The Breakdown - Laos Does About-Face on Bitcoin to Attract China’s Mining-Ban Refugees

Episode Date: September 17, 2021

Today’s episode of “The Breakdown” looks at a variety of topics covering the evolving relationships between states and digital currencies, including: Inner Mongolia’s fight to keep crypto mining out  Laos’ official about-face on crypto and attempt to attract China’s mining refugees CZ’s latest in Binance’s whistlestop tour to change regulators’ perception of the company Europe’s upcoming ECB trial  Coinbase’s derivative ambitions  And a big raise for Avalanche  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Mlenny/E+/Getty Images, modified by CoinDesk.

It's hard not to see how this makes sense. China bans crypto mining. Miners start to figure out where they're going to pick up and move operations. Some might move to North America. Indeed, we've seen that happen, but others might be looking for easier overland moves. Boom, there is Laos bordering to the south. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, September 16th, and as you probably heard, yesterday's show was fiery and focused on a single big topic with a few little caveats. But today, we're going to do kind of the opposite type of show. A grab bag,

looking at a variety of topics, things that have maybe flown under the radar because we're screaming about Gary Gensler and Elizabeth Warren. Let's start out with the latest out of China. When the history books are written, the actual factual mining ban in China will be a key part of the crypto story of 2021. Remember, the first rumblings we got about China targeting crypto in May, we sort of brushed off as more bluster and reconfirmation of old policies. At first, it was just the banks reinforcing that they weren't allowed to interact with crypto and so on and so forth, but that ultimately changed. And when it changed was when the vice premier made a statement saying that they were going to look into a Bitcoin mining ban. That signaled to all of

the local provinces that this was serious, and it also signaled that to the local mining operations. That weekend, we saw one of our biggest drawdowns coming off of the rally between December and April, and part of that was that miners were actually liquidating their Bitcoin and Ethereum to try to give themselves mobility to make decisions quickly. Subsequently, of course, we've seen one of the most significant, if not the most, significant hash rate migration in Bitcoin's history. Much of that has been to the benefit of North America so far, but that, as we'll see in a minute, could change. In either case, the Blocks-Wofi Zhao has a new report out about how provincial governments in China are dealing with the ban.

In Inner Mongolia, the Development and Reform Commission has hired a contractor to help it monitor for illegal mining operations. This is interesting because there are reports that some Chinese Bitcoin and Ethereum mining operations have quietly even secretly resumed their operations. This partnership with the contractors suggest that the government is going to stay on the case. Now, one interesting nugget from the bidding process is the government's 10 bullet list of the areas that it wants to know about, which includes the production and development process of crypto mining, domestic and international policy stances and regulatory environment over crypto mining, the initial purpose and policy perks that Inter Mongolia gave to big data

and cloud computing enterprises. The cost-revenue energy consumption and taxation breakdown of crypto mining operations locally. The physical distribution breakdown of crypto mining operations locally. Techniques for differentiating crypto mining operations from other big data and cloud computing projects. Analysis of mainstream mining hardware and their energy consumption breakdown. Relevant legal basis for clearing out crypto mining operations. The impact of shutting down mining operations on achieving the carbon neutrality goals

and long-term regulatory responding mechanisms over crypto mining operations. For those who are enthusiastic about a Bitcoin network that has less involvement from Chinese miners, the fact that China seems to be sticking to this mining ban and actually enforcing it has to be seen as a good thing. Speaking of China, the South China Morning Post had an interesting article about Binance. The title is Binance battles regulatory headwinds as world's largest cryptocurrency exchange seeks financial legitimacy. Here's the key quote from CZ. We've come to realize that we need a centralized entity to work well with regulators. We need to have clear records of stakeholders' ownership, transparency, and risk controls. As the largest player in

the industry, we need to prepare ourselves for the shift. We are making changes to make it easier to work with regulators. This is the latest in what is becoming a pretty extensive PR tour for CZ around Binance. The company has been beset by regulatory warnings, from the UK to Singapore to the Cayman Islands. They also were dealing with the high-profile departure of Brian Brooks, formerly lead counsel at Coinbase and then acting director of the Office of the Comptroller of the currency in the United States. He was brought in as CEO of Binance US, presumably to ingratiate finance with regulators, but it didn't last long. After about four months, he left the job, citing differences in approach to the roadmap and going forward, and during the middle of a

reported nine-figure fundraise. Subsequently, CZ has made numerous appearances discussing the transition from a technology startup to a regulated financial entity. He's even gone so far as to talk about how Binance is looking for a replacement for him as CEO, and ideally someone who has experience with regulators. I think this South China Morning Post interview added a slightly new dimension as well, which is the notion of moving from a decentralized organization to a centralized organization. Look, at the end of the day, it's not clear if all of this will impress regulators at all, or if finance will be able to outrun their own tail, but you've got to give them props for trying. One last interesting note on this story, whenever a source is Chinese-aligned media, there is a

whole sub-conversation on what the biases one needs to be aware of are. SCMP is a 118-year-old paper that has long been the Hong Kong newspaper of record, including through British colonial rule. It was owned for a time by News Corp, and in 2016, 2016, it was acquired by the Alibaba group. Since then, numerous international publications like New York Times, The Atlantic, and Der Spiegel have accused it of being a tool for promoting China's soft power abroad, although in a more subtle way than out-and-out-state propaganda. At the same time, in March of this year, the Chinese government required that Alibaba disposed of its media assets, including the SCMP, so who knows? Make of that what you will.

