry to have people that are willing to go that far, to generate the hashes and to make their profits and to be flexible with the rules.
So I think that’s a big loss. And then I think also like these days, we’re starting to see things emerge like the Bitcoin mining council. And I think the western trend towards this ESG mentality is possibly even a bigger threat than the Chinese government.
Saifedean Ammous: Yeah, ESG is [00:22:40] environmental sustainability and governance. It’s the latest buzzword making its way around the fiat world in which basically you pay people some money to give you some gold stars that say that you are good and responsible. And it’s a great grift for the people who are awarded these points.
Neil Woodfine: Yeah. I think the S is for social actually, it’s contributions to society.
Saifedean Ammous: Social, yeah. It’s hard to keep track of all the buzzwords.
Neil Woodfine: Yeah, the way it works in China at the moment is that you have the central government, central entity and it’s playing cat and mouse with Bitcoin businesses. But like ESG is individual private companies, lots of them, all going to enforce these ideals on their own companies and then the broader world as well, which is a little bit more risky in my opinion.
As well, I think things like the mining council, they talk about sustainability and environmental concerns, but then they specifically use the term ESG in a lot of their materials. And it’s [00:23:40] okay, so if you’re worried about the environment, why have you tagged on this S and this G like, what else are you going to be doing later?
I see things like the mining council, let’s see where it goes, but I think it’s likely that it’s a precursor to more coercive industry bodies. Bodies that set standards, and then other industry participants have to follow. Otherwise they have certain action taken against them.
I think it’s imaginable that these bodies will start informing future regulators on how to regulate fossil fuel competition. And it’s almost like by setting up these bodies, they’re implicitly accepting that certain actions will be taken against their competition. Certain actions will be taken against fossil fuel miners, and they’re going to stand by while that happens.
Cause we’ve created this group and we’ve proven that we’re ESG compliant. So I think that’s definitely problematic, and the good thing about China is that at the moment they don’t buy into any of that crap. The entrepreneurs there, they’re profit driven and they’re going to deliver the hashes is to the Bitcoin network and do that in as [00:24:40] efficient a way as they possibly can.
So yeah, I think that was the loss. And then just more broadly I think the mining ban in China demonstrates the vulnerability of mining as an institution to state interventions. So like it’s not just burning mining farms, it’s chip production, rig production, farm operation. For one example is almost 99% of chip production is happening in Taiwan at the moment.
Most of the Bitcoin mining equipment is happening in Taiwan. Taiwan’s right next to China. And China has its eyes on Taiwan and has done for a few decades. If China can ban the mining of Bitcoin within its borders, what kind of threat does that pose to the production of mining equipment itself?
And there is literally no other options for producing chips and it would take a very long time to set up a foundry elsewhere in reaction to any actions that happened in China. So I think we’re all excited and optimistic about Bitcoin, myself included, but like there are some real threats to the way the system works [00:25:40] today.
And this was a bit of a wake up call to the fact that, okay mining, it lends itself to economies of scale. It lends itself to centralization. There are places that are best for Bitcoin mining and you better have a big farm. Otherwise you’re not going to be as profitable as your larger competition.
And then another thing is this was a ban, like I said not so bad. All the stuff is kicked out of China, they could have done something worse with it. And the worst thing is confiscations. So instead of doing the ban, they could have actually just confiscated all of the equipment. And that causes a really big problem for everybody.
It’s not going to destroy the network, but it could cause a lot of censorship and gridlock issues on the Bitcoin network. Yeah, it’s a bit of a concern.
Saifedean Ammous: Yeah. I think we saw something in the range of 50 to 60% of the mining hash power decline over the past few weeks.
So that means something in that range is the amount of mining that was in China. I think I agree with you, I think it is a threat, but I always like to say miners [00:26:40] are more like the slaves of Bitcoin or the servants of Bitcoin rather than the masters in that ultimately, as a miner, you have two choices. You can mine, according to the consensus rules that are set up by the nodes, or you can waste electricity and waste a lot of electricity on trying to achieve proof of work solutions that don’t work and that don’t get you anything.
