Chinese Digital Migration and Resold Lamborghinis on A Blockchain

Off the Blocks | Vol 95, November 26, 2019

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Recently, the Chinese premier, Xi Jinping, President of the People’s Republic of China and General Secretary of the Communist Party of China, said that the country needs to “seize the opportunity” afforded by blockchain technology. He added that China “… [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.” This has, of course, led to a wide range of speculation on what it means for the world and the trajectory of both public and private blockchains.

The below commentary first appeared on CNBC and provides a good primer for context and the trajectory of the digital currencies and provides a perspective from the East.

The Good, The Bad And The Ugly Of A Chinese State-backed Digital Currency

As investors and technologists worry that the U.S. is falling behind in the race for dominance in blockchain, Beijing is trying to get ahead.

In a bear market for crypto we make friends; in a bull market we make money.

- Rae Deng, founding partner of Du Capital, a crypto investment firm

Deng said at CNBC’s East Tech West conference in the Nansha district of Guangzhou, China she sees another flourishing crypto scene coming, with more Chinese investment striding to the market after Beijing suddenly announced plans to embrace blockchain technology.

China is eyeing for a thorough digital migration. The policy signal will definitely bring a lot of incremental capital into the market.

She argued that Beijing’s public support will drive “traditional money” – corporate investment in Chinese traditional sectors — to become a big player. These investors previously shied away from the crypto market due to its sensitive status. Initial coin offerings (ICO) have been banned in China since 2017.

The magnitude and appetite of the traditional money will definitely change the status quo of the crypto community. That’s a total game changer.

China’s Blockchain Opportunity

In late October, the global crypto market surged after Chinese President Xi Jinping said the country should “seize the opportunity” blockchain technology presents.

The price of bitcoin briefly soared above $10,000 following Xi’s remarks. That pop was mirrored by similar spikes in the prices of more than a hundred Chinese stocks with blockchain exposure as well as a bunch of other cryptocurrencies.

While Beijing’s unexpected move came after Facebook announced its Libra cryptocurrency project in June, the policy change did not happen overnight, according Edith Yeung, managing partner at Proof of Capital, a blockchain-focused venture capital fund.

They have been working on and studying this for the last 5 years so this is not just ‘because of Libra therefore we do this’.

- Edith Yeung, Proof of Capital

China is moving full speed ahead while Facebook defends the cryptocurrency project against skeptical regulators. The social media giant has also seen many key payment partners, including Mastercard, Stripe, Visa, PayPal, and eBay, pull out of the project.

Industry experts predict that China could start rolling out its state-backed digital currency as early as the next two to three months. Government grants have been set up to help blockchain projects. For example, Guangzhou’s city government launched a 1 billion yuan (about $140 million) subsidy fund to support the development of the blockchain industry.

What’s The Rush?

China’s crypto initiatives are strategically significant. Blockchain is the technology field that China started to develop almost at the same time as other countries in the world. It’s hard for China to claim technological supremacy on fields like Internet Plus [China’s initiative on information technology] or artificial intelligence, but the blockchain technology would be a perfect fit for China’s technological dominance. It’s called ‘corner overtaking’ strategy in Chinese. Xiao told CNBC in Mandarin, indicating that the practice could be risky yet effective.

- Xiao Wunan, executive vice-chairman of the China-backed Asia Pacific Exchange and Co-operation Foundation (APECF).

To be sure, China’s digital currency might be very different from bitcoin or other tokens, which emphasize anonymity and decentralization. A state-issued digital currency would help the Chinese government fight issues like counterfeiting and product safety, but it also raises privacy concerns.

Internationalization Of The Yuan

First, a state-backed digital coin could “further facilitate the internationalization of yuan,” Du Capital’s Deng said. “It could run in parallel with the SWIFT [Society for Worldwide Interbank Financial Telecommunications] system and also the One Belt One Road initiative could be a carrier of that,” said Deng. A digital currency would also be able to tap into China’s massive, and largely cashless, payments system.

