Interview with HongShuning: 20 years at the Chinese Central bank and A Believer in Bitcoin

Jun 12, 2024

This podcast episode features Hong Shuning, who has worked for a long time at the Nanjing branch of the People’s Bank of China. He graduated from the Computer Science Department of Tsinghua University in 1992. In 2011, when Bitcoin broke the $1 mark, he wrote a paper advocating for the use of national computing power for mining, the establishment of Bitcoin banks, and countering the hegemony of the US dollar. Nowadays, Mr. Hong mainly supports the RGB direction and is involved in entrepreneurship in this area. However, he also lost some of the Bitcoin he bought early on due to contracts and investing in ICOs.

The audio-to-text conversion used GPT, so there may be errors. Listen to the full podcast: YouTube Spotify

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When Bitcoin broke $1, I first encountered Bitcoin

I first encountered computers in middle school and later got admitted to the Computer Science Department of Tsinghua University. Back then, we mainly studied mainframe-related content, as there were no PCs or the Internet. We learned languages like Pascal and C, and the course content was quite similar to what it is today, primarily focusing on computer science and technology, including software, hardware, and networks.

After graduation, I initially worked as a programmer and later joined the People’s Bank of China, where I was involved in software development, system management, and network management. I worked at the People’s Bank of China for nearly 20 years, during which I also handled tasks related to payment clearing and payment systems.

In 2011, while working at the People’s Bank of China, I first came into contact with Bitcoin. At that time, Governor Zhou Xiaochuan proposed the goal of RMB internationalization to counter the hegemony of the US dollar. I learned about Bitcoin through some technical blogs and subsequently read its whitepaper. After reading it, I felt that this was a new currency to counter the hegemony of the US dollar. I also studied Bitcoin’s source code in detail and found that it fully realized the ideas in the whitepaper, making it a truly effective currency. I introduced Bitcoin to people around me, but most were not interested.

As a result, I wrote a paper making three suggestions from the perspective of the state and central banks:

1. The state should participate in mining;

2. Establish Bitcoin banks to transfer Bitcoin to the public;

3. Use Bitcoin as a reserve to issue RMB, thereby countering the hegemony of the US dollar.

Although the paper caused some reactions in the Bitcoin community, it was not taken seriously by the state at that time.

What initially attracted me was the technology and economic theory behind Bitcoin. Satoshi Nakamoto proposed a brand-new monetary system in the whitepaper, mimicking the characteristics of gold, which was very effective in early monetary systems. I believed that Bitcoin was a feasible currency and had the potential to solve the problems of current fiat currencies.

I have been studying Bitcoin, focusing on whether it is truly a currency and whether it can last long-term. Although my initial paper used Marxist economics to argue for the value of Bitcoin, I still had doubts in my mind, so I continued to delve into economic theories to verify the long-term value of Bitcoin.

In 2011, Bitcoin broke $1, and many technical blogs started paying attention. To study Bitcoin, I built the Bitcoin codebase and mined with my laptop. At that time, CPU mining was already very slow, and I only mined a few tenths of a Bitcoin. I also tried to buy Bitcoin, but gave up due to the lack of domestic purchasing channels at the time. It wasn’t until a few years later, when domestic exchanges like BDCC emerged, that I began to officially buy Bitcoin, around 2014 when the price was a few hundred yuan. Since then, I have basically never sold Bitcoin, nor have I sold Bitcoin for fiat currency needs, but I did lose some Bitcoin due to contract liquidation and investment in Ethereum innovations. I have always reminded everyone not to speculate on contracts or invest in altcoins, as these are painful lessons. I hope everyone can learn from experience, hold Bitcoin, and not lose it.