You can choose to play nice or you can have fun staying poor as Bitcoiners would say. Set up all these machines that connect all that electricity and mine nothing with it, get no revenue for it. It’s less of a concern I would say, the nodes, being able to compromise nodes perhaps, but it seems like perhaps maybe we are on the cusp of a downsizing of the mining industry globally.
As it got really big in China, we had government get uncomfortable about it. And maybe the large mining farm model is not going to be very popular around the world.
And then people will have to [00:27:40] mine in smaller arrangements and they’ll have to mine with the more mobile and nimble arrangements, like the trucks you mentioned who were connecting to power plants and can be very quickly moved. Maybe we’ll see more things like that. Trucks driving around to places where there’s waterfalls and hooking up a hydroelectric generator and hooking it to the miners.
Maybe we’ll shift toward the mining process that goes like this. And I guess the good thing is that the difficulty adjustment will always adjust in a way that optimizes for us to being able to continue to operate the network. I think I agree with you in that it is a terrible thing for Chinese miners and in particular, you think about just how much money and investments and capital has been spent on this over the years.
It’s a pretty sad thing to see. But I think for the network overall, perhaps the fact that they’ve diversified the location, instead of the majority being in China now nothing is in China. [00:28:40] Everything’s going to be more distributed in more jurisdictions.
And so there’s less power that each jurisdiction can have over it. It’s an interesting idea. It’s weird to think of how it is going to go in the future. I have to say though, I think people like to talk about Bitcoin mining as if it is geopolitically important.
I must admit, I don’t really see that. I think Bitcoin mining is like gold mining. Switzerland was on the gold standard and it was the country that probably had the most gold per capita and into the 20th century it was definitely. All the world went off the gold standard in 1914 or 1930s, depending on how you look at it, Switzerland stayed on the gold standard until the 1970s.
And so it had an enormous amount of gold and everybody wanted to send their gold to Switzerland for safekeeping in the middle of the century. And yet The the Swiss didn’t mine any gold, and there was no Swiss mining. There was no Swiss gold mining. People just don’t mine gold in Switzerland.
On the other hand, a lot of [00:29:40] very poor African countries had a lot of gold mining and that didn’t do them much good. People would mine the gold and they would buy it and sell it. I think the mining is not what’s important. I think what’s really important is the hodling. Or I should clarify that, in that the mining is important to the extent that it increases the amount of hodling, but what matters is the hodling.
Because the mining, it’s a business enterprise where you’re going to put in some fiat and get out some Bitcoin and hopefully the Bitcoin you’re going to get is more than the Bitcoin that you could have bought with the fiat when you first invested. Whether it is or not is just an entrepreneurial question that people will go through. And if they make a profit and they sell the Bitcoins, then it’s really no different from any other business that made a profit.
They used up some Bitcoin, they held Bitcoin for a little while, they’ve helped the Bitcoin network grow, but in the long run, [00:30:40] if they convert it to fiat, it doesn’t really matter. So I’m not so sure about all of the geopolitical importance of having mining. Perhaps it’s important if you want it to attack Bitcoin, to continue to keep the miners, as you alluded to.
But as a country, the benefit you get from mining, I think there’s a bit of a mercantilist test idea here that if the miners are located in China then that gives China an advantage. I think it gives Chinese businesses and individuals an advantage because it allows them to make money off of it.
But does it really help China politically to have it or not, mining in particular?
Neil Woodfine: I think the only angle I see there is they could use it as a threat to the rest of the world. If it moved to a Bitcoin standard, if you have the mining within your borders or the majority of the mining, you can start to say, we’re going to push this button if you don’t do X, Y, Z, and then cause people to act in certain ways.
So that’s the only angle, even if you got into that situation, you may just see an increase of hash power elsewhere in the [00:31:40] world to combat that threat. And that’s the good thing about proof of work versus proof of stake. Like when somebody has got the majority and proof of stake, good luck with that, but at least with proof of work, you can build more, it’s external to the system and it pushes the attackers out.
But yeah, certainly from an economic point of view, unless Bitcoin money is even more profitable than it is today, I don’t see it being a huge economic benefit to the country that it resides in.
