SHANGHAI -- On Jan. 6, a leaked photograph of an official notice from China's internet finance regulator began to circulate on Twitter. The statement, released by the authorities two days earlier, told local governments to stop subsidizing companies that create new bitcoin, the digital currency, and ensure they make "orderly exits" from the market.
To those outside the opaque world of cryptocurrencies, it appeared to be little more than a routine request from China's sprawling bureaucracy. But inside the bitcoin community, including the investors who had piled in as its value skyrocketed in 2017, the message was alarming.
China is home to about 70% of the total computing power dedicated to bitcoin "mining" -- that is, creating new units of the currency by solving complex math problems with sophisticated software. A clampdown on mining in China, achieved by pinching off electricity supplies essential to the power-hungry process, could drive up costs and fundamentally reshape the bitcoin market. Worse for bitcoin investors, it could mark the end of a frenzied trading boom.
Not surprisingly, the market did not take the news well. The bitcoin benchmark price fell to $15,000 after the announcement from $17,000 the day before, according to CoinDesk, a U.S. cryptocurrency information site. The price continued to fall, dropping below $10,000 on Jan. 17 -- about half of the all-time high of $19,783 it had reached only a month earlier.
But even as the bitcoin price was plunging amid fears of a Chinese crackdown, it was business as usual inside the Beijing headquarters of Bitmain Technologies, the world's largest mining-pool operator. Nishant Sharma, Bitmain's international marketing manager, pointed out that the Chinese regulators were only targeting particular types of miners. Bitmain, backed by U.S. venture capital firm Sequoia, did not appear to be among the companies being forced to make an "orderly exit" from the market.
"The authority's notice will likely affect only those illegitimate miners who are not paying appropriate electricity bills and taxes," Sharma told the Nikkei Asian Review on Jan. 11, a week after the notice was released.
How far the Chinese authorities, who have already banned the use of bitcoin and so-called initial coin offerings, will extend their crackdown on the mining industry is yet to be seen. But it is clear that Beijing is aware of the importance of bitcoin's underlying technology, known as blockchain, and its potential to disrupt the worlds of banking, insurance and securities trading.
"Whenever I talk to them, regulators say they encourage development of blockchain-based technologies in the country," said Kevin Guo, co-founder and co-chairman of Dianrong, a Shanghai-based peer-to-peer loan startup.
China is hardly alone in taking steps to control bitcoin and its peers. French and German finance ministers said in mid-January that they would propose a global regulatory framework on cryptocurrencies at a G-20 meeting in March. South Korea's Financial Services Commission, perhaps alarmed by the "kimchi premium" in the country's cryptocurrency markets, banned anonymous cryptocurrency trading from Jan. 30 by enforcing a "know your customer" requirement at banks. Even regulators in Japan, who have taken a more welcoming approach to the technology, were forced to launch an industrywide security check following the sudden $500 million hack of cryptocurrency exchange Coincheck in January.
Regulators around the world are alarmed by the rampant use of cryptocurrencies for money laundering and other criminal uses. They are also concerned about the potential damage that the bursting of a bitcoin bubble would have on their financial systems. The 1,330% rise in the value of bitcoin last year has led many economists, investors and bank chiefs to label it a bubble, a scam or even a Ponzi scheme.
While bitcoin bulls would bristle at the "bubble" label, there is little doubt that is what it is. But what is not ephemeral is the array of cutting-edge technologies that underpin bitcoin and other cryptocurrencies, from blockchain to new types of sophisticated semiconductors. The result is a chaotic, rapidly changing startup boom that will probably lose money for many investors but also contribute to the emergence of a new industry -- much like the real-deal internet industries that were created after the 1990s dot-com bubble burst.
Unlike in the 1990s, however, the emerging tech industry is not monopolized by Silicon Valley. Many of the biggest, most innovative new companies are in Asia.
Piyush Singh, managing director and financial services lead at Accenture Asia-Pacific and Africa, thinks there is a good chance Asia will leapfrog the rest of the world in blockchain-related technologies. "Although Asian companies may have had a late start compared to Silicon Valley, adoption into real businesses is faster in Asia, partly pushed by supportive policies in such governments as Singapore and Hong Kong," Singh told the Nikkei Asian Review.
Building a 'smart economy'
Thanks in part to Sequoia's investment last September, Bitmain is one of the best-known of China's digital currency startups. It operates the world's two largest "mining pools," networks of computers that allow members to share processing power as they create new coins. (A single bitcoin transaction consumes enough electricity to power about 15 U.S. households for an entire day, according to Digiconomist.)
The majority of mining computers connected to Bitmain's pools, mostly owned by independent companies and individuals, are located in rural China, where electricity costs are low. Bitmain's two pool networks, AntPool and BTC.com, account for about 44% of the world's mining computing power.
Bitmain's largest revenue source is not mining pools, however, but sales of mining computers using its own design of application-specific integrated circuit chips. Demand is so great for its ASIC chips that Bitmain placed an urgent order for them in January with Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, according to local media reports.
It has started designing other kinds of ASICs -- chips for machine learning in the field of artificial intelligence, which will compete with Google and Nvidia. Founded in 2013, Bitmain is emerging as one of TSMC's top clients, along with Qualcomm and Nvidia. Morris Chang, TSMC's founding chairman, recently said that cryptocurrency mining and AI will be major growth factors for the company this year.
