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How China Took Center Stage in Bitcoin’s Civil War
--- Quote ---A delegation of American executives flew to Beijing in April for a secret meeting just blocks from Tiananmen Square. They had come to court the new kingmakers in one of the strangest experiments in money the world has seen: the virtual currency known as Bitcoin.
Against long odds, and despite an abstruse structure, in which supercomputers “mine” the currency via mathematical formulas, Bitcoin has become a multibillion-dollar industry. It has attracted major investments from Silicon Valley and a significant following on Wall Street.
Yet Bitcoin, which is both a new kind of digital money and an unusual financial network, is having something of an identity crisis. Like so many technologies before it, the virtual currency is coming up against the inevitable push and pull between commercial growth and the purity of its original ambitions.
In its early conception, Bitcoin was to exist beyond the control of any single government or country. It would be based everywhere and nowhere.
Yet despite the talk of a borderless currency, a handful of Chinese companies have effectively assumed majority control of the Bitcoin network. They have done so through canny investments and vast farms of computer servers dispersed around the country. The American delegation flew to Beijing because that was where much of the Bitcoin power was concentrated.
At the time of the meeting, held at the Grand Hyatt hotel, over 70 percent of the transactions on the Bitcoin network were going through just four Chinese companies, known as Bitcoin mining pools — and most flowed through just two of those companies. That gives them what amounts to veto power over any changes to the Bitcoin software and technology.
China has become a market for Bitcoin unlike anything in the West, fueling huge investments in server farms as well as enormous speculative trading on Chinese Bitcoin exchanges. Chinese exchanges have accounted for 42 percent of all Bitcoin transactions this year, according to an analysis performed for The New York Times by Chainalysis. Just last week, the Chinese internet giant Baidu joined with three Chinese banks to invest in the American Bitcoin company Circle.
But China’s clout is raising worries about Bitcoin’s independence and decentralization, which was supposed to give the technology freedom from the sort of government crackdowns and interventions that are commonplace in the Chinese financial world.
“The concentration in a single jurisdiction does not bode well,” said Emin Gun Sirer, a professor at Cornell and a Bitcoin researcher. “We need to pay attention to these things if we want decentralization to be a meaningful thing.”
The power of Chinese companies has already come to play a major role in a civil war that has divided Bitcoin followers over the last year and led to the departure of one of the top developers of the virtual currency. The dispute has hinged on technical matters as well as on bigger questions of what Bitcoin should look like in 10 or 20 years.
Network BottleneckThe American companies whose executives journeyed to the Grand Hyatt — including venture-capital-funded start-ups like Coinbase and Circle — are fighting to make Bitcoin bigger. They hope to expand the capacity of the Bitcoin network so that it can process more transactions and compete with the PayPals and Visas of the world.
The current size of the network goes back to the early days, when Bitcoin’s founder, Satoshi Nakamoto, limited the amount of data that could travel through the network, essentially capping it at about seven transactions a second. As Bitcoin has grown more popular, those limits have caused severe congestion and led to lengthy transaction delays.
The American delegation in China had a software proposal, known as Bitcoin Classic, that would change all that.
The Chinese companies, though, had the ultimate decision-making power over any changes in the software, and they did not agree with the American delegation. The Chinese had thrown in their lot with another group of longtime programmers who wanted to keep Bitcoin smaller, in part to keep it more secure. The Americans hoped to persuade the Chinese to switch sides.
In a hotel conference room, the American team of about a half-dozen people cycled through its PowerPoint slides, in English and Chinese, arguing for expansion of the network, most notably pointing to the long delays that have been plaguing the system as a result of the congestion. The Chinese representatives listened and conferred among themselves. The group took a break for a lunch of lamb and dumplings at a nearby mall.
“We kept coming back and saying, ‘For better or worse, you have this leadership in the industry, and everyone is looking to you to show some leadership,’” said Brian Armstrong, chief executive of Coinbase.
Ultimately, Mr. Armstrong said, “We were unable to convince them.”
Some Bitcoin advocates have complained that the Chinese companies have been motivated only by short-term profit, rather than the long-term success and ideals of the project. Bobby Lee, chief executive of the Bitcoin company BTCC, which is based in Shanghai, bristled at that — and at the notion that the Chinese companies represent any sort of united front. He attended the April meeting and pointed out that the Chinese companies had disagreed among themselves on how urgent it was to make changes to the Bitcoin software.
He said the American companies failed to understand the power dynamics in the room that day. “It was almost like imperialistic Westerners coming to China and telling us what to do,” Mr. Lee said in an interview last week. “There has been a history on this. The Chinese people have long memories.”