Saifedean Ammous: Yeah, I tend to agree. I think the the important thing is how many people end up holding the currency.
And so if they ban OTC desks, I think that would be a big blunder. I think countries that are preventing their citizens from just accumulating Bitcoin, they’re the ones that are committing a big mistake because they’re just forcing their citizens to buy at a price 10 or 100 or 1000 times higher than other prices.
I like to say one thing in which Bitcoin is different from other kinds of technologies and networks, if you’re 10 years late to Facebook and then you decide to get a Facebook account, the day you get the Facebook [00:32:40] account it works as well as the accounts of somebody who has been there for 10 years.
It has all the functionality. Same is true for Google or Amazon or Netflix. You get in 10 years late, you still get to watch all the shows on Netflix. You can order all this stuff on Amazon, but with Bitcoin, the user experience is vastly different. If you get in within 10 year difference, because you will be able to get far fewer SATs if you got in 10 years later or to any date, most likely.
I think it’s really about the hodling, is what matters. And to the extent that this hurts the hodlers and to the extent that it’s forced Chinese people to sell, I think it is harmful for China in the longterm, but other than that, I don’t see it as that big of a threat to Bitcoin or to China itself as a problem. But in terms of Bitcoin, of course it’s as you said, the proof of it work is the innovation here.
The way that I see it as the only reason that proof of stake systems continue to survive, and there aren’t really any fully pure proof of stake systems, they still all have some element of proof of work. I [00:33:40] think the few proof of stake systems that have been tried have more or less shut down or gone to zero at this point.
But the reason that such ideas can float around in the crypto space, if you want to call it that, is basically because Bitcoin runs on proof of work. Bitcoin is the big daddy and it protects everybody and everything is redeemable in Bitcoin. And Bitcoin continues to be the frame of reference. I think if we had a system of proof of stake, you could take it out very easily because there’s no frame of reference in the digital world like Bitcoin, that is a proof of work system that you can use for international settlement. Without Bitcoin, shitcoins are just local boards running currencies at the mercy of their national government.
If you had a proof of stake system and 51% of the people were in China, then the Chinese government can really get very significant changes done to the protocol. But with the proof of work system, even if 70% of the miners are in China, the miners shut down, the equipment is shipped [00:34:40] out, it’s sold to foreigners or it’s sent to foreigners.
And that’s it, the system adapts. Difficulty drops, we’re going to witness the biggest difficulty drop this week. I don’t know if you noticed, but it’s going to go down so far, it seems like it’s going at 26 and a half, now we’re recording on Wednesday and it’s estimated to be dropping at 26 and a half on Friday or Saturday, Friday night or Saturday morning, roughly.
And it’s the biggest drop in difficulty in Bitcoin’s history. It’s going to be an enormous decrease in the difficulty, which means an enormous increase in the profitability of minors that remain. And so the beauty of how Bitcoin works is, okay so this punishes the miners that exist in China that work in China but it rewards miners that are in other places.
And that’s just the beauty of the price mechanism because now there’s more money in the hands of foreigners or foreigners with respect to China who will be buying the equipment. And so the equipment will [00:35:40] relocate and the miners were able to start mining more and more, and mining is going to move to a place where it is accepted and valued more.
And the hash rate will adjust. Maybe it’ll decline. Maybe it’ll decline more over the next few weeks and months, but no matter how much it declines, ultimately the more that the hash rate declines, the more profitable the remaining miners are, and that causes the price to increase because the remaining miners start accumulating more coins and that increases the price.
And then finances more miners to get in other locations. And it could well be the case that right now we see the more of the bootleg mining taking place. As smaller operations proliferate rather than bigger operations. One thing that worries me is we saw with the coronavirus crisis, how a lot of the world essentially copied China very quickly, the Chinese implemented lockdowns and very quickly, [00:36:40] the rest of the world was onboard with this as a great idea.
And I wonder, the kind of Chinese international influence that managed to get a lot of the world to see the value of these draconian lockdown measures, if that kind of thinking now translates into international affairs around Bitcoin, and we see a global coordinated attack against Bitcoin.
Do you think such a thing is in the cards? What do you think?
