By Luke Sheehan
It was seen as strange by outside observers: the People’s Republic of China, despite its ban on cryptocurrency exchanges, permitted the energy-intensive domestic cryptomining industry to continue through 2017-2018. A story reported on last week by The South China Morning Post, and noted with interest on Twitter by crypto luminaries like Emin Gun Sirer and Vitalik Buterin, concerns a move by the National Development and Reform Commission (NDRC) to “completely eliminate” crypto mining. The Commission is the country’s main economic planning body; the ban will therefore be enforced, though when and how is not clear.
Coming after many warnings about the environmental wastefulness of Bitcoin, the policy can be considered less an ecologically astute move than as part of a strategy to cultivate blockchains – and in the long run, cryptocurrencies – with ‘Chinese characteristics’. In other words, regulated, contained and relevant to the economic grand plans that the leadership have put in place since the millennium: One Belt One Road and Made in China 2025.
Much that is remarkable went down in the Chinese crypto scene in 2018. Two parallel realities exist: on the one hand, discouragement (FUD) has spread through an area that was once overloaded with hype. On the other, money and development has continued to flow to projects that match the government agenda. Such is the global punching power of the new Chinese digital economy, and the power of the government within the country, that there seems little doubt that decisions and projects emerging here will affect how the story of blockchain and crypto develops in its second decade.
Of course, as a speculative market powered by cryptocurrency trading, blockchain as a whole has been treading very cold water for a year. This is no different in China, where the government’s move to shut down domestic trading in 2017 has been followed up by a generally chastising (but not overtly punitive) attitude from Beijing. To recap, unhappy with an ICO scene that it described as consisting of “90% scams” the People’s Bank of China targeted currency exchanges with a ban in September of that year. This preempted the bursting of a global bubble already predicted by many, arriving with Bitcoin’s sharp decline in value from the spring of 2018. The government action and reactions among traders in the country likely contributed to both the rise and fall, though it is likely these had multiple causes.
Through the course of the year, the government moved to restrain specific expressions of the industry while embracing others. In August, public events promoting cryptocurrencies were banned from hotels and Wechat accounts connected to crypto media were shut down. News brands affected included domestic outlets like Huobi News and Jinse Caijing, a blockchain news platform that had raised over a million dollars in A-round funding in August 2017, just before the hammer descended. This took place even as Chinese Bitcoin miners were allowed to expand their operations and Chairman/President Xi blessed blockchain as a “breakthrough technology”, placing it in a list of areas of interest for national development, alongside AI, mobile, quantum computing and IoT. In fact, the CCP’s 13th Five Year Plan of 2016 had already picked up on blockchain’s potential, mentioning it several times if not providing any specific plans.
In Shanghai and Shenzen, burned investors pressurized teams and tried to recover money. Projects with significant capital means and international profiles migrated away as the Kool-Aid drained from the conversation. This background caused companies to either ‘restructure’ (fire staff), shut down entirely or effectively become zombie projects, their founders searching for ways to pivot into fields like consulting as their tokens sat in crypto exchanges at low values, without significant movement.
In the course of 2018 I worked as communications and content consultant for several such companies, and came to recognize the names of the funds and VOCs that had helped to swell the bubble. They were often moving to unravel their investments, while teams creating code or selling grandiose ambitions gave increasingly hollow performances.
After the regulation and the exposure of many scams, for international investors it seemed as though crypto was ‘dead’ in the PRC. Working within it, one was able to see a common, obvious discrepancy between what was said publicly (restoring transparency and data “rights”, removing middlemen and unleashing new eras of digital independence, collaborative decision making, etc) and done privately (opaque financing, vertical decision making, back door channels to officials).
Indicative of the reliance on hype that had overtaken the industry was the tendency to disband marketing teams. In the proliferation of blockchains and tokens in China in 2017, coins and their developers had often arrived with little more than a convincing idea and a hefty marketing team, with code writing maybe coming later if the ICO took off. In a mobile-phone crazed country where ‘influencers’ attain viral fame faster then anywhere, scam boosting and poorly planned ventures were a serious danger. People had swiftly learned to trade crypto on their phones. Therefore, some commentators approved of Beijing’s regulatory move. In the West, Facebook and Twitter acted independently shortly afterwards to block cryptocurrency advertising.
On the ground, in the mass extinction of tokens and blockchain projects, the marketers were often the first in the firing line in 2018.
An unusual case of conflict between marketers and developers came from Shanghai. This debacle attained the level of a minor scandal more than a mere market failure. The Skycoin project was begun by an American, and has been in development in China for a half-decade. In July 2018, SkyCoin‘s founder Brandon “Synth” Smietana claimed that he had been held at knifepoint in his home in Shanghai by his external Chinese marketing team. At the time this was treated by many as an elaborate scam, not helped by Synth’s requests to his own community to dump their SKY tokens and rebuy them, to “reset” the price.
Notoriety increased when Skycoin got into bed with John McAfee later in the year, after a conference in Malta at which they appeared jointly in an event titled ‘The Dark Side of the Chain’ to discuss their respective stints in prison and kidnapping (Malta’s own legal and ethical murkiness, cause for serious concern even as the country throws its loving arms around blockchain, shall be the subject of a future article).