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Continue reading the main story A Mining PowerhouseThe mysterious creator of Bitcoin, Satoshi Nakamoto, released the software in early 2009. It was designed to provide both a digital coin and a new way to move and hold money, much as email had made it possible to send messages without using a postal service.
From the beginning, the system was designed to be decentralized — operated by all the people who joined their computers to the Bitcoin network and helped process the transactions, much as Wikipedia entries are written and maintained by volunteers around the world.
The appeal of a group-run network was that there would be no single point of failure and no company that could shut things down if the police intervened. This was censorship-free money, Bitcoin followers liked to say. Decision-making power for the network resided with the people who joined it, in proportion to the computing power they provided.
The allure of new riches provided the incentive to join: Every 10 minutes, new Bitcoins would be released and given to one of the computers helping maintain the system. In the lingo of Bitcoin, these computers were said to be mining for currency. They also served as accountants for the network.
For the first few years, aside from its use as a payment method on the Silk Road, an online drug market that has since been shut down, Bitcoin failed to gain much traction. It burst into the world’s consciousness in 2013 when the price of the digital money began to spike, in no small part because Chinese investors began trading Bitcoins in large numbers.
Mr. Lee said the Chinese took quickly to Bitcoin for several reasons. For one thing, the Chinese government had strictly limited other potential investment avenues, giving citizens a hunger for new assets. Also, Mr. Lee said, the Chinese loved the volatile price of Bitcoin, which gave the fledgling currency network the feeling of online gambling, a very popular activity in China.
There has been widespread speculation that Chinese people have used Bitcoin to get money out of the country and evade capital controls, but Mr. Lee and other experts said the evidence suggests this is not a significant phenomenon.
“No Chinese person is pushing for Bitcoin because it’s libertarian or because it’s going to cause the downfall of governments,” said Mr. Lee, who moved to China after growing up in Africa and the United States and studying at Stanford. “This was an investment.”
The extent of the speculative activity in China in late 2013 pushed the price of a single Bitcoin above $1,000. That surge — and the accompanying media spotlight — led China’s government to intervene in December 2013 and cut off the flow of money between Chinese banks and Bitcoin exchanges, popping what appeared to be a Bitcoin bubble.
The frenzy, though, awakened interest in another aspect of the currency: Bitcoin mining.
Peter Ng, a former investment manager, is one of the many people in China who moved from trading Bitcoins to amassing computing power to mine them. First, he mined for himself. More recently he has created data centers across China where other people can pay to set up their own mining computers. He now has 28 such centers, all of them filled with endless racks of servers, tangled cords and fans cooling the machines.
Mr. Ng, 36, said he had become an expert in finding cheap energy, often in places where a coal plant or hydroelectric dam was built to support some industrial project that never happened. The Bitcoin mining machines in his facilities use about 38 megawatts of electricity, he said, enough to power a small city.
The people who put their machines in Mr. Ng’s data centers generally join mining pools, which smooth the financial returns of smaller players. A popular one, BTCC Pool, is run by Mr. Lee’s company. This month it attracted about 13 percent of the total computational power on the Bitcoin network. The most powerful pool in China — or anywhere in the world — is known as F2Pool, and it had 27 percent of the network’s computational power last month.
The Politics of PoolsBig pool operators have become the kingmakers of the Bitcoin world: Running the pools confers the right to vote on changes to Bitcoin’s software, and the bigger the pool, the more voting power. If members of a pool disagree, they can switch to another pool. But most miners choose a pool based on its payout structure, not its Bitcoin politics.
It was his role overseeing BTCC Pool that got Mr. Lee invited to the meeting with the American delegation in Beijing. The head of operations at F2Pool, Wang Chun, was also there.
Perhaps the most important player in the Chinese Bitcoin world is Jihan Wu, 30, a former investment analyst who founded what is often described in China as the world’s most valuable Bitcoin company. That company, Bitmain, began to build computers in 2013 using chips specially designed to do mining computations.
Bitmain, which has 250 employees, manufactures and sells Bitcoin mining computers. It also operates a pool that other miners can join, called Antpool, and keeps a significant number of mining machines for itself, which it maintains in Iceland and the United States, as well as in China. The machines that Bitmain retains for itself account for 10 percent of the computing power on the global Bitcoin network and are enough to produce new coins worth about $230,000 each day, at the exchange rate last week.
Mr. Wu and the other mining pool operators in China have often seemed somewhat surprised, and even unhappy, that their investments have given them decision-making power within the Bitcoin network. “Miners are the hardware guys. Why are you asking us about software?” is the line that Mr. Ng said he often hears from miners.