This podcast is sponsored by Nidig, the institutional-grade platform dedicated to building a more inclusive financial system through Bitcoin. To find out more about NIDIG and their mission to bring Bitcoin to all, go to nidig.com slash NLW. That's NYDIIG forward slash NLW. From China, let's head south to Laos. The Financial Times is reporting this morning that Laos has authorized mining and trading crypto, and this is a pretty serious about face for the country, given that just last month, their central bank warned banks, companies, and people against the ills of using crypto. Still, it's hard not to see how this makes sense. China bans crypto mining. Miners start to figure out where they're going to pick up and move operations. Some might move to North America. Indeed, we've seen that happen,

but others might be looking for easier overland moves. Boom, there is Laos bordering to the south. From an energy profile perspective, it makes a ton of sense. It produces a surplus of hydroelectric. Indeed, with hydroelectric, they can even claim to be clean Bitcoin mining energy. So far, six companies have been authorized to begin mining and trading crypto, including construction groups and a bank, the industries will be regulated by the Bank of Laos and the country's national power utility, Electricite du Laos. There's another context that makes this make sense, which is the loss of tourism during COVID-19. Importantly, this isn't just a loss of revenue, but also represents a reduction in demand for hydropower. The problem is that the country has borrowed

significant sums to build dams along the Macong River to get that hydro power. It's sort of a perfect storm, excess power, revenue shortages, and a northern neighbor pushing out a potentially lucrative industry that is now looking for a new home. One wrinkle in how this all might play out is the crypto-crime narrative. Northwest Laos is home to what's known as the Golden Triangle. This is a region that borders Myanmar and Thailand and is notorious for drugs production and trafficking. To get a sense of where that narrative can go, just look at this quote from Zachary Abusa, a professor at the National War College in Washington, who specializes in Southeast Asia. You should always be concerned when countries with poor regulatory records start to get involved

in things like cryptocurrency. To say that the Laoshen financial system is immature would be a brutal understatement, and we have to be concerned if they are rushing into this. Still, from our vantage point, any time a government smaller otherwise makes a massive policy shift towards crypto, you know the results are going to be interesting one way or another. Speaking of digital assets and governments, let's move west to Europe. The European Central Bank is set to start out on a two-year investigation around a digital euro this October. On Wednesday, however, at the Digital Euro Summit, Jürgen Schaff, who is advisor to senior management at the market infrastructure and payments business area of the ECB, said that a digital euro is not guaranteed. Quote,

this is still not a decision to introduce or issue a digital euro. After these phases, we will have to assess properly whether the potential benefits outweigh the potential disadvantages and then take a profound decision. Schafe also argued that they can't move as quickly as someone like the Bahamas, which released a CBDC called the Sandaller in 2020, or do some wild experiment like El Salvador. Quote, money and the provision of money is something you don't play with. We cannot do huge-scale experiments that rock the whole society and system. So whatever we're going to provide, if we provide it, has to be really sound and safe. He also said they're focused on a retail CBDC, i.e. a cash equivalent instead of a wholesale CBDC that's for settlement between financial

institutions. He reinforced that a digital euro would not replace cash but would instead complement it, and he also made clear that big tech involvement in money is a concern and a driving one at that. There is a concern that the monetary stability of the euro area is a bit at stake when there could be a crowding out by big tech's end quote. For my part, I think that this whole we might not do it language is total BS and that they're absolutely going to do it. They just want to leave themselves the flexibility. Finally, a couple smaller stories to round us out. Moving to a different exchange besides Binance where we started,

Coinbase is looking to get into the derivatives game. It's currently sinking entrance to the National Futures Association, which is the U.S.'s best-known derivatives self-regulatory organization. Coinbase announced that it has filed an application to register as a futures commission merchant, saying, quote, this is the next step to broaden our offerings and offer futures and derivatives trading on our platform. Coinbase has been open about their derivatives' ambition, discussing them, for example, on the

Blocks the Scoop podcast with Frank Chaparro. The most interesting thing about this is that its timing coincides with its big battle with the SEC, so clearly fighting different regulatory fronts in different areas. Now lastly, how about one big old fundraise? Polychain and Three Arrow's Capital have pumped $230 million into the avalanche ecosystem. This is interesting insofar as you're watching the serious Layer 1 DFI battles between Ethereum, Polygon, Solana, Avalanche, etc. Avalanche previously announced a $180 million incentive program,

and part of this $230 million raise is meant to bring liquidity to Avalanche's defy ecosystem. Indeed, it is very clear that in this layer one battle, liquidity is the name of the game. Said Avalanche founder, Amin Concier, to make anything at avalanche scale, you need large-scale capital. To provide a decks that operates efficiently, to provide liquidity tools that provide operations with low fees, low overhead, you often need access to large amounts of capital.

Anyways, guys, hopefully this has been a useful little hop-skipping-a-jump across the world, how governments are looking at and interacting with crypto, what's going on with finance and Coinbase, and of course, what comes next with all of these new technologies competing with one another for investor and builder attention. But for now, I appreciate you listening. I hope you're doing well. Until tomorrow, be safe and take care of each other. Peace.