Bankless - China's Crypto Ban... Why Now? | Sahil Bloom (SotN 9/28)

Episode Date: September 29, 2021

"Evergrande is the train wreck that the financial world and media can’t help but watch." A week ago, Sahil Bloom dropped a thread on twitter detailing the buildup and consequences of the Evergrande debt crisis. This week, he's coming on State of the Nation to paint a macro picture of global events and their effects on the economy and crypto. There are so many puzzle pieces in the world at large, and we're trying to get to the bottom of how it all settles. What does this mean for the global economic landscape? How does this line up with another recent China Crypto ban? ------ TracerDAO | Perpetual Pools are now Live on Aribtrum! https://bankless.cc/Tracer  ------ SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  ️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  MATCHA | DECENTRALIZED EXCHANGE AGGREGATOR https://bankless.cc/Matcha  LEDGER | SECURE YOUR ASSETS https://bankless.cc/Ledger  UNISWAP | DECENTRALIZED FUNDING https://bankless.cc/UniGrants  ------ Topics Covered 0:00 Intro 5:30 Sahil Bloom 8:36 What Happened to Evergrande? 15:48 Risk to Chinese Economy 20:08 Who's Getting Punished? 27:39 Transparency & Trust 31:54 Central Bank Decisions 36:58 Updates on the Situation 42:00 China's Crypto Ban... Why Now? 47:22 Why Take it Seriously? 52:35 Geopolitical Rivalry 56:58 Bullish for Crypto? 1:00:38 Closing & Disclaimers ------ Resources: Sahil on Twitter: https://twitter.com/SahilBloom?s=20  Sahil's Evergrande Thread: https://twitter.com/SahilBloom/status/1439920043404546050?s=20  Sahil's Newsletter: https://sahilbloom.substack.com/  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Hey, Bankless Nation. Welcome to another state of the nation. David and I are super excited about this. David, it's great to have you back. State sides. We can talk about this. This is a talk that we've wanted to do since like last week. Evergrand made the headlines. There is some lot of stuff going on in China that I think we want to unpack today. It is affecting macro markets. It's affecting crypto as well. And we have Sahel Bloom, who is an expert on the subject to talk about that. it with. David, how you doing, man? You feeling refreshed from all your conference travels? Oh, my God, extremely. It's so nice to be back in my actual apartment with my actual setup. I hate recording a podcast on a laptop. So it's good to be back and good to be back into the

swing of things, making more content out of the bankless ecosystem. Content never stops around here. Content never stops. Nope. Okay. You know what? And like events never stop either. Crypto never stops. So why are we talking about Evergrand today? Why is that important to the crypto story? And, yeah, what's the TLDR here? So there's so many puzzle pieces floating around the world right now. We have United States as a nation state being very hostile to crypto. We have Evergrand, which is a very large real estate like gargantuan in the Chinese markets. And China is also becoming really, really hostile to crypto. Meanwhile, the quantitative easing and loose monetary policy continues. And also now we have apparently a catalyst for,

a potential catalyst for a global contagion event. We're going to see if that description is still relevant a week later. But there's so many different puzzle pieces that are like floating around, hanging around in the air, and we're trying to see how it settles, right? So what we're trying to discover today is does this ever grand real estate, what's the word, like crisis, I guess? How much is that going to impact the future of monetary policy? policy out of China, how much is that going to impact our crypto industry and how much of that

is impacting the markets as we see them right now? This is one of these events where, like, in hindsight, we'll be able to kind of explain exactly what happened. But in the moment, we're still trying to figure it out. And that is what we are talking with today with Sahel. Yeah, and absolutely. Also, recently, I mean, on Friday, it's news that China has banned crypto again. So how does that impact things? Is that related to Evergrand in any way? Are these ice isolated incidents or maybe there's some sort of tie that binds all of these things together. So guys, this is going to be a fascinating conversation. Got to tell you about what's going on in the bankless nation.

Wow, releasing podcasts. We had this fantastic podcast with Ariana Simpson from A16Z, all about crypto gaming. What's the total addressable market for crypto gaming, David? I mean, anyone listening, did you not play games as a child? So you, which means everyone, basically everyone. It's 8 billion people, guys. That's exactly what Ariana said in the podcast. Listen to that one if you want to get up to speed on crypto gaming. Also, our friends and sponsor, Tracer Dow, they wanted us to let you know that they are crushing it when it comes to perpetual products on layer two. This is on Arbitrum. They've got almost $20 million locked in their contract. So this is a way for you to go leverage long, ETH or Bitcoin. If you want, you can go long. You can go short. If you so choose, maybe. trade on some of the macro news coming out of China. I don't know. All of these positions are tokenized, though. There's no liquidations. There's a mining program. And of course, our favorite,

it's all bankless. No banks involved over here. So go ahead and check that out. We will include a link in the show notes to Tracer Dow and what they're up to. But David, I've got to ask you the question I ask every week before we get in. That is, what is the state of the nation today, sir? The state of the nation is correlated. And that's a great way to trade the markets. Again, back at Tracerdale, if you want to trade how correlated we are, because this China news came out and then we dumped and then this Federal Reserve insider trading news came out as well as this debt ceiling. A lot of macro things are happening that is pushing the crypto markets around, which as a crypto native guy really, really frustrates me. I prefer to be a self-sovereign from the macro markets, but all markets. are tied to each other one way or another. So, Ryan, the state of the nation this week is correlated. We are correlated. Yeah, I was hoping, David, in 2021, we would leave all of that macro market correlation in the dust and behind and crypto would have a run on its own. And it has to a great degree. But of course, we are still tethered to what happens in macro and definitely Evergrand

and China ban is part of the story there. So guys, we will be right back to talk about all of this and more with Sahil, Sahil Bloom. But before we do, we want to thank the sponsors that made this episode possible. When you shop for plane tickets, you probably use kayak, Expedia, or Google to compare ticket prices. So why would you limit yourself to just one exchange when you trade crypto? When you make your trades, you want to make sure that you're getting the best possible price on your trade and that you aren't paying high gas costs that you could have otherwise avoided. That's why you should be using Macha. Macha routes your orders across all the various DFI exchanges on Ethereum. Ethereum, Polygon, Binance Smart Chain, and gives you the best possible prices without taking any

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You may have seen some of his Twitter threads. They are like world famous. Many of them go viral. He has this gift of distilling things down to their essence. He also has a master's supreme public policy from Stanford. He's recently been focused on this ever grand crisis, everything that's happening in China and keeping us all informed. Sahil, it is fantastic to have you on bankless.