Neil Woodfine: Yeah. I’ve said already that I think anything is on the cards at the moment. Especially after seeing the reaction to Corona, I think a lot of things happened in such a short space of time which I probably would have thought was never possible.
And that makes me think that yes okay, so like things can change very quickly. So yeah I think there’s already a narrative being built, that like aside from just Bitcoin being bad for the economy and stuff like that, the mining is specifically being targeted as [00:37:40] a threat to the climate and a threat to humanity.
And so I think they have the narrative that they need to be able to start making laws against Bitcoin mining. Again, I think it will probably be gradual rather than the very sudden ban that happened in China, but they could start pushing out no fossil fuel mining, and then this Steve Barber business go on and a bunch of others gradually finding other reasons to push out the renewable guys too.
So yeah, I could see that happening. Like we saw with the Corona stuff, people saw drones flying overhead barking orders at people to get back in their houses and people having the doors welded shut. In the west, people were shocked by it. It was like, that’s crazy, can you believe it?
And literally, just four or five months later, there was drones flying overhead in Australia, in the UK as well. Shouting orders to people to that they shouldn’t be outside. And I was like, it’s normal now.
It might seem crazy that China would ban Bitcoin mining right now, but it might not seem so crazy in a few months time when some of the western countries start doing the same. So [00:38:40] we ban fossil fuel mining cause that’s obviously bad, but then like the green ones are left and the easy narrative
there is they’re sucking up energy from green sources that other people could be using, so let’s use that energy for heating people’s homes or putting people’s lights on and stuff. Bitcoin mining is not necessary energy use, let’s get rid of that. I could imagine that happening, but fingers crossed it doesn’t.
The idea is that there’s always going to be some small rogue countries that are going to allow it to happen, but I think if we saw the international coordination that went into the pandemic response, it was pretty scary. There was almost nowhere to hide.
And and then if you look at US dollar, any money laundering regulations, they’re all getting increasingly global. You’re getting compliance from pretty much every single country on the planet. Places like Switzerland, no longer able to offer privacy to their clients and stuff that’s really sinking its claws into every country out there.
And yeah, I don’t think it’s beyond the realms of possibility that you would see such a massive international coordination against Bitcoin. Bitcoin does [00:39:40] threaten the modern state and the way every single one of them operate today, which is on very cheap money given to them through central banks.
If Bitcoin starts to threaten that, I could imagine them all clubbing to work against their shared threat.
Saifedean Ammous: Yeah, I think there’s a possibility there and I don’t think they could win ultimately, but I think they can’t destroy Bitcoin, they’ll still be places where you can mine.
And actually one way of thinking about it is that government restrictions and regulations on mining are basically a part of the difficulty adjustment of mining. As the hash rate increases a lot. And as the profitability of mining increases a lot, one difficulty that arises, first of all the Bitcoin algorithm will raise the difficulty in order to make it harder for you to mind so that the number of coins stays constant.
But as the value of these coins rises in dollar terms or in fiat terms, then you get the angry government start stomping their feet and demanding you stop because they want [00:40:40] their share and it might be the case, now we’re going to enter a point in which miners in many countries are going to be handicapped basically, through much higher costs for being able to comply.
We’ve had a seminar here where we discussed the Bitcoin mining council. I think it’s more of a threat to American miners than it is a threat to Bitcoin, in that what they’re likely going to do is to do something similar to what Elon Musk has going with cars, wherein car producers who make gasoline cars have to pay him and have to pay him renewable energy credits because he’s producing immaculately conceived the cars from the farts of angels, whereas they are producing horrible, bad, evil cars that are made from the farts of the devil and involve combustion, which emits gases, which as we all know, all gases are evil.
I think we could have something like that in Bitcoin mining, where the most efficient miners are going to have to be [00:41:40] handicapped. Most efficient monitors in the kind of jurisdictions that fall for this kind of nonsense, they’re going to be handicapped in a way. And you can think about it as being part of the difficulty adjustment.
Mining in a country that has people worried about combustion and freaking out about carbon dioxide means that you end up having to pay a premium on the cost of mining. So you need even cheaper electricity there in order to mine whereas everywhere else, where there are no restrictions, then the mining there can be done cheaper, so you’re going to relocate.