Sharma said he and his colleagues in the company's sales and marketing team are receiving about 1,500 online inquiries per day about its mining machines. The typical waiting time for a new order is two to three months, and the company is shipping the machines to over 100 countries, with China being the largest customer, he said. The company's head count has nearly tripled to over 800 for the past year. "A majority of our workers are graduates of either Peking University or Tsinghua University," said another Bitmain worker, indicating the company is attracting China's top young talent.
China is not the only place in Asia where this new crypto-industry is emerging, however.
Vansa Chatikavanij, a native of Thailand and Columbia University graduate, first encountered bitcoin while working at the World Bank as a water resources specialist. The digital currency, she realized, had huge potential in moving funds securely in underdeveloped countries.
After leaving the World Bank in late 2016, she began working with a venture capital firm, which dispatched her last year to a Bangkok-based digital payment startup called Omise Holdings. Her job was to interview its co-founders, Jun Hasegawa and Ezra Don Harinsut, and report back to her colleagues at the firm. But after an enthusiastic discussion about the possibilities for a new type of blockchain, Hasegawa turned the tables on Vansa. "So, when can you start working?" he asked her.
"Then I realized it was me who was being interviewed," Vansa recalled.
The project, and the blockchain it would build, was named OmiseGO. By February 2017, Vansa found herself running it. "I thought this is a rare team that could actually materialize the huge potential of blockchain technology," she said.
OmiseGO is envisioned as a platform that connects all kinds of value-exchange networks, including those for credit cards, mobile payments, airline mileage systems and the Omise payment network itself, which is being adopted by merchants like McDonald's in Thailand and e-commerce retailers in Japan. The OmiseGO-based network is designed to handle millions of transactions per second, compared with Visa International's 30,000 and Bitcoin's three to four.
OmiseGO raised about $25 million in Ether, a cryptocurrency, in an initial coin offering in June 2017, and today it is paying salaries by converting the Ethers into conventional currencies. Its parent, Omise, founded in 2013, has received equity investment from established companies such as Mitsubishi UFJ Financial Group via Bank of Ayudhya and Charoen Pokphand Group of Thailand through its payment subsidiary Ascend Group. The Omise group now employs more than 100 people -- and is still hiring.
Other Asian blockchain startups are gaining global reach. NEO, an open-source blockchain platform, was developed in Shanghai and has become the basis for more than a dozen new companies. (It also generates a cryptocurrency called NEO that is one of the world's most valuable.)
Da Hongfei, who founded NEO in 2014, says his aspiration is for NEO to become a platform for a "smart economy."
NEO is designed to "bridge the real word with the digital world," Da said, citing its transaction-processing capacity of thousands per second. "The blockchain technology is so powerful that its penetration into real businesses is just a matter of time. No one can resist it, just like how the internet spread."
Da hopes NEO will become a standard blockchain for the financial services industry by paving the way for automated securities and other asset transactions. Already more than a dozen startups, inside and outside China, are developing what is called "distributed application" software based on NEO. Among them is Hong Kong-based Red Pulse, which is building a semi-automated stock-research generation platform using the NEO blockchain. The platform uses AI to collect data and generate research notes, which are edited by humans and then distributed to Bloomberg and other financial information providers.
After Indonesia banned the use of cryptocurrencies in November, Jakarta-based Pundi X was forced to make a sudden change in its business plan. The digital point-of-sales system company, which is aiming to make it easy for consumers to use cryptocurrencies for routine shopping, is now looking outside its home country to expand its business. "We are prioritizing crypto-friendly markets such as Thailand, Japan, Singapore and Switzerland," said Zac Cheah, chief executive of Pundi X.
Chinese cryptocurrency exchanges also left for friendlier regulatory climates after the authorities cracked down on them last year. Huobi, once the largest bitcoin exchange in the world, transferred all its digital-asset deposits to its Hong Kong exchange in November. It also announced it would open a new exchange in Japan in a partnership with SBI Group of Japan. OKCoin closed its Beijing-based operation for Chinese residents and is reinforcing its Hong Kong-based operation.
For Chinese investors in cryptocurrencies, there were plenty of alternatives overseas. Many simply switched to over-the-counter brokers based outside of China, while others began trading on virtual communities in chat services like Telegram. Unless the Chinese government manages to identify these overseas websites and block them all, its citizens will be able to continue trading cryptocurrencies.
The tightening rules are not discouraging China's cryptocurrency entrepreneurs, either. On Jan. 13, more than 80 people gathered at a small whiskey bar in Beijing for a cryptocurrency "meetup." They included students, scholars, digital coin miners, engineers, investment bankers and analysts. A banker from a major European bank said she was there to find a good deal source. Even in heavily regulated China, interest in the market remains high.
Bobby Lee, founder of BTCC, based in Shanghai, has every right to be bitter about his experience with China's regulators. BTCC was once the second-largest cryptocurrency exchange in the world by trading volume, but it was forced to shut down in September after the authorities banned ICOs. That led to the company's acquisition by an unnamed Hong Kong blockchain fund on Jan. 30, which meant relocating its operations to Hong Kong.
Yet Lee remains bullish on the future of cryptocurrencies. He thinks bitcoin's value is created by the "inherent failures, limitations and inconveniences of fiat money systems."
"In 20 years I think we will see the collapse of fiat currencies because they are so poorly managed," he told the Nikkei Asian Review in early January. He calls cryptocurrencies "wild animals, which by definition cannot be domesticated."
For regulators around the world, the test will be to grasp the nature of these wild new technologies -- and come up with a regulatory regime for the digital era that does not kill innovation.
Nikkei staff writers Masayuki Yuda in Tokyo, Wataru Suzuki in Jakarta and Cheng Ting-Fang in Taipei contributed to this article.