How are you doing today? I'm great, man. Thank you for having me. I appreciate you all and love what you're doing. Man, like likewise. And we especially appreciate the light that you've kind of shined into what's happening in China with this ever grand incident. We're going to talk about that.

We also want to talk about China's crypto. ban how this all plays out in geopolitics. But first, can you give us, like, for somebody who hasn't been paying attention for the last couple of weeks on the Evergrand Crisis, but they've heard a headline. They're worried about contagion, this sort of thing. Can you give us, like, the 101 on what actually happened, like timeline of event style? Yeah, yeah, for sure. Let's set the stage, I guess, to start. And the first rule of all of this is do not put the word ever in your name. You had like the ever-given thing with the boat that got stuck in this way. canal. Now you've got Evergrand. It's just never a good idea. So stay away from that if you want to start a

business. You hear that Evernote? Sorry. I think they might already be dead, unfortunately. I don't know. We might just not know it yet. So Evergrand, what is it? It's a Fortune 500 Chinese property developer. It's based in Shenzhen, China, founded in 1996 by this guy, Hoy Kayyan. Apologize if I'm but but doing my best. You know, it really started to boom in the 2010s. The founder came up in the manufacturing industry. He really built this thing from the ground up. It's a big business, call it 100 billion plus of revenues, 5 billion-ish in net profits. Last year, it has about 1,400 projects across 280 or so cities around China. The simplest way to think about the business is that it's a home builder. They buy land, they develop the properties on top of

the land, apartments, homes, etc. And then they sell the finished products and customers who are buying and occupying them. The challenge with this type of business is it has a really long cash conversion cycle. So what do I mean by that? You know, it takes a while to go from where they invest the money to build these properties by the land, build the properties, pay the contractors, do all the construction, to when they're actually receiving cash when they sell the properties on the back end. With the exception of small upfront deposits that people might have to pay in order to kind of lock down a unit, there's a very long time between when they invest and when they're actually receiving cash. So that's the challenge with the

business. How do you solve that? Really, it's with. It's, debt. You need some sort of financing mechanism for this. The cheapest way, historically, for them to do that, has been with debt. There's equity capital, much more expensive, so they've been using debt. The problem for Evergrand, which we're going to get into, obviously, is they used a whole hell of a lot of debt along the way. Even by property developer standards, they've been going above and beyond in terms of the leverage profile of the business. You look at the Chinese property development sector, they were far and away the most over-levered property property developer, maybe the most in the world, actually, if we were to look at it. So they had ended up

accumulating $100 billion of debt for this business as they continued to grow it over the years. Along the way, the founder, who had come up and was kind of a modest living standards in his childhood, became a billionaire. Over the last couple of years since 2018, I saw an estimate that he took about $5 billion of dividends as one of the major shareholders of the business. All the while, they were accumulating an insane amount of leverage and debt on this business. So pretty crazy, just like backdrop to the whole situation. And honestly, not that crazy that they took debt in principle, but the amounts and the quantum that it reached became quite mad. And we've talked about it, and I'm sure you've talked about it on the show, debt is a double-edged sword in the best

sense of the word. On the good side, it's great. You can grow with really cheap cost of capital. you can go and borrow money to spend rather than having to invest your own. That's great when it's working. On the other end of it, it's not so great when you get caught by the other edge of the sword. So a couple things happened that led to them getting caught, quote unquote, in the last while. Number one, China started to place some restrictions on leverage levels within the property development sector. Why did they do this? We're going to get into it as we dive into some of the things around crypto.

But in my mind, it's power. They want to control. They want to have more control. these sectors, they don't want the kind of crazy spending that the property development sector and other sectors have grown accustomed to. So they placed some restrictions on leverage levels, net leverage ratios, liability to asset ratios, et cetera, that Evergrand was on the bad side of. And so all of a sudden, Evergrand can't borrow at the same levels that it previously did in order to continue to fuel the growth. And the way these things work, it's not dissimilar

from a Ponzi scheme as you think about it, because what you're looking at is you're having to borrow more and more money to fund your growth. You keep having to borrow money in order to fund the same amount of growth. And as soon as that growth slows, it starts getting much harder to pay the interest payments on that to service the debt. And that's what happened to Evergrand. About a year ago, they had to send a letter to local provincial government, basically saying, we're worried that we're not going to be able to make an interest payment on some of this debt that we have outstanding. And by the way, we pose a systemic risk to the entire country if we go under because we've borrowed so much money and we have all of these homes that we are building for all of these Chinese consumers.

And they basically said we're a systemic risk, which I think is like a pretty cheeky move in general because you're putting a pretty strong arm under the government to say, if you let us go under and it does collapse the economy, we told you so. And if they do nothing, you know, and that ends up being the case, it just looks really bad. So you're sort of in a cheeky way, strong arming them for the future. While also at the same time. It worked in the U.S. It worked in the U.S., right? I think it works, which is the funny thing. I mean, people have, it's this moral hazard problem, right, where there's a few levels of moral hazard here.

There's one where you're borrowing money to fund all this growth. And so you're buying properties. You don't really care what you're spending to buy these properties or to buy the land because someone else is financing. And it's not my check that I'm writing. It's some bank or some hedge fund or whoever it is that's giving me the money. In this case, they were borrowing from literally everybody. I mean, they were borrowing from employees. They were borrowing from the retail sector.

It's really, really bad when you get into the weeds of it. But basically, all of a sudden, they couldn't borrow to just keep growing. They weren't growing quite as quickly. They were having trouble meeting these payments. And then you start getting this cycle. It's the de-leveraging spiral that people talk about. And there is both a technical side to it, i.e. not making able to meet payments and a psychological side to it, which is suddenly the narrative starts building that, oh, Evergrand's not so healthy. Maybe they're not going to be able to deliver these homes.