I think this is the key thing that people miss, if there is a global ban on Bitcoin mining, then we get a lot of the Bitcoin difficulty without the hash. A lot of the costs of the difficulty, a lot of the cost of mining is in setting up gray market or black market mines.
And because it’s going to be so expensive to be able to get a large number of Asics set up and connected properly, that’s the difficulty. [00:42:40] Even though the hash rate is going to be smaller and the difficulty will decline. You can think of the difficulty as increasing because you need a higher cost for operating Bitcoin.
It washes out eventually because the system ends up working anyway because every 10 minutes we are finding a block and every two weeks we’re readjusting in order to make the difficulty, bring us to about two minutes per block.
Neil Woodfine: Another thing on that point is that mining economics do trend towards centralization, at least the way things are right now. But centralization draws attention and makes it more likely that you have to adhere to any compliance that might come down the line in the future. Regulations and compliance are extremely expensive. Anybody that works in the financial industry will know that.
Let’s say you’re complying to some ESG requirements, your environmental side, that’s going to have costs associated with it. You’re using suboptimal equipment to generate your energy. And then on the social side, you’ve got to do some philanthropic efforts and burn money that way.
And mining [00:43:40] trends towards being very price sensitive, right? You only have a very small profit margin that will make all of the decentralized miners, the guys that don’t have the economies of scale, suddenly they might actually start to end up being more profitable. You might have this kind of regulations before this decentralization effect.
Now, maybe there’s a little bit of wishful thinking talking there, but I could imagine that that being the case.
Saifedean Ammous: I think I agree with you because you’re going to be raising the difficulty disproportionately higher for people who are in centralized mining operations, as opposed to people who want smaller operations, basically the smaller your operation, the lower the chances that you’re going to have to pay a price for the government or that you’re going to be regulated or shut down.
And maybe this does end up leading to a million miners in a million garages all over the world, and a few smaller rigs here and there, and this could well be the case, which is not a terrible thing. And I also don’t think, the centralization of [00:44:40] mining is that much of a terrible thing.
Geographically we’ve had, it happened in China for quite a while. Theoretically we can think about many ways in which it could go wrong, but it doesn’t seem to go wrong in practice. It’s one of those things about Bitcoin that, a lot of the things about Bitcoin are like that, you can find a lot of ways in which this shouldn’t work in theory, but it does work in practice.
And that’s generally how most nocoiners lose their minds coming up against this conundrum where things just shouldn’t work, but they continue to do. And I think the centralization of Bitcoin mining might be one of those things. I don’t think it was that big of a problem, perhaps. But it’s not a problem anymore.
We’re getting rid of this as a problem because we’re distributing all over the world. All right. Let’s see, who’s got questions, anybody want to ask anything? Peter, do you have anything to ask?
Peter Young: Yeah, I just had a thought to share, which was what Neil was just saying there about the [00:45:40] centralization of mining.
Reminds me a little bit of James Dale Davidson and William Rees-Mogg book, The Sovereign Individual. Because one of the key points made in that book is that the reason why states were able to grow in power during the 19th century was because industry tend to centralize around factories. And there was a lot of migration from the countryside through to cities and that created this kind of a honeypot of productivity, which was easier to capture.
So I was just saw a bit of a parallel there regarding there being this economy of scale centralization with Bitcoin mining and that kind of general dynamic, which was that the more centralized things become fat economic reasons, things are likely to become more centralized for economic reasons in certain niche areas and mining may well be one of them, but then there is also this historical tendency that when they do become more centralized, they tend to become threatened by state power.
So I just [00:46:40] thought that was an interesting parallel.
Neil Woodfine: On that, the good thing about Bitcoin mining is it can happen at small-scale as well. Every hash is just a hash. You don’t need a massive factory to, it’s better for your economies to scale but if the larger operations are getting compromised, it’s very possible for you to run a Bitcoin mine at home and people to individually support the network.
Saifedean Ammous: Any other questions?