Predicting Bitcoin to reach $100,000, Bitcoin’s development is slower than expected

First of all, Bitcoin’s long-term rise is an inevitable trend that cannot be artificially changed. Although there was no clear price prediction in the early days, after leaving the People’s Bank of China in 2017, I publicly predicted that Bitcoin could reach $100,000 in the next few years. This prediction was based on a comparison with gold; if Bitcoin completely replaces gold, its value should be around $400,000. Therefore, the $100,000 prediction was actually a conservative estimate. Although it has not yet reached $100,000, I believe it is only a matter of time.

Through further research, I found that Bitcoin’s potential is far beyond replacing gold. With the development of the Lightning Network and Bitcoin’s second layer, Bitcoin has the ability to replace the US dollar and become the foundation currency of the world economy. Once this is achieved, Bitcoin’s value will far exceed $100,000, $400,000, or even $1 million. At present, Bitcoin’s price is still significantly undervalued, mainly because people’s cognition and acceptance of Bitcoin are slower than expected.

Bitcoin’s slow development is mainly due to its blockchain performance limitations. In the early days, Bitcoin’s scalability and programming capabilities were weak, and a speed of 7 TPS could not support large-scale circulation. Therefore, many people, including leaders in the economic, financial, and technical fields, believed that Bitcoin could only serve as digital gold and not as a circulating currency.

However, the emergence of the Lightning Network has changed everything. The Lightning Network has infinite performance and extremely low fees, and its speed is even faster than Alipay, making Bitcoin fully capable of being a circulating currency. Technically, Bitcoin payments have reached the level of modern electronic payments. The remaining obstacles are people’s acceptance and the development of application scenarios.

To make Bitcoin a widely accepted circulating currency, it is necessary to develop many application scenarios on the Lightning Network and promote the use of Bitcoin by more people. Once achieved, the previously envisaged large-scale use and high-value target of Bitcoin can be reached. Currently, the technical problems have been solved, and the key lies in promoting applications and people’s acceptance.

Supporting the Classic expansion plan

I have always been concerned about the Bitcoin hard fork and expansion dispute in 2017. The discussion about Bitcoin’s expansion actually started in 2015. The mainstream opinion was that expansion was needed, but there were different views on the size of the expansion. Some people thought expanding to 2MB or 4MB was enough, while others thought 8MB, 16MB, or even 32MB was needed, and some believed in unlimited expansion. These technical paths had corresponding codes developed.

At that time, I supported the Classic plan, that is, the 4MB expansion plan. I also participated in some development work, but unfortunately, this plan was abandoned due to bugs and security vulnerabilities and was not recognized by miners. Various solutions emerged afterward, including SegWit and other 2MB plans, which I studied carefully. However, I was not satisfied with these solutions, including the BCH plan, which I also considered a step backward.

I still preferred the Classic plan, as it was the simplest and most straightforward solution, requiring only one line of code to change. I believe Bitcoin will still expand in the future, but I hope it adopts the simplest and most straightforward solution, like the Classic plan, rather than complex solutions.

Completely rejecting Ethereum, believing ETH will ultimately go to zero

When Ethereum ICO happened, I had the opportunity to participate, but I was not optimistic about Ethereum’s solution and still am not. Ethereum aims to solve Bitcoin’s script function expansion problem, but I believe that if Bitcoin restores the previously deleted instructions and uses some workaround methods, it can achieve relatively complex functions without the need for Ethereum’s Turing completeness.

The early Bitcoin community was highly enthusiastic about technical innovation, with various technical paths continuously proposed. I believed that in such an environment, Bitcoin could achieve Ethereum’s functions. Therefore, I felt that Ethereum was unnecessary, essentially reinventing the wheel. Unfortunately, due to the hard fork dispute in the Bitcoin community, especially after the conservative faction won, Bitcoin abandoned its script function expansion, leading to a missed opportunity, while Ethereum rapidly developed and attracted a large number of application developers.

Despite this, I still firmly believe that Bitcoin can achieve all of Ethereum’s functions through innovations like Taproot. Recently, new protocols on Bitcoin like RGB have also validated this point. With these functions realized, Ethereum will become unnecessary, so I have always believed that ETH will eventually go to zero.