Maybe they're going to go under. And then all of a sudden it gets more expensive to borrow. people start demanding payments quicker. Your vendors start asking for payments quicker. Suppliers start asking. And the whole cycle starts to build. The media starts reporting on it. It becomes a story.

And it just starts to spiral, both the technical and the psychological. And that's what happened to them. And when you look at it, to me, it's like the finest example of this thing called Dornbush's Law, which is this amazing thing that not many people have heard of, which is with any great crisis, it takes a lot longer to happen than you think it will, but then it happens much more quickly than you ever thought possible. And so it's like this gradually than suddenly thing with bankruptcies or with unwinds. And that's really the case here. I mean, people who have been observing Evergrand for years have known this was a hot mess for a long, long time, but all of a sudden

you're getting hit. And in the last two, three weeks, the narrative has materially accelerated, and you're in this environment where they're very quickly, you know, having the rubber meet the road on all of this. Sahil, can you help us measure the amount of systemic risk that Evergrand poses to the Chinese economy? I think it's pretty funny that they read an email to the Chinese government saying, like, hey, we're a systemic risk, implying that they definitely knew that they were a systemic risk, and they took on all this debt anyways, which is kind of like, you know, an FU to, you know, everyone around them, right?

But, like, how much of a systemic risk are we talking about? Yeah. I mean, the question when you have done, evaluate something like that is, are they just saying it because they want to have a bailout in the event that they go belly up, or are they actually a systemic risk to the economy? You know, is this the Lehman moment that everyone's been calling it? When I look at it, just on a kind of pure numbers basis, you have $100 billion of debt here, give or take, $300 billion or so of liabilities.

When you compare that to like, you know, the financial crisis, 07-09, you were talking about the trillions of dollars of CDOs that were outstanding. it was a different quantum and a different magnitude of overall exposure in the economy, not to mention the multiples that came off of that on side bets and whatnot, and how that played through the whole economy. The similarity, which people want to draw upon, is housing, right? You're like looking at the housing, you're looking at real consumers, middle class, working class consumers in China.

But the level in the quantum of this is just muted relative to what we had seen back then. So I actually think what they did by saying that was much more of a play to get bailed out, because it's better for you if you get bailed out, right? You don't lose all your money as an equity holder. Maybe the bondholders don't lose all of their money. It's just a better situation. But the reality of what they're facing now is dire, and it's really a mess, and it's embarrassing for China. I mean, you have something like 1.6 million unfinished homes that they are on the hook for, have accepted some deposits for, and seem like they will probably be unable to deliver. That's like $200 billion worth of home value or something like that. They've been offering up these

wealth management products. They started getting creative basically when they were running out of money and saying, hey, you employee or hey, you retail investor, give us some money. We're going to give you a high yield investment product for that. In reality, they were just taking that money and using it to fund their losses and trying to pay off debt, you know, take money from one person to pay off the other guy. I've seen that movie before. And it's ugly. It's just an ugly situation. They were like advertising for that in elevators in the properties that they had developed. It's really a pretty embarrassing situation, and it's a black mark on China right now, I believe. Okay, so you said they have 300 billion in assets and only 100 million in outstanding debt,

which feels like a pretty safe ratio, right? Sorry, 300 billion in liabilities. Oh, okay. Well, okay. The inverse. They are way over levered. Okay. No, it is an ugly situation for sure.

And it's not clear that there's really an easy way out of it. You know, and when you look, and if you're in the, you know, Chinese policymakers' shoes right now and you're looking at it, there's sort of two options, right? You're cut in a tough spot. You basically can either bail this out. And the downside of that is you're condoning financial excess, right? This founder has made $5 billion on dividends over the last several years while a bunch of Chinese consumers are getting blown out, having homes that they paid for, that they're not able to get, all of the vendors, suppliers, the bondholders, et cetera, getting smoked. You can bail them out and condone all of that and say it's

fine, do nothing. You can do nothing and let, kind of let everything unwind. Just let the whole system fall apart, let the Chinese consumers get stuck with no money, let everyone get kind of wrecked, right? My best guess is that they end up shooting the middle. They kind of adopt a middle ground where basically they find a way to obviate the moral hazard, which is probably wiping out most equity holders, making sure the founder, whoever the largest shareholders are, feel real pain associated with it. China's pretty good at that. Make sure that that happens. But the consumers and probably some of the senior bondholders, people kind of further up the waterfall, end up being made whole or close to hole so that you don't have this like massive systemic thing flowing through the economy and so that

China can continue to, you know, create this aura of power and control over what is an economy that I think is really on loose footing. So there are a ton of parallels here that we're seeing. with 2008, except for the fact of the size. The magnitude is orders of magnitude, much smaller. Instead of happening in America, it's happening in China. And importantly, in this scenario, in the Evergrand scenario, we already had 2008, right? We already had these lessons to learn. And also, another main difference, I would say, is like you alluded to, the disposition of the Chinese government is going to be very, very different than the disposition of the American government in 2008 when the...

crisis was a first-time crisis and also orders of magnitude higher. And so you're saying that like, and something I'm actually hopeful for is that these people would have, maybe they don't use this term in China, but in America we would have used the term golden parachute, right? Like, sweet, you levered up your company, you extracted a lot of the money, you paid yourself a big bonus, and then you crashed the economy, and then you got to bail out from China. Hopefully, China actually is seeing that behavior. And like you said, going after those key individuals in specific rather than just like allowing the market to clear, having a lot of pain for the individuals and for the normal equity holders.

Yeah. Yeah, no, I mean, I think your characterization is all correct. The question I would have is like, is this the tip of the iceberg, right? Even if this one event is not the Lehman moment, maybe this isn't the size or scale where you could have it become the massive downfall, is this one of the precursors to that? Is China, you know, sitting on a really unstable footing where this is one of the things and then several other cards fall and all of a sudden you have this spiral of the overall debt bubble that's been happening there for a while? The fact for China that's different than the U.S. is this is going to be a precedent-setting event for them in some ways of how they choose to handle on a large international scale something of this magnitude.

