The Breakdown - The Business of Geopolitical Competition

Episode Date: September 15, 2020

Today on the Brief: Crypto exchange volume sees highest month-over-month increase since February 2018 Uniswap overtakes SushiSwap in total value locked What Coinbase vs. Apple means for the future of decentralized applications Our main discussion: NLW looks at the business of geopolitical competition, including: TikTok, Oracle and the new politics of deal making in the “new Cold War” “Mulan” controversy around Uyghurs and Hong Kong police support  The real motivation for China’s digital currency

It seems clear that China wants to get the actual advantages of a digital currency before anyone else. In other words, they believe that there are actual feature advantages to this type of digital currency that will cause some number of people to switch their behavior to a Chinese digital currency rather than one of these other global reserve currencies. That thesis is, of course, yet to be tested, but I think that it's hard to see how this is anything other than an attempt to pry away percentage of reserve currency status from the dollar and from the euro. 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 crypto.com, BitStamp, and nexo.io,

and produced and distributed by CoinDess. What's going on, guys? It is Monday, September 4th,000. And today we are talking about the vicious business of geopolitical competition. First, however, let's do the brief. It is something of a crypto day on the brief, so first up, let's look at trading volume. Crypto trading volume saw its biggest month-over-month increase between July and August since February of 2018. Volume grew 75% from 108.3 billion in 2020. July to $191.2 billion in August. Now this is just spot volume and there is a huge amount of focus right now on derivatives as well, so it may even be understating the real activity. The month was

an interesting one. Even though it wasn't huge in terms of Bitcoin price, there was obviously a huge amount of activity in the defy space, but even more than that, it still felt like the narrative was strong with Bitcoin. It didn't feel like there was a sort of settling in of a return to normalcy. It felt like there was a temporarily cool off in a larger heated up trend than anything else. That may be what we're seeing and what was reflected in these numbers. Speaking of Defi, since I covered this on the weekly recap, next up on the brief, let's take a quick look at the Uniswop Sushi Swap TVL battle. I went through the whole saga on Saturday if you want to listen to that, but basically my TLDR is that this is a vicious competition that's all about incentives,

and that that reflects the larger state of competition in the context of open source protocols. When you rip out IP, all you have left are incentives and eventually maybe network effects, but right now incentives are beating the pants off of network effects. The latest in that incentive competition is that block rewards for liquidity providers on sushi swap dropped from 1,000 tokens to 100 tokens. This was completely planned after the migration of the $800 billion that we saw last week, but still, total value locked in sushi fell from $1.46 billion to $885 million. In the same period, meanwhile, Uniswap volume locked increased to $955 million.

In their analysis of the episode, Coin Desk said, The Drop suggests a significant number of LPs were primarily motivated by maximum. maximizing their sushi holdings, rather than by supporting an ostensibly more decentralized alternative, to which I say, yeah, duh. This is exactly what I was getting at on my Saturday episode, is that this is a competition that's entirely about incentives, and because of that, I wouldn't take this as some ha-ha moment for sushi swap. Instead, I would take it as a welcome to the Thunderdome moment for the industry as a whole. Liquidity providers in the context of decentralized finance are somewhere between mercenaries and degenerate gamblers, and that is not an insult,

by the way, but it is the reality of this space right now. Naval Ravikant even weighed in on this on Twitter on Saturday, saying the next big wave in defy starts when Wall Street figures out that crypto has built a better casino. His point, of course, is that this is a crazy financial playground, and we should expect more craziness to come. Last up on the brief today, one more note on Defi, and it's a little bit of the first. competition with centralized networks. Coinbase has a rough track record with the Apple App Store.

Their first ever app was removed less than a month after launching in 2013, and last December, Brian Armstrong, CEO of Coinbase commented on a Reddit post about Apple iOS issues, writing that, quote, Apple seems to be eliminating usage of DAPs from the App Store. Well, on Friday, Brian came back to Twitter to talk a little bit more about this. he wrote, In the wake of other companies struggling with Apple's App Store restrictions, I want to share a bit about Coinbase's own struggle here. Many companies are reluctant to speak out on these topics for fear of retaliation,

but I feel like we need to continue the dialogue in the open. We've tried discussing this through regular channels with Apple, and I reached out directly to leadership to request a dialogue, but we seem to be at a dead end. Here is the issue. Apple has told us we cannot add the following functionality in our iOS apps. One, the ability to earn money using cryptocurrency, and two, the ability to access decentralized finance apps. Why would Apple want to prevent people from earning money during a recession?

They seem to be not okay with it if it uses cryptocurrency. I'm not sure why. This is what our Coinbase Earned product does. We sometimes end up in bizarre negotiations with them, modifying the product and asking users to jump through hoops, do a task on mobile, then move to the web to claim your reward, to comply with their guidelines. This creates a worse experience for Apple and Coinbase customers. In addition to earning, they have told us we cannot provide a list of decentralized apps, which are really just websites to users on iOS.

