By the numbers: understanding value transfers to and from China

By the numbers: understanding value

transfers to and from China

Can blockchains positively impact areas

such as remittances?

Before we get to remittances...

.... we must first look at what is happening

domestically.

Until recently, some foreigners thought Chinese

internet activity solely related to:● instant messaging (QQ)

● online gaming (WoW gold farming)

● counterfeit wares/pirated content (PPS now part of

iQiyi)

However that is a dated view as local

Internet-based companies have pushed into

the domestic financial industry

● These tech based companies have moved into fintech verticals such as

direct banking and mobile payments

● As of March 2015, seven of the world’s 20 most valuable startups are

Chinese-based

Tencent financial services

● January 2014 - Launched “Licaitong” (a

MMF) with China Asset Management Co o As of January 2015 has over 10 million users and

fund has grown to over 100 billion RMB ($15b USD)

● July 2014 - Tencent received regulatory

approval to set up WeBank in Shenzhen

● January 2015 - WeBank launched and first

loan for 35,000 RMB went to a truck driver

In June 2014 WeChat also added...

… one-click

payment and

money transfer

between users

During five hour TV gala on Chinese

New Year’s Eve (2015)

● A total of 1.01 billion “red envelopes” were

exchanged on WeChat

● WeChat gave away $80 million USD

provided by corporate sponsors in the form

of virtual hongbao

● Viewers shook their phones 11 billion times

Some people accidentally broke

TV’s by feverishly shaking phones

Internet usage in China

● Through Q4 2014 - WeChat had 500 million

monthly active users, up from 335 million in

Q3 2013 Note: Tenpay (also from Tencent) has over 200 million registered

users

For comparison, as of December 2014:

● 649 million Internet users in China

● 557 million mobile Internet userso 1.29 billion mobile phone users

o Students are largest demographic (~25%)

Alibaba financial services

● June 2013 - Launched “Yu'ebao” (a MMF)

with Tianhong Asset Management Co

● By end of Q3 2014 - user base increased to

149 million, jumping 20% in one quarter

● Peaked during July and AUM has declined

(along with rates)

● As of December 2014 - Yu’ebao had around

~579 billion RMB ($92 billion) in assets

Alibaba cont’d

● As of Q3 2014, Alipay Wallet Had 190 million active users

Delivering 45 million daily transactions and

> 50% of that coming directly from Alipay

daily transactions

● In its prospectus: Alibaba had 279 million

customers using its platforms (Taobao,

Tmall, Alibaba)

● In 2013, gross merchandise volume (GMV)

reached $248 billion on all Alibaba sites

Other domestic activity

● In 2014, domestic search engine leader

Baidu, and the largest appliance retailer,

Suning, applied for banking licenses

● In October 2013 Baidu launched “Baifa” with

China Asset Management Co

● In January 2014, Suning launched “Lingqian

Bao” with GF Fund Management Coo Note: all of these products are primarily based on

interbank lending & negotiated deposits

What about P2P/WMP lending?

Due to loose or no credit ratings, growth in debt

could be problematic in long-run:

● Over 1,400 lending platforms in China

● 275 of the P2P platforms went bankrupt or

had difficulty repaying money in 2014o Up from 76 a year earlier

● PBOC will seek to regulate Internet finance

while allowing it room to grow

Restrictions faced by new entrants

In March 2014 new regulations:

● Made it harder for customers to shift funds to

online rivals

● Banks imposed transfer limits (not from

regulators)

● Banned new types of payments such as QR

codes (but still in use, unclear hurdle)

● Halted the launch of virtual credit cards

Still a long way to go

"If you look at Alibaba's wealth management

service, the amount of deposits in there is

something like $300 billion, which is less than 1

percent of ICBC's deposit base. These online

initiatives have made unbelievable progress in

a short amount of time, but they have a long

while to go compared with China's

megabanks.”● Jim Antos, bank analyst at Mizuho Securities Asia

Can’t forget China UnionPay (CUP)

● Founded in 2002 as a monopoly (SOE), globally 2nd

largest by volume (after Visa & ahead of Mastercard)

● As of Nov 2014, there have been more than 4.5 billion

CUP cards issued worldwide

● In all of 2014, CUP cardholders spent 41 trillion RMB

(~$6.54 trillion)

● Pushing abroad: can be used in over 140 countries, 13

million overseas merchants and 1.2 million ATM

machines accept UnionPay

● Pushing into NFC / mobile payments (partnered with

Apple, China Telecom, China Mobile)

What does any of this have to do

with remittances and blockchains?