You know, the U.S., you watch the big short. Anyone that's seen that movie at the end of it, they have that whole tongue-in-cheek scene. of like all of these guys went to jail, right? And then you kind of get the dot, dot, dot, nope, not a single person that, you know, had taken on all this ridiculous risk and made all this money off of all of the consumers who got screwed. Not a single one of them went to jail. I mean, we were in the U.S. in one of the richest countries in the world, super successful. There were these people making tens of millions of dollars. You had real consumers who lost their homes who were tragically crushed for the next decade. And those guys got off. Not a single one of

them went to jail. And China has a moment in time where they have to decide and they have to take a position on what's going to happen with this type of obvious financial excess and this type of risk-taking behavior. And they need to set a precedent for whatever it is in the future. The scary thing is, you know, it goes on behind closed doors, right? Who knows where, you know, the founders, where the key stakeholders in this are going to end up, what's going to happen? But the world is watching. You have the entire world's media now really hyper-focused on this situation. And so China has a big opportunity. it's also a big risk of how they're going to handle it and what's going to end up coming from it.

Yeah, you said the world's eyes are definitely on this. And you also said earlier, Sahel, that China doesn't really like being embarrassed, right? This is an embarrassing situation, and they don't like being embarrassed. This is how it first came on my radar. And many folks in the West were these kind of these protests that we saw. This is why David's parallel with 2008. I know others have made it seem so apt, because we saw all of these images of Chinese citizens, the consumers that you're talking about, the consumers that are getting hurt from this incident, like storming, I think, the Evergrand offices.

And I'm just curious. So from the perspective of one of these consumers, one of these protesters, almost like an Occupy Wall Street-type microcosm moment, are they basically getting screwed out of their homes? So they put some sort of a down payment expecting Evergrand is going to provide them a home. And now suddenly there's this creeping realization

that they're not going to get a home and they're not going to get their down payment back. And so they're pissed off and they storm the building. And my impression is China doesn't really like protests like these, right? Like it's like, let's be quiet about this, right? We're an organized society. We don't operate this way. And when I say China oftentimes, I mean the CCP, you know, especially.

But like, what is the outrage, by a consumer. Are they just getting totally screwed right now from this deal? Yes. I wish there was a better answer than that. I mean, the reality is kind of two-fold, or three points I would make here. And it's bad and it gets to worse. So the bad side is they put up money for these homes. And when you do that, you expect you're actually going to have the product delivered. You know, if I go give someone money to do work at my house, if I, you know, pay a contractor to do some work at my house, give them $10,000, come fix my bathroom. I expect that that person is going to show up, do the work, finish it,

then I'm going to pay them upon completion, whatever the remainder is. And there's a bond. There's a trust that's built up in that, and that's what the economy thrives on. We need trust in these systems in order for the economy to work. Suddenly, if I go pay the biggest property developer in China some money to come and build this house for me, and I give them my life savings up until that point, and then I'm going to go buy the rest of it when it gets done. A few years later, that property developer no longer exists. and that house that I thought is built is like a ball of concrete that's sitting there unbuilt

with grass growing all over it, et cetera. It looks really ugly. And I didn't get my house. Where does that trust go? How do you continue to have trust in the economy and the government, et cetera, when that type of thing happens at scale? It's really scary to think about. And that has lasting effects as you think about playing that out over the coming years because

that consumer now, I don't have trust in large institutions if that was a big company that told me to trust them and told me to give them their money. And now this happens. and then overlay on top of that, this whole thing they did with creative financing, which I hate as a phrase, but it's the reality of what they did was then they said, okay, shoot, we're running out of money. Let's go borrow money from everybody that we can. And so the way they did that was they said, oh, here's this high yield investment product that you can buy from Evergrand. And, oh, we're a safe company.

We're the biggest property developer in China. Trust us. We're good. They put up, you know, papers in the elevators of properties that they had already developed where people were living. And you're living in the property. So, of course, you trust it. You're like, oh, this is real. This is a real company.

I can invest in this is fun. And people gave them real consumers who had invested a lot in the homes already, or retail investors who were just looking to have some sort of yield, gave them money. They strong-armed employees into it. They said, oh, if you want to get your bonus at the end of the year, you have to give us this money and buy one of these products. Otherwise, you might be in jeopardy of not getting your bonus. So what do you do as an employee?

You give the company your money. And now suddenly, they're missing payments on it already. right, because they're going under and they don't have the money to pay it. They were promising 10 plus percent interest rates and it's gone. I mean, the money, who knows where it went, they used it to fund some losses elsewhere, they used it to pay interest payments on some other debt. And so the consumer in all of this is getting totally screwed. And that's what China has to really contend with. And that's the biggest risk in my mind from a power struggle perspective is they need to prove to their own population and to the world who is looking on that there is some level of

control over this and that they can actually support their people in a meaningful way who have gotten really taken advantage of in this situation. There's a frequent saying that if we had public, auditable, open permissionless blockchains running our financial system in 2008, 2008 wouldn't have happened because of the level of transparency that blockchains bring to financial markets. Like one of the big messes of 2008 was there's this gigantic spaghetti network of financial contracts that no one could parse apart. do you think that if is there any amount of like and you're talking about all this trust that needs to be established in institutions is there any amount of just like this is happening because these markets are inherently obfuscated or black boxed or just difficult to read or was the information that caused this crisis more or less open to everyone and people just weren't paying attention is there something that the is there something to open transparent blockchain financial systems that could have fixed this yeah absolutely right trustless systems where you no longer need to trust whoever's the counterparty on this because

there is a system that sits in between that can create that will clearly help this type of thing. You won't have the type of like rampant activity that leads to this type of cycle in the same magnitude that we've seen it. The reality here is like there's nothing really new about Evergrand. I hate to say it, right? Like I wrote a bunch about it. The one thing that jumps out at you if you've been around or if you've studied financial history is there's nothing new under the sun. This is the exact same thing that happens over and over again in history. You get into these bull markets, it's easy to borrow. It's really cheap to borrow. So you start borrowing more. You grow a bunch because of that. Suddenly you're not growing as much. I can't pay my interest. You start having the unwind.

