A few days before the People’s Bank of China’s (PBOC) critical date, May 10th, five exchanges stated they would regulate themselves. Will this save them? Weiwu Zhang is not very optimistic. He explains what happened previously, and what it means for the situation – and why he thinks that the attempt at self-regulation is not just an act of desperation but, more importantly, a fatal misinterpretation of the Lord’s intentions.

In ancient times the kingdom of Qi, the most powerful Kingdom in the land, invaded Lu. Lu was a small kingdom, but with a General destined to become legendary. General Wuqi 吴起 was a member of the fellowship of Confucius, and a master of the art of war – second only to the author of ‘The Art of War’ himself, Sunbin. The King of Lu, however, worried about the loyalty of his general, because his wife was from the enemy country, Qi. So the general killed his wife and served the king her head on a plate. The result? The king sent his general to the battlefield, and after he successfully fended off the mighty Qi, the general was sent to exile.

by Zhang Weiwu

In early May 2014, the five biggest Bitcoin exchanges in China – OKCoin, Huobi, CHBTC, BTCChina and BtcTrade – claimed they would regulate themselves. They promised to advise the public to invest carefully, obey all regulations and laws, stop all margin trading by 10th May,

charge a fee for high frequency trading to oppress exuberant speculative activities, and report to the regulatory authorities regularly about the latest developments and risks.

Some wondered at the exchanges’ offer to ‘self regulate’. Exchanges are expected to be regulated, so self-regulation is against the principle of ensuring the correct ‘checks and balances’. So I called Mr Hua Songxiu, CEO of CHBTC (one of the leading exchanges in China), and asked him if the exchanges had received an order from the PBOC. He said, ‘The 5 exchanges acted on our understanding of the best course of action. There was nothing from PBOC.’ Then I checked with the 2014 Global Bitcoin Summit in Beijing, organised by Bitcoin Foundation, about the statement that five top Chinese exchanges had vowed not to participate. Again, Mr Xu Yiji of the Summit told me, ‘We had nothing from PBOC. It was a voluntary move.’ Like Wuqi, the king’s general, they acted without being ordered to do so.

They say the world is a stage. If you live in China, you are in the front row. Things change quickly sometimes, and you can only speculate what’s happening for real. As of late 2013, the Bitcoin exchange market looked like one of the Chinese survival stories, with 0% transaction fees being the norm: a fight to the death producing one winner who takes all. It has happened repeatedly before. The most famous case is Alibaba driving eBay out of China with their 0% fee policy, and now we are expecting that winner to launch the world’s largest IPO.

But now it is becoming clear that policy risk is overshadowing that manic death-match. On May 10th another ultimatum from the PBOC passed. The five exchanges’ claim to self-regulation seems to me not just an act of desperation but, perhaps more importantly, a fatal misinterpretation of the Lord’s intention.

Creating an imaginary Lord to report to

Let’s look at one of the exchanges’ promises: ‘We will report to the regulatory authorities regularly about the latest developments and risks.’

This is both funny and interesting. Who is the regulatory authority? If you look for a regulatory authority, the number one candidate is the China Banking Regulatory Commission, a former division of PBOC tasked with regulating Peer-to-Peer and other online financial schemes. Are you going to report to this CBRC? They did absolutely nothing about Bitcoin. They weren’t even tasked with closing the bank accounts of Bitcoin exchanges – which is something they are good at and which is within their jurisdiction. Instead, the order comes directly from PBOC. Are you going to report to PBOC directly? The exchanges are far too small to report to PBOC.

In fact, the Lord never said ‘regulate’, despite the wishful thinking that understood it that way. They just made up an imaginary Lord they could report to and rely on. What really happened here is that PBOC delivered a clear message: they want Bitcoin out of the picture. I deciphered the message in an earlier article entitled ‘Truth and Rumour’, and re-emphasised it in ‘It’s not a survivor’s game, it’s a loser’s game.’

Readers who are familiar with Chinese culture know that it is customary for subjects to act in accordance with their Lord’s will, and to act without the command actually being given. Sometimes it is a matter of life or death. This self-regulation is an attempt to act in accordance with the Lord’s will, not in accordance with his orders. But will it work? Will the exchanges be pardoned and allowed to live? To view the situation from a Chinese perspective, a story or two helps.

→Are you a naughty child evading punishment, or you are an enemy?