What is RGB, and why do I favor the RGB direction

Bitcoin has always had a severe problem, which I call Bitcoin’s Achilles’ heel. With the halving every four years, miners’ rewards will become less and less, making it difficult for miners to get enough incentives from block rewards to cover high computing costs, threatening Bitcoin’s security. Eventually, Bitcoin may face the risk of a 51% attack, making it unreliable as a currency, and it may even go to zero, which I consider Bitcoin’s greatest risk.

To address this issue, Bitcoin needs a large amount of transaction volume, which can be achieved through commercial and financial applications. However, the performance limitations of Bitcoin’s blockchain make it difficult to support large-scale circulating currency applications. Therefore, despite efforts to promote Bitcoin payments over the past decade, few mainstream businesses accept Bitcoin as a payment method.

Ethereum has attracted a large amount of transactions through DeFi (decentralized finance). If Bitcoin can achieve similar DeFi applications, it can bring a large number of financial transactions and eventually push Bitcoin to become the foundation currency of the global economy. To achieve this goal, we need to implement smart contracts and other complex applications on the Bitcoin blockchain.

The RGB protocol is a solution to achieve Turing-complete smart contracts on the Bitcoin chain. Unlike other solutions, RGB executes smart contracts off-chain, with users trading among themselves and only recording proofs on the Bitcoin chain. This method not only solves performance issues but also allows for nearly unlimited scalability.

The basic principle of RGB is off-chain accounting and on-chain proof. This method enables Bitcoin chain transactions to far exceed Ethereum’s performance while having Turing-complete functions. Therefore, RGB can realize DeFi, GameFi, NFT, and various applications, bringing a large number of transactions and providing miners with enough fee income to ensure Bitcoin’s security.

Currently, the development of the RGB protocol is relatively slow but is approaching the prelude to official release.

Once released, assets and various Turing-complete applications can be implemented on it. I personally believe that within one to two years after the official release of the RGB protocol, it can replicate all of Ethereum’s development in recent years, bringing significant technological innovation and ecological applications.

To promote the commercialization and engineering of RGB, we are developing some auxiliary tools and infrastructure to help users more easily use the RGB protocol. These tools include node management, smart contract management, and data management, making it easier for users to access wallets and use various decentralized applications (dApps).

BlackRock’s centralized risk is not a concern

The risk of Bitcoin’s centralization, including being controlled by Wall Street, is not severe. As early as 2011, I hoped Bitcoin would be controlled by the state in my paper because the concentration of social wealth is an inevitable trend, whether it is gold, the US dollar, or Bitcoin.

The concern about being controlled by Wall Street has two layers of meaning. First, Wall Street bankers do not have that much wealth themselves; they only help manage wealth for others. Bitcoin ETFs are similar; although ETFs seem to have hundreds of thousands of Bitcoins, these Bitcoins do not belong to Wall Street but to countless institutions and individual investors behind them. Therefore, while wealth is concentrated, it is still dispersed.

Historically, gold was concentrated in the hands of the Federal Reserve in the Bretton Woods system, but now gold is starting to flow back. Bitcoin may enter a similar state, depending on which country first recognizes Bitcoin’s advantages. The United States is actively seizing this advantage. If history repeats itself and Bitcoin is concentrated in the hands of the US government or the Federal Reserve, the United States may use these Bitcoins to issue new dollars.

Even if this happens, compared to the current unanchored dollar printing, it is still an improvement, and it is better for ordinary people. This step is still a victory for Bitcoin. As for whether it will again break away from the standard in the future, that is beyond our predictive ability.

As for China, if some suggestions had been adopted back then, the situation might be different, but we cannot assume that. However, many countries are now starting to realize this, so the future may not be monopolized by the United States alone. The best situation is that governments worldwide are competing for Bitcoin resources, forming a healthy competition.

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