This happens. The thing that's making it more interesting is the overlay of the geopolitical side with China, all of this creative, you know, fraud, borrowing, all of the stuff they did where the consumers are getting screwed over. And you have this massive public spectacle of all of it that's playing into it. And I think that's the most interesting part of it because the reality of the situation is this thing has played out time and time again. Will blockchains, crypto, all of that help in the future with, you know, developing more trustless systems around all of finance? Absolutely. No doubt. I still think we're probably a few years away from that becoming more mainstream. And as we've seen with what China did last Friday, I think we're a ways away from having China

wanting to adopt anything like that. Well, you know, another reason people might point to is just debt is so cheap. I mean, if you're ever grand, why not just keep stacking up that debt, right? Like, interest rates are close to 0%. And central banks have had this easy monetary policy for like the last, you know, 10 years and continuing to decrease things, decrease risk. And so do you think that this played a major role? in this. And maybe this is also why it's not just Evergrand. Maybe Evergrand is the first kind of

rotten egg that we discover, but maybe these rotten eggs exist in China and all sorts of other economies because the cost of capital is so low and things have just moved down the risk spectrum to the most uber risky. Does that play a role in this? What do you take on that? I mean, artificially low interest rates play a huge role in risk-taking behavior because you're not getting yield here. You know, if you're an investor and you're not getting yield on, on, you know, on treasuries or on whatever is really low on the risk spectrum, you start chasing it elsewhere. And so you're starting pushing, pushing further, further out. And you talk about, you know, where stock markets have gone to and people, everything that's priced in, all the growth,

it's because people are going further out on the rest spectrum. You know, you have these artificially low risk-free rates, quote-unquote, on one end. And, yeah, it drives irrational behavior. It's a dislocation in the market. I personally am a pretty free market guy. I tend to think of myself that way. And so the reality is when you start disrupting free markets by taking whatever actions, whether it's explicit, like in Japan, and you're going and actually just buying on one end of the treasury curve, or if it's implicit where you're the Fed and you're issuing guidance on what interest rates should be, those things all artificially lower interest rates. And so a company, yeah, if I can borrow it, you know, 1.25% versus having to put in equity capital that has 15%

implied costs, that's a no-brainer as long as you can do it. And as long as you're growing to pay it. So is there a sense that like the central banks themselves have kind of created the problem and they've created the systemic risk that caused ever grand to happen? Like how has the CCP and the central banks actually contributed to the conditions that caused this mess to begin with? Yeah. And this is global. So you can point to the central bank of China, you know, CCP, you can point to the Fed. You can point to central banks globally.

I think there is a pretty widespread agreement now that it's probably. time to kind of get back to more market-based interest rates and start allowing these things to float more readily. They took down interest rates a long time ago, and they've never really come back up. When you look at the long-term chart of it, we've been in a just like systemically lower interest rate environment for a really long time. And it causes weird things to happen. People take weird actions when that's the reality. So I don't think that's a China thing, the U.S., the Fed, I mean, what they've done with interest rates and what it's done to risk-taking behavior on the other end of the spectrum. Does it create bad actions?

Yeah, and that's the normal cycle. If you go read, Ray Dalio has his kind of amazing tome on market cycles and market crises. And it's incredible. And it's played out time and time again. You get, you know, an environment of really low interest rates and people start taking a lot of risks and it leads to excessive risks. And they raise interest rates and suddenly you get a blow up and it comes back down. And it's just a cycle that has played out time and time again throughout history. And I think we're just seeing another version of it now. The difference here is, is this is really a first on the public stage for China. Absolutely. And so you kind of alluded to this, your best guess, on what China is going to do as a result of this. But yeah, I'm curious if you could kind of rearticulate. So they could either, I guess, decide to bail out their existing investors, the banking system, or bail out the people or maybe sort of thread the needle and try to do a little bit

of both. What actions do you think they will take to try to, uh, you know, fix this issue. Yeah. It's all about power. The whole thing comes down to power for them, and the best thing they can do for their power, both actual power and perceived power, is to keep things as quiet as possible and handle it as quickly as possible. And so I tend to think that that is the solution they will push towards. And what I think that looks like, if I had to guess, would be something where bondholders, for the most part, are okay. And you kind of have the senior bondholders in particular that, you know, are sitting further up the waterfall and

end up okay and bailed out. And you have consumers that end up generally okay. Those consumers who gave cash or the wealth products, basically people where you don't want these protests happening. And to your point earlier, you want to keep things quiet. You don't want this to be all over the news. You don't want those pictures out everywhere. And so you figure out a way to bail out consumers. You figure out a way to bail out those more senior holders. But the equity, for the most part gets wiped. And people that were the speculators in all of this, including the founder and primary shareholder, who has made a ton of money off this, is the one that ends up on the hook. And I think that that's probably the right middle ground solution for them to go with, because

it does obviate the moral hazard problem where you're not condoning this financial excess for future. And I won't be surprised to see the founder in some trouble publicly and, you know, and made an example of in some cases where you send a message to other entrepreneurs and other builders that this type of financial access won't fly. And if that's his fault or if he's just a casualty of what is happening and the need to set a precedent in China, I don't know. I don't really have a response to that. But I think that's probably what you end up seeing happen over the coming weeks. And in China, this doesn't require a legislative act or sort of a congressional act per se, right? So like, it could be a few senior party members who basically dictate that this is the way

it's going to be, and then so it is. Yeah. I mean, it's the downside of democracy, if you will. I think it was like Winston Churchill, who said that democracy is the worst form of government, except for all the other ones. You know, in a free democracy, you have to have public hearings about all of this. You have to, you know, really play it out, have due process around all of it, et cetera. It's messy. It's out in the open. It's messy. It's challenging. You have to get a lot of people on sides around it. I mean, we've seen it with them trying to manage all the COVID recovery bills and all of the different, you know, money printing activity, everything that they've done over the last year is challenging. You get everyone weighing in on it. You have two Fed chairs that are having to resign because they were like insider trading or, you know, allegedly involved in those things. It's messy. In China, a lot of this can happen behind closed doors. And you've already seen this in the last week. There was a bond payment that was due. There was some like really vague statement that Evergrand put out that they had reached some sort of agreement. No one really knew what the terms of that agreement were, but they weren't in default. And so things are happening behind closed doors as we speak. Decisions are being made.

