China, blockchain innovator

Issue 47/2019

From the SCMP:

"China’s cryptocurrency miners are cautiously celebrating a government decision not to ban the energy-intensive industry even as authorities launch a fresh crackdown on trading virtual currencies, though operators remain wary of more robust regulation in the future.

In a surprising policy shift in late October, China’s economic planning agency, the National Development and Reform Commission (NDRC), removed cryptocurrency mining from a list of activities set for elimination by the end of 2020.

Although trading cryptocurrency is banned in China, mining is not, and the country dominates 70 per cent of global mining operations thanks primarily to cheap electricity supply.

Its nearest competition, India and the United States, accounted for 4 per cent and 1 per cent of total mining share respectively."

Let me quickly clarify something: cryptocurrency mining is not innovating. China has excelled at mining because it has access to relatively cheap real estate, skilled labour, broadband and electricity. The one exception might be on the hardware side, where some innovation has occurred in terms of maximising efficiency, with China's Bitmain (75%) and Canaan (15%) dominating the cryptocurrency mining hardware market. But Chinese companies are still laggards in terms of their development and implementation of blockchain technology.

However, the decision not to ban cryptocurrency mining is important when taken in the context of President Xi Jinping's recent speech, during which he declared that blockchain would play:

"An important role in the next round of technological innovation and industrial transformation. As such it should be made a key part of the country's innovation programme, and investment in the sector should be increased.

Major countries are stepping up their efforts to plan the development of blockchain technology. Greater effort should be made to strengthen basic research and boost innovation capacity to help China gain an edge in the theoretical, innovative and industrial aspects of this emerging field."

By no means should China now be considered 'friendly' to crypto. Remember that it's still illegal to use Chinese yuan to buy crypto, or exchange crypto for yuan, and rightly or wrongly China is cracking down hard on on crypto exchanges peddling what it calls "air tokens":

"It's obvious the Government is nervous about all these unsavory "air token" projects 空气币 (slang for scam project). And it will continue to rout these sorts of things from China. The bigger question though is the long-term fate of legitimate cryptocurrencies such as bitcoin and ether. With investments from the likes of the ShuiMu QingHua BlockChain Fund, it’s way too early to say that the Government has fully embraced "blockchain not bitcoin." But it has made it clear that air tokens—and the exchanges that promote them—will vanish into the air. Or be suffocated."

Any attempt by the Chinese politburo to centrally plan the direction of Xi's "innovation capacity" will be doomed to failure (Soviet jet trains anyone?), but if it takes a hands-off approach and gets the incentives right then there's no reason why China won't eventually move beyond mining hardware innovation and lead the charge on the software side as well. It's just not yet even remotely clear that's the path China is heading down.

Personally, I still think that the United States is where the next major blockchain breakthrough will emerge (noting that could be a new crypto, e.g. what Libra threatened to be, or an at-scale, real world implementation of an existing crypto), even if its Congress seem intent on playing whack-a-mole on any mainstream attempts to innovate in this space.

Enjoy the rest of this week's issue. Cheers,

— Justin


The bits


SoftBank has the world's biggest Ponzi scheme

I'm sorry but there is nothing visionary about Masayoshi Son's "Vision Fund", just a good old fashioned Ponzi scheme:

"Since unveiling his $100 billion Vision Fund in 2016, Son has become the most active tech investor on the planet, pouring money into more than 80 companies. That helped create a bumper crop of unicorns, more than 300 startups priced at $1 billion or greater, according to the research firm CB Insights.

When SoftBank buys shares in a startup and then invests again at a higher valuation, Son says he has made a profit. That is legal under accounting standards, but SoftBank receives no money. The only change is that SoftBank has boosted the value of its original stake from, say, $1 billion to $2 billion by raising the value of the startup. In SoftBank’s income statements and return calculations, at least some of the additional $1 billion can be counted as profit.

Son’s bookkeeping has allowed him to claim his average internal rate of return far outpaces those of other investors. This month, as SoftBank took a hit from WeWork, Son defended his investment approach. “There are 5,000 venture capitals globally and average IRR is 13%,” he said. “Our return is about twice as big as this."

Son spotted an opportunity in outdated accounting standards and the tech bubble, that's all. His returns are on paper only, achieved by throwing billion after billion at hundreds of actual and potential 'unicorns', at increasingly inflated valuations, over several funding rounds. This will not end well for Son's investors.

Learn more:


HSBC moves to the blockchain

Financial services are the most obvious low-hanging fruit for blockchain technology (that and things like land titles). For context, $20 billion represents about 40% of HSBC's private placement assets under management, so it's significant but still small in the grand scheme of things.

Learn more:



Image of the week

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Hong Kong election results

These were local elections so more symbolic than anything but it was a strong anti-Beijing week for Hong Kong. The voter turnout of 71% was double that of the 2015 elections, with pro-democracy candidates victorious in 347 of the 452 district council seats up for grabs. The map can be a bit misleading - for example, the Islands District to the south is went Pro-Beijing mostly because 8 of the 18 seats are held by unelected ex-officio (Pro-Beijing) representatives.


This week's data breaches



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Issue 47/2019: China, blockchain innovator was compiled by Dr Justin Pyvis and delivered on 03 December, 2019. Feel free to send feedback, suggestions for future issues, ideas, insults, or pretty much anything that crosses your mind to his Keybase or Twitter account.