Thank you for joining us for this edition of the NovaBlock newsletter. Here, we explore the intersection of technology, finance, politics, and of course, the crypto asset space.
On Friday October 25th, Chinese President Xi Jinping made a bold statement that shook the crypto/blockchain world:
“We must take the blockchain as an important breakthrough for independent innovation of core technologies. We must clarify the main direction, increase investment, focus on a number of key core technologies, and accelerate the development of blockchain technology and industrial innovation.”
Almost immediately following the statement, bitcoin pumped 40% from the local lows of $7400 to over $10,000. Although there may be a confluence of factors contributing to the pump, the statement denotes a seismic shift in the market, in which China declared the value of the technology and its intention to make the technology’s development a national priority. Although the statement lacks specifics, we will see China’s active involvement in the space take effect over the next few years.
China is locked in a war with the United States on several fronts. As celebrated hedge fund manager Ray Dalio noted:
“There is a rising power (China) challenging the existing world power (the US), which will probably lead to more conflicts between them about many different issues. History has shown that this situation has led to the increased risk of wars that typically come in four forms: trade wars, capital wars, technology wars, and geopolitical wars.”
The US and China are competing across these four dimensions, and each power’s approach to blockchain technology is indicative of the conflict. With the emergence of bitcoin, the US has more to lose due to the US dollar’s status as the de facto global reserve currency. China understands this deeply and is embracing the technology as a way to undermine US power. If the US fails to embrace the technology in a similar way, it risks having a large part of Eurasia completely blocked and protected from US sanctions through the emergence of a new Chinese global reserve currency. The People’s Bank of China has been making strides in the development of its central bank digital currency, called DCEP (digital currency electronic payment), which is expected to launch in a matter of weeks.
Although Silicon Valley is considered the ultimate hotbed of innovation, Beijing’s Zhongguancun neighborhood (often called “the Silicon Valley of China”) has been quick to catch up. China’s political system of centralized control is mirrored in the centralized structure of its largest tech companies. WeChat is the digital Swiss Army knife for modern life. Users send text and voice messages to friends, file taxes, pay for groceries, book doctors’ appointments, unlock shared bikes, and buy plane tickets, all without ever leaving the app. Whereas thousands of US-based apps provide these services separately and are siloed databases that rarely communicate, few Chinese apps dominate and generate detailed treasure-troves of user data. This has been the design of the Communist Party of China, which has actively blocked foreign technologies in favor of centralized home-grown alternatives.
Infamously, US regulators have taken a slow moving, dubious approach to regulating digital assets. The SEC has yet to provide basic securities vs utilities guidance, any form of regulatory clarity has come from analyzing enforcement action against violators and one-off statements by SEC members. The little guidance provided by the IRS poses more of a burden than clarity, treating air drops as taxable income at the time of receipt and removing any like-kind conversion provisions between crypto assets. When is a network sufficiently decentralized? Which of the assets currently trading violate securities laws? Are miners, lenders, and wallets subject to money transmitter and banking laws? These are just a few of the questions the industry is currently grappling with.
US politicians have not done the industry any favors, as they continue to demonstrate their misunderstanding of the technology:
Treasury Secretary Steve Mnuchin commented, “I want to be careful that anybody who’s using bitcoin – regardless of what the price is – is using it for proper purposes and not illicit purposes…there are billions of dollars of transactions going on in bitcoin and other cryptocurrencies for illicit purposes.”
Trump and Mnuchin’s assertions are flagrantly ignorant and misinformed. Recent research from Chainalysis and the United Nations Office on Drugs and Crime revealed traditional fiat money is used 800 times more than bitcoin to launder money on the darknet. Furthermore, studies have shown 90% of US bills carry traces of cocaine.
China’s DCEP will most likely be used to increase the government’s control over the population, enabling it to track every single person and what they are doing, enforce the strictest currency controls, and financially shut out dissidents. However, there is a silver lining to all of this. President Xi’s statement substantially increases awareness of blockchain, which directly translates to awareness of bitcoin. As more people are introduced to a digital non-sovereign, immutable, censorship resistant store of value, bitcoin will rise in prominence and act as a counterbalance to dystopian forces. The US must make a choice. Will it sit on the sidelines as its monetary dominance is challenged, or will it innovate and recognize how cryptoassets and blockchain technologies can enhance and improve our financial systems, not destroy them?
Quick Hits
Canadian regulator approves bitcoin exchange traded product. The Ontario Securities Commission (OSC) provided a favorable ruling regarding 3iQ’s Bitcoin Fund and announced that they would issue a receipt for a final prospectus of the Fund, paving the way for a closed-end bitcoin fund to be listed for trading on a major Canadian stock exchange. This is a historic ruling that will allow Canadian retail investors to gain bitcoin exposure in a secure and easy way. Notably, the ruling precedes any US approval of a bitcoin ETF. Hopefully, this will serve as a positive use case and apply pressure on the US SEC to change their tune.
tZERO partners with Alliance Investments to tokenize River Plaza, a luxury real estate development in Manchester, UK. River Plaza is the UK’s first real estate-backed security token offering (STO) and the first project of Alliance Investments’ real estate tokenization plan to tokenize $640 million of real estate projects across the UK over the next few years. We are avid fans of the digitization of real assets, such as real estate. It is encouraging to see more of these projects underway, as it highlights the value of using blockchain to reduce frictions for capital formation and secondary exchange of real assets.
Bakkt to launch consumer app and merchant portal in first half of 2020, and will test its product with Starbucks. The ICE-owned bitcoin derivatives platform recently launched its institutional bitcoin futures market in September. Providing an easy way for consumers to spend digital assets at various retailers was always phase 2 of their roadmap. It is promising to see Bakkt continue to deliver on their roadmap and provide reliable infrastructure for trading and spending digital assets. Although we do not think the app will drive major volume in its early days, we applaud Bakkt’s initiative to increase utility and merchant adoption of digital assets.