And my guess is that's how it plays out, is that it's going to be pretty hush, hush. You're not going to get a whole ton of clarity around what's happening, and the results will be what they will be. Well, I think you may have just answered my next question, but I'm going to ask it anyways. Now that this event is roughly 10, 11, 12 days old, is there any update we have? Anything new that's been added on to the story, any progression at all? Yeah, I mean, they have a lot of bond payments coming due. So there's going to be a lot of updates. I think it's something like $7.5 billion of bond payments that are due in 2022, big chunks that are coming up due.

There was one last week. I forget whether there's one this week, but they definitely have several more that are due in 2021. At every single one of those turning points, there will be an update because people will want to know what the payment made. The way it works in China for most bond payments is that they're done through a clearinghouse. And so like a normal payment, it goes through a clearinghouse, it goes to all the holders of it. when you hear in a statement that a bond payment or an agreement has reached outside the clearinghouse, that tends to mean that there was some form of restructuring, a payment plan put in place, something where they didn't pay it in full. And so last week when they made that announcement, that was kind of the reading between the lines version of it,

was something happened behind closed doors, some sort of agreement was reached, and it was done outside the clearinghouse. I would expect you see a lot of outside the clearinghouse activity from Evergrand in the coming months and quite possibly six months. So the last question, because we want to spend some time on crypto here in China's crypto ban recently. But the last question is kind of like about contagion. I mean, should we be worried about this, Sahel? Like, is this going to infect other markets? Is this just sort of the Lehman moment, as you will?

Or can we just like stop worrying about this now? What's your take? I would say I'm less worried about it than I was two weeks ago when I first started reading about it. I just spoke to more China investors who have been really deep in this market and have a deep understanding of it. Who had been observing it for a long time, had kind of come to the conclusion that it was relatively muted in terms of how extensive the impact would be if it unwound, had come to terms with how China was probably going to handle it. And so I would say today where I sit is I'm less concerned about this being the single moment that leads to global contagion. I think the concern I have is that this is the tip of the iceberg. And there's a bunch more of these things sitting out there in China and otherwise that, you know,

that we've been in a bull market for for 10 plus years now. And so you're going to start having these tails of financial excess and de-leveraging spirals that when added up, you know, start to reach into the trillions of dollars. It's not just the $100 billion moment of an ever grant. Right. Everyone's worst fear is that like because the bull market has gone on for so long, everyone has positioned themselves accordingly to number go up. And when number stops going up, then everyone gets caught with their pants down. So Hill, we want to turn the conversation towards the crypto side of things, why this is relevant to crypto. Obviously, there's that recent China ban which we all have heard China ban crypto. We've been here before, but this one feels different.

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bankless. All right, guys, we are back talking about China, talking about Evergrand. Now, we're going to continue the discussion and talk about China's latest crypto ban with Sahil Bloom. This happened on Friday. So crypto industry, I mean, we felt these bands before. Like, this has got to be like the, you know, 60th or 70th time. This has happened. Although, I will say there were elements of this band that maybe felt a little bit different. And, you know, one thing that came into mind is broadly speaking, apparently there were 10 agencies, including the People's Bank of China, that were involved in China's in this band. So some insiders are saying this is a clear sign of the seriousness of the ban. But it was also at the same time, there's no secret that China

doesn't like crypto, doesn't want it inside of its borders, just that. this summer, Sahel, we saw a massive exodus of crypto mining from China. And, you know, there was meat to that ban, too, in that we actually saw crypto mining facilities, like, completely leave, set up jurisdictions elsewhere. I wonder if you could set that kind of the high level picture from everything you've seen. Why do you think China is taking this hard line on crypto? What's in it for them? Well, I don't know if there are any Dune fans out there. I'm a, I'm a sci-fi nerd, but the whole thing of he who controls the spice controls the universe. This is like this is money, right?

So for China, money is at the heart of everything for them and they need to control it in order to continue to have control over the people, over their economy, over, you know, geopolitical space in the long term. And so for them, crypto is a big risk. You know, they view it in a really closed-minded perspective in my mind. And the way they think about it is if someone else is in control, and is kind of a sovereign individual, as it were, that's scary to them. And so when they're taking these actions, I think that that's the broad overlay to it,

is just having control, showing power and the ability to do this. And it sets the tone for whatever they're going to do on digital currency, you know, the digital yuan or whatever they're going to pursue in that regard. That's all around this same environment of trying to create control, trying to create power. The flip side of it, I think it's a massive opportunity for the U.S. from a geopolitical perspective to try to take the stance of being pro-innovation and pro-crypto. When you think about capital flows, that's everything from a macro perspective, right? When you're looking at countries, and there could be a massive capital inflow into U.S. markets

if you take a more accommodating stance on these type of new technologies and new progress. So that's kind of my general thought and general perspective on it. And the reality with these things, as I think about it, just to use an analogy, is like you take a hose, you turn on the hose at full blast and then put your thumb over it. That's like innovation. You try to stifle it and you put your thumb on it. It doesn't last very long. Suddenly it starts squirting out from around your thumbs and it goes nuts and goes everywhere. My guess is that's what you're going to end up seeing in China as it relates to crypto. That makes a ton of sense. Everyone knows in crypto that crypto is money that's designed to be outside of the control of nation states, right? And China is like

that's pick one country that doesn't like that the most and that's China. But I think another question I want to ask is why now? Because China could have actually implemented a ban back in 2017 and stuck with it. And people are drawing the associations between this ever-grant crisis and people using crypto as capital flight vehicles to escape this crisis, right? Is there any association between this ever-grand crisis and the crypto ban? I think there's probably a couple ways you could think about this. One would be diversion where you're just like, oh, crap, we're on the, you know, we're on the global stage for something not so great, and we have this little crisis going on. And so let's, like, throw out this ban, you know, like press the press release, whenever it was

supposed to go out and shoot it out now, because we want to divert everybody. It's like, I saw this great tweet the other day that just said it had like a, you know, CCP party calendar. And it was like issue press release banning crypto. And it was like last Friday of every month. And I thought that was so funny because it does feel like, you know, deja vu suddenly, okay, another ban on crypto. I get it.