In terms of domestic payments...

...Bitcoin as it exists today, will unlikely compete

with either existing incumbents or large web

companies in the near future.● Not competitive or convenient to use compared with

WeChat, UnionPay or an ATM managed by ICBC

● Very little “circular flow of income” due to a lack of

merchant or institutional adoption

● Domestic payments are also incredibly cheap & real-time

with the banks as well

o Alipay handled up to 2.85 million transactions per

minute on Single’s Day (11-11)

So what can some of this tech be

used for then?

Informal value transfer system● Local form of hawala is called Fei ch’ien

● (飞钱 or "flying money")

Not very popular anymore, most use ICBC

● Internal, domestic remittances: o Rural migrants sent home nearly $30 billion in 2005

o Depending on province, most of this can and is now

processed in less than an 30 minutes through

existing banking system● Banks in different provinces, even if same bank, may use different systems

(i.e., withdrawing RMB from ICBC in Beijing costs money if your account was

originally opened at a different ICBC location such as in Shanghai)

Prior to mobile platforms, typically done via ATM

International remittances to China

(inbound) reached $60 billion in 2013

Two (possible) blockchain

advantages

● By by-passing a few correspondent banks,

there may be less delay between cash-in

and cash-out in some corridorso This cannot be known a priori due to KYC/AML

o Has to be on a case-by-case basis -- and because

there may be fewer banks used, there could also be

less aggregate fees required

(Note: fees to miners may change)

Ignoring licensing/permits requirements is

myopic long-term

In an ideal world

● No one would need to cash out from one

currency to anothero We do not live in an ideal world

● Next best possibility is simply “netting” value

on a daily basis with trusted parties (e.g.,

hawala)o Can be done simply via secured instant messaging

Bitcoin specific “rebittance” companies:● Abra (still pre-Beta)

● Rebit (Satoshi Citadel in the Philippines)

● Coins.ph / Coins.co.th

● ArtaBit in Indonesia

● BitPesa in UK targeting Africa

● Bitspark.io in Hong Kong

● BeamRemit.com (Ghana)

● HelloBit (Mexico, PH)

● BitX (“Falcon” in multiple jurisdictions)

● Volabit (Mexico)

● Satoshi Tango (Argentina)

● Sendbitcoin.mx / Mexbt.com (Mexico)

● Coinee through Skyhook, Bitstamp and Coins.ph

“Regarding regulations, what do the

real experts say?”

Is Bitcoin transmission regulated?

“Later, on March 4, 2013, I met up with [the Bitcoin

community in NY] again, and there happened to be some

journalists there — because bitcoin was gathering steam

then, becoming worth more, and people knew it had been

used by the drugs market.

I told them that bitcoin was already regulated from the

financial crime prevention point of view, and that like any

money-sending it quite likely was subject to licenses and

compliance program. A week later, FinCEN confirmed I

was right.”

- Juan Llanos, AML/KYC expert

“Grey areas” for startups?“One common argument you hear is how [a Bitcoin startup] are compliant with

all the rules and regulation (just failing to mention, they may be compliant, but

still unlicensed). However, it does raise one very important question. If an

startup is compliant with all the rules and regulation and does not have a

license, does it matter?

From a transaction point of view, the answer is No! It does not matter. All the

data points collected, the checks and balances done are the same and yield

the same transaction parameters. The data does not change if the entity is

licensed or not. So, does it really matter?

Needless to say, the answer lies with the regulator. What is of interest is if such

grey transaction could spell trouble down the line or not, both for the startup, its

investors and the transaction partners who may be licensed in one geography.”