WeChat Pay has one billion transactions a day and footprints in 60 countries,” “China has the digital payment infrastructure of that scale and also domestically as China is moving towards a cashless society. It only makes sense for the central bank to adapt to that digital revolution reality.

- Rae Deng

China is the world’s largest e-commerce market, accounting for more than 50% of global transactions, according to a July report from the U.S. Department of Commerce’s International Trade Administration. In 2018, third-party mobile payment transaction volume hit 190.5 trillion yuan, according to China-based analytics firm iResearch. That figure amounts to about $28.78 trillion, based on the 2018 average exchange rate from the U.S. Internal Revenue Service.

Safer Food And Fewer Counterfeits

A state-backed digital currency could give regulators greater abilities to track money flows and product logistics within that massive e-commerce market. That would better equip them to tackle issues like counterfeit goods and product safety concerns, APECF’s Xiao explained.

The prime application would be in the agriculture sector because food security is one of the most crucial issues in China. Regulators would be able to track and identify origins of products. Also, if we apply the blockchain technology to Chinese e-commerce site, it would be much easier to address fake goods issues.

- Xiao Wunan

His comments come as China grapples with skyrocketing pork prices as African swine fever kills millions of hogs. “Similarly, it would be important to the healthcare sector too, as China may soon allow entry of Indian generic medicines in the country,” he added. “Traceability is the best cure for fake medicine.”

Enterprise Market

Experts also see the potential for a state-backed digital currency in China’s business-to-business (B2B) market. Currently, the country’s payment leaders – WeChat Pay and Alipay – focus on person-to-person or small payments, with little B2B exposure.

That B2B e-commerce market totaled 20.5 trillion yuan ($3.07 trillion) in 2017, according to statistics site China Internet Watch.

Blockchains have a huge potential to reduce cycle time in business transactions. Adding B2B payment into the blockchain transaction in a strong global currency would have a big impact in accelerating B2B [activities]. You could have the first Chinese B2B payment infrastructure that could be very, very large.

- Paul Brody, head of blockchain at Ernst & Young

Concerns About Fraud And A Cryptobubble

But as cash floods into the latest crypto boom, concerns about fast-rising valuations and potential fraud also crop up.

“I hope we will avoid repeating some of the mistakes here in China that happened in the rest of the world,” said Brody.

Cryptocurrencies hit staggering highs toward the end of 2017 and the beginning of 2018, only to plunge to a fraction of those levels. Bitcoin has recently been seen trading around $8,000, far below its all-time high of nearly $20,000 in late 2017.

“Seventy-five percent of the companies in the [previous] ICO boom never produced any product. Most of them never got auditors and that’s why we got a lot of the fraud,” he told CNBC.

Valuations of Chinese crypto start-ups and projects are surging, making it harder for potential investors to negotiate.

“Some of the companies we spoke to immediately raised their valuations by more than 50% shortly after Xi’s speech,” Du Capital’s Deng said. “It has become harder for us to get deals at reasonable valuations because competition is heated.”

“I think there will be bubbles for sure,” she added.

Now some significant news from the world this week:

  1. Travel | German Airline Hahn Air Issues First Blockchain-based Tickets: German airline Hahn Air, which offers scheduled and charter flights within Europe, announced on Monday it has issued the first airline tickets enabled by blockchain technology, in partnership with Winding Tree, an open-source travel distribution platform. Hahn Air on Monday flew passengers holding blockchain-powered tickets on its scheduled flight from Dusseldorf to Luxembourg. Hahn Air is able to list inventory, manage the reservation requests, and receive payments once the booking process is complete. As a mode of payment, the airline accepts cash, credit card, or cryptocurrency, either the lif token or ether. [… Read More on Reuters]