Student 1: I wondered Neil, how active do you think the black market would be, if they tried to suppress Bitcoin?
Neil Woodfine: I would imagine it would be very active. Like I’ve said, Chinese people are very good at just finding a way. If there’s profit to be made, people will bend the rules pretty hard to make it work.
And as well, Bitcoin lends itself to operating internationally and then delivering services from abroad. You would have Chinese entrepreneurs moving outside of China to deliver Bitcoin services within China. To some extent that’s already happening. And I think the harder the central government pushes the more creative the entrepreneurs in China will get.
[00:47:40] Saifedean Ammous: Yeah, I think it’s probably more of a living under communism thing than a Chinese thing. I think all people become resourceful once you put them under a communist regime and they become very good at avoiding regulations. Whereas if you live in a place where regulations aren’t too onerous and too insane, it’s possible and likely for people to go along and not develop a culture of cunningly finding a way.
Neil Woodfine: Just to give you an idea, I heard about one of the Chinese exchange executives, he just has been held in police custody for months for questioning about this and that. God knows what kind of stuff was being discussed. And then he came back out and he immediately, the next day went back to work, just like answering client calls and stuff.
So they’re willing to take a risk. It’s this profit, there’s a lot of profit to be made. And and the rules in China are generally flexible enough for people to get away with stuff. So yeah, I think China will be all right.
Saifedean Ammous: Yeah. Peter, you had a follow-up question?
[00:48:40] Peter Young: Yeah, it was just a follow-up question on the regulatory changes that Neil referenced when he was giving the overview of working OKCoin and then Remitsy and then the different challenges that came in. I’m just kinda curious as on a kind of practical level, how are you able to stay abreast of all of these new regulations that came in?
Because one of the things that I found also living and working in China, was that there are many different regulations, but they’re much more ambiguous than they are in Britain. So there are general directives that come from the government, but there’s often a lot of ambiguity in the laws.
So how did you navigate the ambiguity and how did you find out and act upon new regulations that were coming in. And also I’d be curious to figure out whether you think that ambiguity that there is regarding Chinese law, represents a kind of advantage for areas like Bitcoin, because you [00:49:40] already referenced that payment systems were able to grow quickly historically, but then they got clamped down on afterwards.
Do you think that in general, that ambiguity is a good or a bad thing for businesses operating in China?
Neil Woodfine: I’ll answer those in reverse order. So I’m convinced that the ambiguity is intentional a lot of the time, maybe not always. But the good thing about the ambiguity is that it gives the officials flexibility to arbitrarily enforce their rules.
So if they don’t like particular businesses they can decide, okay you haven’t been following the rules in the business that they do like they can be like okay, you’re okay. I think it’s a little bit intentional, but that’s also a good thing for creative businesses.
You can get away with stuff and then not go to jail cause you can prove that you’ve satisfied certain loopholes. And in terms of how do we navigate the ambiguity? We were a foreign run startup, so it was a wholly foreign owned enterprise as they call it in China. We didn’t have as much flexibility as a Chinese company did. Not only were we are under more scrutiny, but [00:50:40] also we’re British guys. We culturally cannot work out, we can’t read between the lines as well as a local can. So that put us in more of a tough spot than some of the other Chinese companies operating, but they couldn’t really operate in our space because we were offering services to foreign companies.
And that’s something where Chinese companies really struggle, so we were safe in that regard. But basically just whenever government announcement was made, if it wasn’t clear to us what was happening, we just have to go into the industry and speak to our partners other friends and acquaintances within the industry to just work out how they were interpreting things.
It was a pretty shaky experience. Richard was the person that was handling most of this, or I was hearing secondhand about what was going on. But the ground is constantly moving under your feet. And it does happen to some extent in the west, although they tend to go with just one massive lump of new regulations, and then you deal with that for a few years, whereas China’s more incremental…
Yeah, one of our biggest problems was the third party payment providers. There [00:51:40] was hundreds of them in China. And I think at some point, some central government official probably decided they wanted to consolidate that industry a little bit. And then through various different means made a bunch of these third party payment providers illlegal, and a bunch of those guys were our partners.