- Faisal Khan, MTO/MTL expert

Not operating in a vacuum

Non-blockchain MTOs

● Currency Cloud

● CurrencyFair

● peerTransfer

● Remitly

● Pangea Payments

● TransferWise

● Western Union

● MoneyGram

● WorldRemit

● Xoom

● Azimo

● Ria Money Transfer

● Transfast

● Moneydart

● USForex

Problem: not every MTO can send to

all corridors (yet)

For instance, while it has low fees

TransferWise cannot send to China (yet)

According to World Bank, Nov 2014

● Sending money from Singapore to China, cheapest is 6.23% (BKK Forex)

● Sending money from South Korea to China, cheapest is 4.07% (Citibank)

● Sending money from New Zealand to China, cheapest is 4.56% (exchange4free)

● Sending money from Japan to China, cheapest is 6.2% (SBI remit)

● Sending money from Italy to China, cheapest is 8.57% (Western Union)

● Sending money from France to China, cheapest is 6.37% (Western Union)

● Sending money from Germany to China, cheapest is 2.49% (Azimo)

● Sending money from Canada to China, cheapest is 4.86% (MoneyTT)

● Sending money from Australia to China, cheapest is 1.43% (Citibank)

● Sending money from United States to China, cheapest is 4.33% (Sique Money Transfer)

● Sending money from UK to China, cheapest is 5.08% (Western Union)

The reality is that MTO / remittances

in general is currently a relatively

competitive industry globally.

What are the logistics of a blockchain-

based remittance solution?

Despite lots of talk and lamentations, there is

no Bitcoin industry standard or blueprint (yet)

for how this actually works beyond ignoring

compliance costs and ignoring the issue of how

to cheaply, legally cash in or out (e.g., the

“round-trip”)

How are unbanked individuals

supposed to acquire bitcoin?● In many jurisdictions, in order to use most VC-funded

bitcoin exchanges, a user must link their bank account to

the exchange and go through KYC.

● But if a user does not have an ID or a bank account in the

first place, a user cannot do this.

● For emerging markets, local geography not fit for mining:

o Uncompetitive hashrate / non-existent infrastructure

o High energy prices / climate too warm

● >55% of adults in West Africa earn <$1 a day

● How to solve “last mile” of transmission? (37coins?)

Is P2P blockchain-remittance competitive?

● By the time you factor in the cash in/out network and KYC/AML, margins

are typically less than 5%

● Proof of concept, bottom-up financial model that can break down the costs

each step of the way Demonstrate where any crypto can actually make a large enough impact that it can

be competitive

● M-Pesa / Orange Money can transfer money instantly within cooperating

jurisdictions Challenge typically involves differences in cross-border tariffs

What about ATMs?

● All Bitcoin ATM providers currently charge a fee /

markup above spot priceo Why? Because these owners also have costs such as amortization of

the ATM, rent, electricity, insurance, etc.

● Fees typically ranges from 5-8% one-way, could be

double for round-trip o Consequently, compared to traditional remitter could be more

expensive to use BATMs end-to-end

● Bitcoin ATMs increasingly require extensive doxxing,

see “Tested: We Buy a Bitcoin!”o (e.g., national ID, face scan, hand scan, mobile #)

o As of March 2015, approximately 365 active installed BATMs globally

User acquisition costs

● Some Bitcoin-related verticals have low user

acquisition costs due to “free” publicity

● Costs will likely increase due to competition

● Suggested bids feature on Google Adwords:

● “Send money” is $6.08

● “Remittance” is $5.74

● “Transfer money” is $9.76

What about Bitcoin usage in China?

● Merchant adoption is currently non-existent

due to regulatory uncertainty and lack of

support from Alibaba and other merchant

platforms

● Estimated 100,000 “bitcoiners” but most

(still) interact solely through exchanges as

speculators

● Some large mining farms mine at a loss for a

variety of reasons

The future

Blockchain-based solutions are being piloted in China

through specific partnerships

Competitive landscape will change domestically and

internationally over the next year

As of late-March 2015 on AngelList:

• 1,691 payment startups

• 1,000 mobile payment startups

• 115 P2P money transfer startups

Conclusions

● Listening to “Bitleaders” without experience

on matters of international trade & finance is

probably ill-advised

● Cartoonish generalizations do not account

for market dynamics that are different in

every jurisdiction and corridor

● Virtual currencies may play a competitive

role but someone has to roll-up sleeves

Contact

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