You know, what you're doing. The other way to think about it is, you know, know, they've been playing this game for the last several years of like, you know, you see someone doing double-dutch jump rope and they're like waiting to jump in, waiting to jump in, waiting to jump in. And I think China has been playing that game in terms of when to jump in and just take this strong stance and this ban. The challenge for them is it's just gotten so big. You know, if they had done it five years ago, not many people would have talked about it. It wouldn't have been quite as big of a news cycle.

There wouldn't have been as much capital flowed into it. There would have been all the institutional capital that has flowed into it. And that's a big issue now because now it's gotten to be where, like, you know, you talk about too big to fail. Like a lot of this stuff feels too big to fail. You have life insurance companies that have it on their balance sheet. You know, what are you going to say? Like, how do you manage that? How do you do that?

They're college endowments. So it's, you know, it's a tricky situation for them now because I do feel like they've let it get pretty far before making this type of strong action on it. Yeah, it's interesting. I think there's another reaction from. from people in crypto, which is basically like, why should we take this ban seriously? I mean, we haven't seen much from the other bands. Why should this one be any different?

And one of the things, aside from the number of agencies that were involved in this particular ban that might be different is some of the language that was used. So this from a coin desk article I'm going to read, and this is directly from, I think, the statement that China, the Csians, CCP has made that there are legal risks involving crypto activity in any legal person, unincorporated organization or natural person who is investing in virtual currency and related

derivatives violates public order and good customs, right? So some of this language was a little bit stronger. But the thing that really, I guess, made me think that this is different than previous times is we've also seen some of the major exchanges start to react. So, you know, Chinese-based, China-based exchanges like Wabi is one. This is a look at their net outflows of ether from their exchange. And you can kind of see this like tank all the way down. So they had $1.3 billion worth of ETH that was removed from their exchange just on September 26th, right?

By far the largest ETH outflow to date. This is Bitcoin and ETH held on Huwabi over time. It's courtesy of coin metrics. And you can kind of see maybe some people were starting to front run what this would look like. I mean, maybe that Huobi is no longer as competitive as it used to be. There might be other reasons for this outflow. But a lot of, yeah, defy, a lot of capital has been removed from these Chinese exchanges. And this is the token price of Huobie as well. And they have actually decided to close doors to any Chinese customers as of, I think they're going to phase them out. So by the end of December, they will no longer be accepting any Chinese customers.

So this indicates to me, it's like there might be a bit more to this than previous bands. Just as we saw like miners start to exit China in earlier this summer, you knew China was serious about this. Now we're seeing exchanges exit China. So that might be some of the reason. David, I'm actually interested in your take because you've been here for a lot of these as well, these China bands. Does this one feel different? Yeah, it does.

And it's because this is the first time, like you said, like the evidence actually, the charts and the data actually line up with the narrative, right? And the reason why we all started paying attention to that the proof of work ban out of China was because we saw the hash rate drop. We actually saw pictures of miners putting their miners in boxes. And from what I've gathered, when it comes to understanding China's policy from the Western point of view, because it's very much of a black box because most of us do not speak Mandarin and do not have internal to China connections, we just kind of have to wait for actual real evidence to actually emerge because China can implement a policy, but it doesn't actually mean anything unless the local Chinese markets actually react to that policy.

And so it's really the reaction to the policy that is the signal that the policy is actually real, not the policy itself. Like when America does policy and like, you know, makes a statement, that is generally accepted as absolute truth. But with China, when China makes a statement, it's not really true unless you actually see the people and the markets and the businesses in China actually reacting to that thing because they are so much more tapped into the policymakers of China that they know what to react to and what not to react to.

It's just a different world over there. Sahel, any comments on that? Yeah, no, I generally agree with everything that's been said. I view this through the lens of just like first law of thermodynamics, law of conservation of energy. It's not like this is getting destroyed. It's just squeezing somewhere else. And so all of those outflows that you pointed to,

that's someone else's gain. And there's the opportunity for some other sovereign state, to become accommodating around these things and become accepting and, you know, build innovation and businesses. And it creates a ton of jobs as people are building Web3 around these different countries. And so I think if China's not going to take advantage of, you know, what could be the next version of technology, you know, if Web3 is the natural extension of all of this, then that's somebody else's gain. And if it's the U.S. and there's a lot of, you know, funding and accommodation around these new technologies, protocols, everything that's being built, that's a huge opportunity economically, you know,

both with the actual currencies, but more broadly with jobs, with everything that's going to be built around it. So I'm actually, you know, for me, like I think long term, this makes me bullish on what other countries can do to become accommodating around these things. And it's not a shock to me that China is taking this kind of stance on this. They hate the idea of any individuals having power over the state and being able to take control of the money, as it were. Yeah, absolutely. It's it. So this kind of brings us into maybe the geopolitics of, this. So there's there's definitely some, I guess, geopolitical rivalry between the U.S. and China going on, right? And so, but although I will say both governments do have an interest in some level of

control, right? You might say, you know, the Chinese government has, you know, a far greater level of interest and far more restrictions on individual self-sovereignty. But the U.S. government, I think I would argue also wants to be in control, needs to be in control too. And they've come out recently, at least specific agencies have the SEC in particular, and there have been murmurings, all sorts of different agencies in the U.S., about restrictions on crypto and increasing the tightening on crypto in various ways. So I'm kind of interesting your take on how China banning crypto and taking an even more harsh stance on crypto might impact what the U.S. does next, right? Because there's one way to look at this, which just says, yeah, all governments are the

same. They all kind of want control. And so the U.S. is just going to follow China's playbook. There's another way you could think of this, and lens you could think of this, where it's just like everyone's in kind of this Mexican standoff, right? And when China goes left, the U.S. then immediately wants to go right. It's kind of like, you know, Republicans and Democrats in this country a little bit, right? Like, oh, you're going to wear a mask? Oh, I'm definitely not going to wear a mask, you know, or the opposite. Do you want to wear a mask?