This attitude initially led most Chinese miners to align themselves with old-line Bitcoin coders, known as the core programmers, who have resisted changing the software. The miners wanted to take no risks with the money they were minting.
But lately, Mr. Wu has grown increasingly vocal in his belief that the network is going to have to expand, and soon, if it wants to keep its followers. He said in an email last week that if the core programmers did not increase the number of transactions going through the network by July, he would begin looking for alternatives to expand the network.
However the software debate goes, there are fears that China’s government could decide, at some point, to pressure miners in the country to use their influence to alter the rules of the Bitcoin network. The government’s intervention in 2013 suggests that Bitcoin is not too small to escape notice.
Mr. Wu dismissed that concern. He also said that as more Americans buy his Bitmain machines and take advantage of cheap power in places like Washington State, mining will naturally become more decentralized. Already, he said, 30 to 40 percent of new Bitmain machines are being shipped out of China.
For now, though, China remains dominant.
“The Chinese government normally expects its businesses to obtain a leading role in emerging industries,” he said. “China’s Bitcoin businesses have achieved that.”
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Bitcoin 'miners' face fight for survival as new supply halves
--- Quote ---Marco Streng is a miner, though he does not carry a pick around his base in south-western Iceland. Instead, he keeps tens of thousands of computers running 24 hours a day in fierce competition with others across the globe to earn bitcoins.In the world of the web-based digital currency, it is not central banks that add new money to the system, but rather computers like Streng's which are awarded fresh bitcoins in return for processing blocks of the latest bitcoin transactions.Bitcoin can be used to send money instantly around the world, using individual bitcoin addresses, free of charge with no need for third party checks, and is accepted by several major online retailers.The work Streng's computers and others do serves two purposes: they record and verify the roughly 225,000 daily bitcoin transactions and - because they earn new bitcoins for the work they do - steadily increase the currency in circulation, currently worth around $10 billion.The process has come to be known as "mining" because it is slow and intensive, reaping a gradual reward in the same way that minerals such as gold are mined from the ground.But on Saturday, the reward for miners will be slashed in half. Written into bitcoin's code when it was invented in 2008 was a rule dictating that the prize would be halved every four years, in a step designed to keep a lid on bitcoin inflation.From around 1700 GMT on Saturday, instead of 25 bitcoins up for grabs globally every 10 minutes, worth around $16,000 at the current rate BTC=BTSP, there will be just 12.5.That means only the mining companies with the leanest operations will survive the ensuing profit hit. "The most important thing is to be the most efficient miner," said Streng, the 26-year-old co-founder of German firm Genesis Mining, which has "mining farms" in Canada, the United States and eastern Europe, as well as in Iceland. "When the others drop out, that means that they leave the market and give you a bigger share of the pie." SOLVING PUZZLESThe currency was founded eight years ago by a person or group using the name Satoshi Nakamoto, whose real identity has not been established. It was set up to operate independently of any single authority, instead relying on a decentralized global network.Because the bitcoin miners operate autonomously, it is hard to track their numbers and size. But in terms of computing capacity it was estimated earlier this year that the network is 43,000 times more powerful than the world's top 500 supercomputers combined.Computers like Streng's solve complex, automatically generated mathematical puzzles to help secure each block of transactions and keep the bitcoin network safe from hacking or manipulation. For bitcoin users, that security is one of the currency's main attractions. After the first miner secures a block of transactions, its work is verified by the other miners in the network, and that block is added to the "blockchain" - a shared record of all the transaction data - which is virtually impossible to tamper with. The mining, therefore, keeps the whole system going.Bitcoin is now accepted by major organizations including U.S. online retailer Overstock.com and travel company Expedia.The speed and anonymity of bitcoin transactions, and lack of a central authority overseeing the currency, has drawn in many users, including those who want to get around capital controls. It has also attracted investors who see it as a potentially lucrative commodity in itself.KEEPING COOLBitcoin mining started out as a hobby for tech geeks using their home computers in the early years of the virtual currency, but has become more specialized as bitcoin usage expands. As the bitcoin price has risen, as transaction numbers have grown and as the computers have become so specialized that they can only perform the function of bitcoin mining, a whole industry has emerged.It can be profitable if firms are able to keep their expenses low. But the costs of running these machines, which cost around $1,800 each, and keeping them cool are fiendishly high. Streng reckons that, on