  2. India | Binance Enters Indian Market With Acquisition of Crypto Exchange WazirX: Binance, the top crypto exchange by trading volume, announced the news but did not provide details of the deal. The company's entry into India might at first glance seem surprising, with the local crypto industry having been greatly disrupted by a ban on banking services for crypto firms instigated by the nation's central bank in April 2018. Since then a number of local exchanges, including Koinex and Zebpay, have been forced to close, with the remainder moving to survive on crypto-to-crypto trading, and avoiding the fiat system. That's a strategy employed by WazirX, which launched earlier this year offering crypto-to-crypto and peer-to-peer trades. Binance, however, has a way around the banking issue, having launched Indian rupees on its Binance Fiat Gateway in recent weeks. Now it says users of WazirX will soon be able to buy the tether (USDT) stablecoin with rupees via WazirX and use USDT to trade any cryptocurrency offered by Binance. [… Read More on Coindesk]

  3. Storage | Blockchain-based Storage Service Takes on Amazon AWS: Storj Labs, which operates a beta storage service for developers, businesses and consumers, initially launched the Tardigrade Decentralized Cloud Storage Service in August. Today, it announced its Beta 2 release and pricing, taking aim at Amazon's AWS S3 cloud service with what it says is a more cost-effective and resilient approach. The Tardigrade storage service claims 99.97% availability and said its prices are less than half the starting prices of legacy cloud storage providers. Tardigrade breaks up a file into 30 pieces that are stored across 80 drives from a pool of 3,000 distributed throughout any of 183 different countries or territories. Storj's Tardigrade service is fault-tolerant because the hard drives are located throughout the world and data is stored in a way similar to a RAID configuration in a traditional storage server – redundancy is built into the scheme. […Read More on ComputerWorld]

  4. Enterprise | Enterprise Blockchain Adoption Hinges On Use Case Fit: As technology matures and hurdles toward adoption clear, industry watchers are expecting blockchain to spend at least another three years stuck in the experimentation phase. Cultural shifts aside, the success of blockchain application in the enterprise depends on alignment between the context of the problem at hand, the capabilities of the specific technology and the deployment of the resources would require. Failing to balance these three elements means a mismatch between the technology and the problem it's suited to solve, a disconnect that can lead to further sunken costs and friction during adoption. Considering blockchain as the potential solution to a problem should rely on a combination of the company's business requirements, appetite for risk and approach to innovation. [… Read More on CIO Dive]

  5. Business | Waves and the Tricky Task of Being a Russian Crypto Brand: When Vostok, the enterprise branch of Waves, a blockchain startup, launched last year, it was proud to showcase its Russian connections. It debuted with the news of a partnership with Rostec, a state-owned mega-corporation with ties to many hi-tech industries. But the Russian links have been a double-edged sword. While the Rostec tie-up earns legitimacy at home, it complicates things abroad. Rostec was sanctioned by the U.S. in 2014 following Russia’s annexation of Crimea and the war in Ukraine. Registered in Switzerland, Waves is striving to become a key blockchain provider for the Russian state. Based in Moscow, in a large office in the middle of a hipster office cluster, Waves is walking a fine line between being friendly with Russia’s state-controlled corporations (many of which are sanctioned by the U.S. and Europe) and building a positive image for the global market. […Read More on Coindesk]

The Final Word | Lamborghini Uses Blockchain to Authenticate Resold Cars

Image Credit

“When Lambo?” became a rallying cry for would-be cryptocurrency millionaires during the last Bitcoin bull run; now the Italian supercar manufacturer has itself embraced blockchain, using the technology to authenticate heritage vehicles.  Lamborghini announced it is using Salesforce Blockchain to secure and authenticate heritage Lamborghini cars. Resold Lamborghinis, writes the car manufacturer, go through 800 to 1000 certification checks at its headquarters in Sant'Agata Bolognese, Italy.  To create a history of the car, and to verify the authenticity of the parts and services, resold Lamborghinis must pass through a network of photographers, auction houses, dealerships, repair shops, newspapers, magazines, and other media sources—a process the manufacturer describes as “grueling.” Using Salesforce Blockchain, Lamborghini can create a trusted network of parties including technicians, repair shops, and dealerships. From the network, cars will have immutable records of service, restoration, and prior service. […Read More on Decrypt]

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