Okay. Like, you know, we're going to add multiple layers of masks, you know, just to do the opposite of what you do. So I wonder if the U.S. might decide as a result to be more embracing of crypto given where China is going with this? What's your take on how that plays out? So I don't have a whole lot of faith in government in general. And I hate saying that because I grew up and had a lot of opportunities in the U.S. and I think it remains the greatest country in the world. But we have a whole lot of deficiencies in government. And so I have almost zero

faith in our ability to be highly strategic and long-term oriented in decision-making around these things. I would say the most strategic thing and the most long-term thing, we could do right now would be to take an accommodating stance on these things, would be to embrace crypto, would be to embrace all, you know, Web 3, become the central hub globally of Web 3 technologies and, you know, foster all of it in the same way we have with other technologies. You know, the same way we've provided subsidies for coal companies for a long time, provide subsidies and tax breaks for companies that are building the future of innovation, the future of technology, etc. Do I think that's going to happen? No. I think that the easiest solution is to continue to take a, you know,

a more adversarial stance on all of these things. You've seen Gensler and what he's doing. But the reality is, in a lot of ways, the emperor has no clothes, right? Like you're trying to take this moral high ground as the government and say, oh, crypto is, you know, this bad thing and it's dark and who knows what they're doing with this money. And then you have, you know, two Fed chairs having to step down because they were, you know, taking actions that were probably illegal in terms of their trading activity.

And so how do you kind of rationalize those two? I don't know. And that's the fundamental tension that our government is facing right now and its ability to deal with these things. But if you view it in a longer term lens, there is a real opportunity that gets created when China takes such a hard stance on something. And you just hope that there are enough forward thinkers in Congress and in power in the U.S. to actually take advantage of that. I think private markets, by the way, and private capital is taking advantage of it. I mean, you're seeing some of the biggest forward-thinking venture funds in the world pouring so many. much capital into crypto, into Web 3, some of the best technologists of the last 20 years

are the ones that are leading the charge in terms of building this future. But from a government perspective, you don't have a whole lot of smart technological thinkers in the government if you go look at the, you know, in the roster of Congress. And so that's a huge issue because you're going to continue to face these, you know, misunderstandings and inability to really comprehend what's being built and what's happening. And it's going to hold us back in terms of taking advantage of it strategically. So overall, do you think a China band is bullish for crypto? I think everything is long-term bullish for crypto. I mean, I just think it's like the natural trend of progress and technology and society is where we are headed with these things. And so I think that like these blips along the way,

these bands, the different people that are going to try to take control, it's like trying to put, you know, a dam in front of a river that's moving. It's just going to find ways to pour around it and continue marching towards where it's ultimately going and where it's ultimately going and We're going downstream. Progress is being made. Real technologies and applications are being built. And you can't stop that in such a simple way. And so I continue to be just long-term bullish.

Short-term, who knows? I mean, governments do crazy things. It causes price impacts. I don't really have a view short-term ever on things. But long-term, the technologies are real. They're here to stay. And there's real useful, high-utility stuff being built, which at the end of the day is what matters.

Yeah, well said. I think crypto is far more inevitable than most people give it credit for. And so most of these things do end up being blips. I'm curious, as we draw to a close, you've mentioned this several times that this, this Evergrand thing could be kind of just the start or like just the tip of the iceberg. I'm curious if you, like, what could happen next? What might be the next brick to fall or, issue that we have if some of your concerns about the Evergrand issue being more deep-seated pan-out. Could we see, is it more real estate in China should be looking at? Or should we be looking at other corporations in general that have high amounts of debt? Or if things go wrong, how might they go wrong? Yeah, I think the first place to logically look is to other property developers in China. You think of like you have a crisis, you start kind of like expand. ending out from that core in terms of where you look to see if there's spread or if that was the

tip of the iceberg. Property developers in China, there's probably a bunch that are over levered to some extent, none to the extent of Evergrand, but it's still a risk. And if you start losing trust in the property development sector in China and people start pulling their money or there's, you know, increase in the price of the debt, those things can all have an impact where even if you're more lightly levered, you can be the next one to go. As you start to expand out from that, I think that's just you start looking to different sectors. Are there, you know, tech darlings that are over levered or, you know, not grounded in real functionality that have been priced up to the hilt that have a bunch of debt from, you know, an extensive number of the banks or from municipalities or from a bunch of the funds?

You start to just see all of these connection points in this like spider web of the global economy as it has become and figure out, are there other things, you know, that are going to start playing out? And the reality is most of these things are known by somebody and someone has been looking at. about it or talking about it. Twitter is this incredible resource where when I went and I was researching, there have been people talking about Evergrand for the last year. And you go back and search some of the things. There were like real credible people that were saying, this is a mess, this is a house of guards for the last year. But the narrative only caught up to it a month ago, three weeks ago. And to my point on like the technical plus the psychological with these type of spirals, you really need both. The technical starts to play out. But until the psychological hits,

that's when you really get this acceleration of these spirals. So, you know, I think it's about finding the technical looking through it if you're going to spend time on it, figuring out where that exists, and then biding your time until that psychological side starts to play through. Sahel Bloom, thank you so much for joining us. This has been an absolutely fantastic discussion. Where can folks follow some of your work? So I'm at Sahel Bloom on Twitter. It's just my name. I've got a newsletter at www. Sawhillblum.substack.com, I think. Also have a kind of podcast and show launching with my good buddy, Greg Eisenberg, soon.

So stay tuned for that. It's going to be a blast, and we hope to get you guys on there soon. Yeah, absolutely. Can't wait. You are a talented content producer, sir, and we look forward to future collaboration. Thanks for joining us. So Bankless Nation, some actions item for you. Follow Sahil on Twitter.

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