average, it costs about $200 in electricity, including cooling power, to mine one bitcoin. Equipment, rent, wages and business running costs are on top. On Saturday, all else being equal, the halving of the reward will double that cost, to $400, leaving a small margin for profit at the current exchange rate of around $640 per bitcoin. In the same remote region of Iceland as the Genesis mining farm, on a former Cold War U.S. military base lies a bitcoin mining facility belonging to U.S. firm Bitfury. A nearby sub-station means electricity transmission costs are minimal.In the farm's two vast buildings, tens of thousands of mining machines whir away, producing a huge amount of heat, so the buildings are open to the cold Icelandic air at either side, save for particle filters to trap dust. Fans in the ceiling allow hot air to escape, but spin so fast that no rain or snow can enter during the winter. The noise produced by computers and fans is deafening.It is no coincidence that so many mining companies have chosen to build farms in Iceland - Chinese giant Bitmain also has a huge farm there. The volcanic island's cheap, bountiful, renewable energy supply, good internet connectivity, and cool temperatures make it an ideal location. The Icelandic authorities welcome the boost to the economy that the bitcoin miners have brought -- Bitmain opened its farm after an approach by the Icelandic embassy in Beijing. Genesis's Streng says he is such a valued client that the Icelandic energy companies fly him around in helicopters. Bitfury CEO Valery Vavilov, who estimates electricity makes up between 90 and 95 percent of bitcoin mining costs, says one way his firm stays competitive is by making its own hardware. He also says the company, founded in 2011, is prepared for the mining reward cut. "We're prepared - we already went through one halving event in 2012," he said. "You can forecast this...so you have time to prepare, and if you're prepared you can live quite easily."Vavilov, and other miners, say the prospect of new supply halving has already helped drive bitcoin up over 50 percent this year, which should help ease the pain.COMPETITION FROM CHINADespite the fact that the halving was expected, and that the price has risen, it has already claimed one casualty: Sweden's KnCMiner filed for bankruptcy at the end of May, citing the hit to its profits that the reward cut would bring.Daniel Masters, who runs a Jersey-based bitcoin hedge fund and who bought a part of KnC's business, said the Swedish firm, like everybody else, had faced competition from miners in China, which are estimated to make up more than two-thirds of the bitcoin network's computing power, or "hashpower"."It turned out that the Chinese, who really stormed into the mining market in the last couple of years, could just do this whole thing cheaper," Masters said.Some Chinese miners get hydroelectric power from disused dams, while others use cheap coal-powered electricity. Bitfury and Genesis, though, say their lean operations allow them to fight off the competition. Genesis, for example, keeps cost down by remotely monitoring conditions in its mining farms and adjusting its fans and cooling accordingly.And the next time the mining reward is halved, in 2020, they hope the number of bitcoin transactions will have grown sufficiently to mean that the small fees paid by users will make up enough of their income to smooth out the profit cut."By 2020 we will definitely have had the tipping point," said Bitfury's Vavilov.
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Meho Krljic:
Bitcoin not money, Miami judge rules in dismissing laundering charges
--- Quote --- A Miami-Dade judge ruled Monday that Bitcoin is not actually money, a decision hailed by proponents of the virtual currency that has become popular across the world.
In a case closely watched in financial and tech circles, the judge threw out the felony charges against website designer Michell Espinoza, who had been charged with illegally transmitting and laundering $1,500 worth of Bitcoins. He sold them to undercover detectives who told him they wanted to use the money to buy stolen credit-card numbers.
But Miami-Dade Circuit Judge Teresa Mary Pooler ruled that Bitcoin was not backed by any government or bank, and was not “tangible wealth” and “cannot be hidden under a mattress like cash and gold bars.”
“The court is not an expert in economics; however, it is very clear, even to someone with limited knowledge in the area, the Bitcoin has a long way to go before it the equivalent of money,” Pooler wrote in an eight-page order.
The judge also wrote that Florida law — which says someone can be charged with money laundering if they engage in a financial transaction that will “promote” illegal activity — is way too vague to apply to Bitcoin.
“This court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning,” she wrote.
The ruling was lauded by Bitcoin experts who believe the ruling will encourage the use of the virtual currency, and offer a roadmap to governments across the world that have struggled to understand and regulate it.
Espinoza’s attorney, Rene Palomino, said the judge’s order was “beautifully written.”
“At least it gives the Bitcoin community some guidance that what my client did was not illegal,” Palomino said. “What he basically did was sell his own personal property. Michell Espinoza did not violate the law, plain and simple.”
A spokesman for the Miami-Dade State Attorney’s Office said: “We are presently reviewing the court order to determine whether we will be appealing this decision.”