Defi and DAPs are a major area of innovation in financial services that has seen rapid growth lately. They let people get access to a global credit market to get a loan or earn interest, for instance. There are many unbanked and underbanked people in the world who have no ability to get a loan, to buy a home or start a business, so this kind of technology has enormous potential to improve the world over time, even if it is still early days. So why is Apple making it more difficult for iOS customers to use DeFi apps? They've told us, quote,

Your app offers cryptocurrency transactions and non-embedded software within the app, which is not appropriate for the App Store. DAPs or DeFi apps are fundamentally just websites you can access through any browser. So Apple is essentially saying you can't provide users with a list of websites they can go visit through an app. I feel like Apple customers should be made aware. The crypto apps you're used on iOS are not missing some features you want because the teams haven't gotten to them. Those features are being censored by Apple. greatly admire Apple as a company and think they build amazing products, but their restrictions on

the App Store, in particular around cryptocurrency, are not defensible in my view, and they are holding back progress in the world. Apple also has a conflict of interest in applying these App Store restrictions. While they are ostensibly designed to protect customers, it increasingly looks like they are protecting Apple from competition. Forcing users to use the App Store instead of DAPs or websites, or IAP instead of crypto payments, reminds me of what Microsoft did back in the day, forcing users to use IE if you are on Windows, which led to all of their antitrust issues. Apple, it's time to stop stifling innovation

in cryptocurrency. We would like to work with you productively on this. Someday, cryptocurrency could even be integrated into iap and give people in emerging markets better access to the financial system globally. Remember that small group of enthusiasts and misfits at the homebrew computer club who saw a glimpse of the future in the Apple, too? Big ideas sometimes start off looking like toys. That is exactly where Bitcoin was just a few short years ago, and a major transformation and financial services is now underway. So there's a couple things that I think are interesting here. One is Apple is in a very weird transitional position where they were able to capture and control so much of the mobile environment for so long because they invented the genre in many ways

of this smartphone. Remember, when Steve Jobs announced the iPhone, the whole hook of his presentation, which is famous and you should absolutely go watch it if you haven't seen it, was that Apple was not announcing one but four revolutionary products that day. He then went on to talk about all of the different things that it was, a phone, a music player, a browser, etc. And then the whole gist of it was that they were all one device. The point is that because they invented the genre, they were able to control it for a very long time,

but that control is breaking. It's being assaulted on all sides. You have, on the one hand, the epics of the world, and the fortnights of the world, who are making it extremely difficult from a power position, for Apple to lay claim to the next generation of experiences on mobile? And then you have crypto, which is creating an entirely separate financial rails, which will complicate Apple's ability to control the flow of payments entirely through its apps.

I think this is interesting because it's reflective of a much larger transitional battle that's likely to play out between centralized services and the new competitors, both centralized and decentralized, that undermine their ability to control, that's likely to play out a lot over the next few years. Speaking of competition, however, let's shift to our main discussion, the business of geopolitical competition. So I want to talk about three types of geopolitical competition that have business relations. One is tech competition, a second is cultural competition, and a third is currency competition. Tech competition is, of course, the issue that inspired this particular show today, and that has to do

with TikTok and Oracle. Oracle has been said, to win the bidding for TikTok and will be announced as their trusted tech partner for the U.S. For those of you who haven't been paying attention, TikTok is one of the most popular apps in the world. It has something like 100 million downloads in the U.S. alone. And for months, President Trump and his team have been pressuring a sale of the asset, or alternatively, a ban on U.S. soil. For much of that time, Microsoft has been in the lead, but a couple of weeks ago, Oracle moved in in a big way, in part because of a couple of investors in Bite Dance, which is the Chinese parent company of TikTok, that wanted to get a piece for themselves

and saw their opportunity to do so if an Oracle's sale was the winning bid. So the next step from here is that the White House and the Committee on Foreign Investment in the U.S. has to actually approve the deal. The White House has confirmed that they've received the bid, but we don't know exactly what will happen next. Now, a really interesting thing within the context of this deal is that one thing that might not be included is part of the AI powering the algorithm. Just a couple of weeks ago, China imposed its own new export restrictions, and it's not clear on whether the algorithm will be included in this deal, which obviously could be a relatively massive change in terms of how the app functions. What's going on, guys? I'm excited

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You had Microsoft Oracle and even Walmart was kicking around for a while. For Microsoft, they wanted that algorithm and they had this very ambitious plan of having this be a consumer-facing entree for a brand for a company that has largely ignored consumers to instead focus on a corporate audience. It said that Microsoft was also particularly interested in data on the young female audience of TikTok as well. Oracle seems to have wanted to get its hands on this as a way to help kickstart its cloud computing business, which is far behind Microsoft and AWS. Of course, when it comes to this main topic, this idea of geopolitical competition, a lot of what matters here is the precedent. There is precedent, of course, for the U.S.