That was actually worse than the Bitcoin exchange bans. That stuff is just constantly happening all the time. And you just have to work with it. Yeah, it’s really difficult and I don’t envy entrepreneurs working in China because you can have a really good thing going, and then all of a sudden it’s not going anymore.
But if it does work, the profits in China are amazing, it’s such a big market. It’s uniform, it is worth attempting it, but frustrating when it goes wrong.
Saifedean Ammous: So I’m wondering Neil, you’ve worked in Bitcoin companies all over the world and you’ve dealt with bureaucrats and regulators.
Do you have any thoughts on where you think is best currently for Bitcoin companies? If you were to start from scratch, you wanted to start a startup, where do you see a fertile ground for a Bitcoin companies?
Neil Woodfine: Nowhere!
[00:52:40] Saifedean Ammous: Online I guess!
Neil Woodfine: I think if I was going to start something from scratch, I would make pains to make sure that it was mobile, that whatever structure I set up, I was able to shift jurisdictions at a moment’s notice.
And I would also just make sure I don’t touch fiat because as soon as you interface with fiat currencies, we start having the most problems. If you’re an exchange, you’re going to have to comply and you’re gonna have a lot of headaches day to day. If you’re not doing something exactly right, they can just completely cut you off, like the OTC providers in China.
Their biggest challenge is probably not legal issues, but actually just banks shutting off their accounts. Exchanges, payment companies, anything like that, interfacing with fiat, that’s going to lock you down to a specific jurisdiction and also pose a lot of regulatory threats.
But in terms of where’s best right now. I would just find somewhere with very little Bitcoin regulation and try and work with that for as long as possible. I think (???) is quite big on this, just make the business really successful and work and then let the regulations catch up with you.
And to some extent, [00:53:40] he uses Uber as the example, but to some extent that’s exactly what happened with Alipeer and WeChat Pay in China. They also just grew really fast really quickly while they were still operating in a gray space and then the regulations finally caught up with them and now, they don’t have to worry about competitors anymore.
So it worked out well for them. Yeah, I would try and find somewhere with little regulations, cause they’re going to slow you down in terms of building a Bitcoin startup. And also if you’re doing Bitcoin only, and you’re operating from somewhere with lower Bitcoin regulations, you could probably offer your services globally for now, at least.
Saifedean Ammous: Yeah. I think there’s something to be said about places that don’t have a lot of Bitcoin laws because you can get your business started as a software or data center business initially, and then when you’re successful and they are getting taxes from you and they’re seeing the growth, they’re going to want to accommodate you.
They’re gonna want to try and fit the rules for you perhaps. So it’s a good chance to influence a place in getting the rules to go in a good way, as opposed to all of these old [00:54:40] timer, places where, the relationship with Bitcoin has already developed, gone sour, and you’re you’re moving into a place with a lot of baggage, basically.
Neil Woodfine: Yeah, it’s jurisdictions, I left mine for instance, which are welcoming Bitcoin businesses, but immediately your business is regulated by whatever the, I think it’s called the FCA or something over there. And immediately you have all these costs piled on top of you for compliance.
And you can’t work, as a small startup, you need to be bootstrapping you can’t be working with that. When I was working at Remitsy and Wyre in particular, regulations would inform every single decision that we made. Whether it was onboarding a client or implementing a new product update, regulations and compliance was rearing its ugly head.
Does this fit, what jurisdictions does this client come from? Yeah, it was a headache.
Saifedean Ammous: All right. Thank you very much everybody for joining and thank you very much Neil for joining us. This was very informative and we’ve got to have you back on again.
Hopefully it won’t be when one of your other countries bans Bitcoin. Happier occasion where good things [00:55:40] are happening, but we should have you on again, nonetheless, take care.
Neil Woodfine: Sounds good. I’ve just joined Unchained, so hopefully next time we’ll be talking a bit about some aspect of Unchained’s business
Saifedean Ammous: Ah yes, yeah, that is a good topic for a seminar at some point, yeah.
Neil Woodfine: Great. Thanks very much for having me on.
Saifedean Ammous: Cheers. Thank you, take care. Bye.
Neil Woodfine: Bye.