Regulation is not a sexy topic, unless we are discussing crypto regulations.
In the last few weeks, many countries have voiced their unique ways to welcome ( or not so much) the crypto community. Korea has decided to regulate crypto exchanges as banks, while Thailand has permitted certain cryptocurrencies to be traded and exchanges to be opened. Even the SEC made remarks on BTC and ETH not being securities (horay!). China certainly has voiced their opinions too, this time through their permitting of e-commerce company JD to build a blockchain-backed token.
This is particularly important, for 2 reasons. For one, we now know that China doesn’t just care about blockchain, it cares about tokens too. Past announcements only suggested the former, such as President Xi’s recent speech touting the benefits of blockchain technology, and the country’s unfavorable stance towards ICOs and crypto exchanges. But here we are, with an asset-backed-security token being issued by JD in collaboration with Huatai Securities, a state-owned investment bank. Secondly, and more importantly, the announcement divulges a glimpse of China’s crypto strategy. Tokens can be issued, but only if it’s issued by the right party.
TL:DR: to really play and win the crypto game in China as an investor, you should actually be investing and buying into a basket of the top established tech companies such as Tencent, Alibaba, Baidu and JD, instead of the Chinese tokens that are currently ranked in coinmarketcap.com. Very few of the current top market cap tokens can succeed in China (but that doesn’t mean they won’t succeed.)
Some more details about the news per Coindesk:
“According to a report from the Securities Times, an outlet of the China Securities Regulatory Commission, JD Finance established the trial in partnership with Huatai Securities, a brokerage firm that will underwrite the issuance, as well as Xingye Bank, which will act as a trust. JD Finance aims to issue the securities using a consortium blockchain that will see each party act as a node, recording the transactions in a transparent manner. The experiment sets out to ascertain if the blockchain can meet the demands of the various parties involved in the asset securitization process, such as issuers, underwriters and buyers.”
Upon first glance, this partnership is quite unique. First, a Chinese bank is collaborating with a Chinese tech company to jointly develop a blockchain product. This is equivalent to the US if Amazon worked together with Morgan Stanley to develop a blockchain product. That is unheard of, and unlikely to happen given the sheer number of legal issues that would be involved. However, in China, this is not out of the ordinary. In China, for example, tech companies can take a significant ownership of banks through equity. Mr. Moritz shared a great data point in the aforementioned Financial Times article about how Tencent and Alibaba’s investments totaled in over a thousand companies. Many of those investments also include public-listed companies such as banks and state owned enterprises (or commonly known as SOEs). Tencent, for example, acquired 5% of CICC (China International Capital Corporation) last year, the first investment bank in China born out of a joint venture between China Construction Bank and Morgan Stanley. Such large type of stake in a company naturally fosters closer relationship and collaboration. And what to better collaborate on than blockchain?
Now, I don’t believe JD owns significant or any equity in Huatai Securities, but with this collaboration announcement, I promise you that it won’t be the last. Other new token creations between tech companies and banks may already be in the works.
Note: You may ask, why is this important? Now in the US, we have a situation where the finance companies are trying to invest and build out their technology platform and possibly crypto trading I.e Goldman Sachs and JP Morgan, and tech companies like Coinbase are fighting daily over legal battles and clearing through gray areas with the SEC. And then you have an alternative situation in China, where the tech and finance companies are working together to build new products with the support of regulators. Who do you think is going to move faster in getting the cryptocurrency recognized by the masses, US or China? I believe each of these country’s approaches will have its benefits and flaws, opportunities and problems. But the fact that China’s regulators permit such possibility of collaboration is worth learning from.
Now, the Chinese securities commission granted JD the right to issue a financial token in collaboration with Huatai. They did not grant this opportunity to any of the top market cap crypto companies such as NEO, EOS nor TRON. JD.com is primarily an e-commerce company with multiple product lines including food delivery. Despite the company’s recent developments on blockchain, it’s not a pure, crypto-focused company like the others that I’ve mentioned. Note a tech company has been blessed with issuing the first blockchain token, after almost a year since the country banned cryptocurrency trading and ICOs. Even the recent Ministry of Industry & Information Technology’s (MIIT) crypto ranking did not give away this clue. Despite MIIT’s recent high ranks of Ethereum and NEO in its recent technology evaluation, it still opted to let a traditional tech company to issue tokens.
I believe JD was chosen because the Chinese regulators already had a close working relationships with them, along with Tencent, Alibaba and Baidu. When it comes to working with a “foreign” technology like blockchain, the regulators trust the existing technology leaders to test out these products more than the new kids on the block.
A China expert tweeted once- “the purpose of a blockchain is to decentralize, which goes completely against what the Chinese government wants.” Indeed, decentralization undermines the Central Party, and that’s exactly the opposite of what China under President Xi is trying to do. Regulators will not support companies that attempt to decentralize the party’s power or put power into people’s hands in ways they don’t them want to. So Crypto companies that have touted decentralization, even if they were Chinese and may arguably have a leg up to non-Chinese Crypto companies when doing business in China, are at direct opposition with the regulators’ primary objectives. This is something Binance knew early on, and subsequently established their businesses elsewhere (they also didn’t have a choice, but they were also strategic and established a long-term relationship with Malta). Meanwhile, with it’s main objectives to become the world’s dominant power, the Chinese government continued to work towards transforming China with the help of its technology companies. There is a reason why Tencent and Alibaba’s products such as WeChat and Alipay are so ingrained into people’s lives in China (if you don’t know what those apps are, you need to. Better yet, go to Beijing for your next vacation and experience first hand). These tech companies had the blessings of the federal and local government, which permitted them to build amazing tools for their citizens, with recent example such as the mobile “metro cards” and mobile “passport”. Nonetheless, this is also the same reason why all the WeChat messages are monitored and there is no privacy on these platforms. The exact reason that tech companies have collaborated so closely with the government is why these same tech companies will get to first try new shiny toys. When it comes to new token issuance, the government is going to default to working with the technology companies they have worked with before than working with the newcomers in the industry.
The Chinese government also has a habit of fostering healthy competition between the large tech conglomerates, so not just one has all the leverage. To me, the signs of allowing JD to work with Huatai means that not soon after we’ll see Tencent or Alibaba announcing another token. All of this bodes well for the tech companies as well as China’s crypto space. If the initial blockchain+token experiments goes well, these technology companies will potentially take over as the backbone of China’s finance infrastructure. It’ll be a win for regulators as they then would have better control and monitor of banks and all of the country’s money supply. It’ll also be a win for the tech companies, as they will be entrusted with more innovation and potential future businesses.
Note: Now, once the value of tokens is validated, I believe the Chinese government may feel more comfortable to allow companies like NEO to build private chains for businesses and permit it to flourish. Nonetheless, for crypto companies that are based in China or founded by Chinese teams, but don’t have the support of the government will either have try to find a business case elsewhere or be absorbed by the large tech companies who are looking for talent.
This is why, for a long time, I’m going to be very bullish on the future of the top tech companies in China — Tencent, Alibaba, JD and Baidu. I don’t believe that one can just do traditional financial analysis and derive these companys’ valuations by forecasting each of their products’ line revenues. For these companies, their products are not just what you may see on the roadmap, or what’s already in their apps. Instead, their products are influenced and created by whatever the Chinese government wants them to build and whichever technological direction the Chinese government wants to turn to. So, the possibilities are limitless. And for now, it’s blockchain.