Law enforcement has struggled to figure out how Bitcoin fits into illegal activities, and Espinoza’s case was believed to be the first money-laundering prosecution involving the virtual currency.
The controversial virtual currency allows some users to spend money anonymously and it can be also be bought and sold on exchanges with U.S. dollars and other currencies.
The currency has gained popularity with merchants selling legitimate goods and services. In Miami, there are a few restaurants that accept the virtual currency — and even a plastic surgeon.
Regulated services such as CoinBase, which operates similarly to PayPal, allow people to buy, sell and use the Bitcoins. But authorities have raised concerns about the currency being used in the anonymous black market.
Most notoriously, Bitcoins were used to traffic drugs in the now-shuttered Silk Road network. In an unrelated South Florida case, a Miramar man got 10 years in prison after using Bitcoins to buy Chinese-made synthetic heroin from a Canadian prisoner.
In Espinoza’s case, Miami Beach detectives found him through a Bitcoin exchange site, LocalBitcoins.com, and told him they were going to use the currency to purchase stolen credit-card numbers.
The detectives met with Espinoza, 32, three times in person: on Lincoln Road, at an ice cream shop and in a hotel room.
Espinoza was arrested along with another man, Pascal Reid, who pleaded guilty to acting as an unlicensed money broker and was sentenced to probation. Under his unusual plea deal, he agreed to teach law enforcement about Bitcoin.
At a hearing in May, a defense expert, Barry University economics professor Charles Evans, testified that Bitcoin was not actually money.
No central government or bank backs Bitcoin, like the United States does the dollar. Government regulation of Bitcoin remains a messy hodgepodge from state to state, country to country. The IRS considers Bitcoin deals no more than bartering, he said.
“Basically, it’s poker chips that people are willing to buy from you,” said Evans, a virtual-currency expert who was paid $3,000 in Bitcoins for his defense testimony.
The judge’s decision will help Bitcoin flourish in Miami and countries where banking system are tenuous, Evans said in an interview on Monday.
“Bitcoin is perfect for small-scale cross-border transactions and we are international in this area,” Evans said. “If somebody from Venezuela needs a hammer, now that person can send Bitcoin to his cousin in Miami, that cousin can sell the Bitcoin, go buy the hammer and send it to Venezuela.”
The ruling could also spark a push to tweak Florida law. Judge Pooler, in her ruling, said the state’s money-laundering law that targets transactions that “promote” illegal activity requires a “much-needed update.”
“Hopefully, the Florida Legislature or an appellate court will define ‘promote’ so individuals who believe their conduct is legal are not arrested,” Pooler wrote.
Read more here: http://www.miamiherald.com/news/local/crime/article91682102.html#storylink=cpy
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Meho Krljic:
Banks adopting blockchain 'dramatically faster' than expected: IBM
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Bitcoin breaks $1,000 level, highest in more than 3 years
--- Quote --- The price of bitcoin has breached the $1,000 mark, hitting a more than three-year high on Monday.
The cryptocurrency was trading at $1,021 at the time of publication, according to CoinDesk data, at level not seen since November 2013, with its market capitalization exceeding $16 billion.
Bitcoin has been on a steady march higher for the past few months, driven by a number of factors such as the devaluation of the yuan, geopolitical uncertainty and an increase in professional investors taking an interest in the asset class.
"We are seeing the aftermath of zero interest rates run amok. So bitcoin is a healthy reminder that we don't have to hold on to dollars or renminbi, which is subject to capital controls and loss of purchasing power. Rather it's a new asset class," Bobby Lee, chief executive of BTC China, one of the world's largest bitcoin exchanges, told CNBC by phone. China is the source of the majority of trade in bitcoin and the devaluation of the yuan and fears over capital controls have contributed to the recent spike in the digital currency.
But several other factors have also had a notable impact. For example, bitcoin's price has appreciated around 137 percent in the past 12 months but got a big boost after Donald Trump won the U.S. election in November.
Another big event this year was in June when a change in bitcoin's underlying rules meant those who were "mining" the cryptocurrency – a process whereby users are awarded with bitcoin if they solve complex mathematical puzzles in order for a bitcoin transaction to go through – received less rewards. This was due to the process known as "halving," which essentially reduces the supply of bitcoin.
But overall, bitcoin experts said that the market is growing in terms of volumes and those participating, creating a "network effect" that will see the price rise further.
"The value of Uber in any city is directly dependent on the number of drivers and number of users, it's not linear it's exponential. The same is true of the value of bitcoin," Lee said.
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