Yet the Shanghai marketer-assailants were indeed charged and spent much of the year in prison under suspicion for crimes that they have since bitterly denied in broken English online, calling Synth a “Judas-character” who manipulated them from the get-go. Meanwhile, after having the Skycoin logo tattooed on his back, John McAfee adopted a mentor role, bringing Synth to the Caribbean to shoot assault rifles at fish from his boat and post the vids on Twitter. After Christmas, McAfee changed his mind and broke off association with Skycoin – on Twitter, while Skycoin’s marketers dismissed him as ‘drugged out’ on the same platform. All very GUBU.
Other extreme events included a mischievous youngster and probable scammer in Hong Kong casting real banknotes into the street from a rooftop to promote his “Mining machine”. Local anxiety for such treatment of authentic money should not be underestimated. Hong Kong put him into the dock.
The production of hardware items like ASIC mining chips is a crucial part of the Chinese scene, both legitimate and crooked – Bitmain’s overnight apotheosis led to competitors and imitators emerging with various mining ‘rigs’ and boxes, such as the Hong Kong entrepreneur’s machine. Skycoin has also vigorously promoted its Skyminer boxes, which will apparently produce an impenetrable and decentralized network for users, along with copious profits… if the world opts to adopt Skycoin. The ambitious scheme, if it takes off, is not something likely to be popular with authorities in their main country of residence.
Meanwhile the 20-something billionaire of Bitmain, Jihan Wu, had a tougher year, laying off much of his staff and stepping down as CEO, as Bitcoin dropped in value.
Some platforms connected to China, like Binance (Chinese-Canadian Changpeng Zhao, ‘CZ’, of Binance being the financial and software prodigy, while Jihan Wu was the hardware star) have endured and seem on the verge of suddenly acquiring a “solid” presence. The spread of crypto continues even as the market shrinks, with the fire sale dumping of currencies providing a stream of income. Binance’s cleverly structured “native” token piggybacks on users’ activities, and has held onto solid valuations since being launched early in 2018. Many other clever schemes, notoriously trading bots on the platform, have added to its boldness. The wily CEO also has plans for Real estate and ambitions, typical of the post-Alibaba generation of digital ethnic-Chinese entrepreneurs, to attain social status and respectability through philanthropy at the same time as mega wealth.
All of this makes Binance a culturally Chinese animal, no matter where a passport was handed over or the company’s roving HQ has washed up – most recently they joined the migration to Malta. Despite the enormity of traffic from Chinese users armed with VPNs, it would be hard to see the exchange operating openly within China for the near future. Reliable rumor did suggest that they maintained an office in Shanghai for much of 2018, before moving on.
In the meantime, Beijing has worked on dominating the cutting-edge technology.
In the capital and Shanghai, dedicated ‘blockchain towers’ and zones have been set aside to allow the tech to grow under supervision. Shanghai’s Yangpu district contains Bay Valley, where tower A6 will be overseen by the sanctioned Shanghai Blockchain Technology Association. Research labs connected to Fudan, Jiaotong and other universities are also conveniently located within Bay Valley.
So what will be the nature of the blockchains that will emerge from these spaces?
The national plans mentioned earlier center on heavy infrastructural investment (One Belt One Road) and helping the growing middle class migrate into services and IT as the ‘world factory’ regions in the Pearl Delta move towards more sophisticated manufacturing (Made in China 2025). Therefore the desire to meld blockchain with other technologies has come to the fore.
Several companies offering a hybrid masterplan have emerged and are growing fast in stature. One example is Beijing-based Matrix AI, which combines blockchain with AI and big data for industry. Future cooperation with state-run infrastructure projects is one obvious goal. Presently, Matrix is in the process of testing its blockchain-AI systems with rolling stock in Kenyan railways, in partnership with a national Chinese group, testing such things as operability and likelihood of system failures. Ratings agencies and investors within and without the PRC now consistently tout Matrix as undervalued, and no wonder.
Another area of application that may see mass use is storage of identification on the blockchain. The NEO offshoot project Ontology (one wonders where creators find these names sometimes) is invested in such forms of personal data storage, and has declared interest in bringing the tech to the UN-based digital ID plan named ID2020. Coming under the aegis of the UN, this may well generate tools to empower refugees and displaced persons. Yet looking at the focus on gathering and storing digital fingerprints, it is hard not to see a common theme with the anti-anonymity regulations delivered by the Cyberspace Administration of China in February 2019, which make it obligatory for all blockchain companies to store information on users before allowing them to access any service. The same law requires that companies censor content and data that is disruptive of national security.
On the topic of cryptocurrencies, the fact that projects like Matrix still promote tokens ought to give pause. Now, within the token-trading community eyes are slowly returning to China. Yet it remains to be seen whether the way will be cleared for a tokenized native market to flow into or interact with the open ocean of crypto trading online. Many anticipate some form of national cryptocurrency, but the suggestion is that this may take several years – an eternity in that fast evolving space. Meanwhile blockchain development, as distinct from tokenization, continues.