government nixing deals because of national security concerns. In fact, that's a key part of what the Committee on Foreign Investment is supposed to do. This level of engagement, however, and President Trump's argument that the U.S. should get a piece of the sale is completely without precedent. And it shows the degree to which tech is becoming a geopolitical football. We've seen this over the past couple of years with the incredible pressure that the U.S. is putting on allies to block China 5G. And this feels to me like the beginning, certainly not the end, of the tech business being, like I said, a geopolitical. football. Some argue that from a markets perspective and specifically a free markets perspective, this deal is just full of losers. Tim Culpan and Bloomberg wrote a piece called In TikTok sale,

Microsoft is no loser and Oracle no winner. No one comes out with a strong hand in this tech Cold War fire sale. He concluded his piece, Welcome to the new era of tech Cold War deal making, absurd, calamitous, and only just beginning. The companies that win in this new world order of cross-border acquisitions will be those most willing to walk away when things fall apart. Put another way, this deal has been weird from the get-go, but unfortunately, that weird appeals to be maybe something of a new normal. Next, let's shift to culture competition, and I want to focus on Milan. Disney's live-action remake of Mulan has just come out, and it has been subject to a huge amount of controversy. The core reason for that, although there's multiple, is that it was filmed

partially in the region where officials have been accused of huge human rights abuses and even genocide against Muslim Uyghurs in China. There are thinly disguised mass detention camps, political indoctrination and re-education camps, and even worse things coming out, and this is not making Disney any friends when it comes to the reception of this movie. Marco Rubio sent a letter to the Disney CEO asking why the company chose to film the movie in this region, and Josh Hawley, a Republican senator from Missouri, said, This is nice, Disney now thanking in its movies the China Security Bureau involved in Uyghur concentration camps. As if these accusations weren't enough, the movie also saw complaints because lead actress Lou Yife's voice support last year for Hong Kong's police.

Now, there is a really important note about all this. It's not just some weird snafu from Disney. Disney is explicitly going after the China box office, which is the second biggest box office in the world. You can see this in the fact that they were very intent on getting an all-Chinese cast, and they did in fact top the box office in China this weekend. However, the news was pretty mixed for them. The reviews were very middling in China, scoring a 4.9 out of 10 on the top movie review site in the country, and the movie itself made a bit more than a previous Disney release in Aladdin, but less than half of what the live-action remake of the Lion King made. Of course, ultimately, Disney and Mulan don't matter. This reflects something much

larger, which is the question of how much American companies will be willing or able to compete for domestic Chinese markets in the future. This is massively more complicated than the political rhetoric around China, as these companies are already embedded and have spent years building entrees into these markets. They're not likely to just turn and vacate them right away. This is where you could see some pushback from American business on the idea of a new Cold War. At the same time, there are also lines, and it certainly seems to many that the Uyghur concentration camps are one of those lines. As we figure out really what this whole unwinding and unbundling of the relationship between the U.S. and China is, there are going to be these types of

dimensions that cross-cut both business and culture. Finally, I want to talk about one other type of geopolitical competition, which is currency competition. To understand where China fits in the global currency battle, you really have to understand the dollar itself, which is obviously something that we spend a ton of time here on the breakdown. And to give you a quick context take, I wanted to read an excerpt from an article called the dollar may slide further, but analysts say its demise is, quote, greatly exaggerated. I find this to be a pretty mainstream narrative piece in terms of both the idea that the dollar is falling, but also that there's just not much competing with it. So let's read that excerpt. Research firm Capital Economics senior economist Jonas Gulterman said talk of the

dollar's downfall is greatly exaggerated. He said dollar bears have pointed to the greenback's declining share of global foreign exchange reserves over the past few years. According to IMF data, the dollar share of total global reserves fell from 64.7 in the first quarter of 2017 to around 62% in the first quarter of 2020. In the last quarter of 2019, it saw a low of 60.9%. Golderman said, however, that the dollar indexes declined since March can be attributed to reasons other than the currency's reserve status, including low interest rates and Europe's steps to stimulate the continent's economy. The later has spurred a, quote, remarkable shift towards the euro. In fact, Golterman argues that the coronavirus crisis has reinforced the dollar's role as

the key global currency. He noted that the Greenback surged as safe haven demand jumped in March as the pandemic swelled in the U.S., Europe and elsewhere. Perhaps more importantly, there is no obvious alternative to the dollar, Gulterman added. The next two largest economies, the Eurozone in China, are both smaller than the U.S., and the euro, due to its still fragile, political underpinnings, and the RMB, due to China's capital controls and unique political system, have significant shortcomings as reserve currencies. Sven Schubert, senior investment manager at Europe-based vauntable asset management, also pointed to the yuan and the euro as the two most viable alternatives over the coming decades. But neither are yet, quote, serious competitors,

he said. Schubert added that around 50% of global trade contracts are still quoted in the US dollar despite the country accounting for only about 12% of global trade. The depth of U.S. financial markets is unrivaled. Central banks still prefer to hold a majority of their reserves in U.S.D. The key commodities in the world are traded in U.S.D. and most global trade contracts are quoted in U.S.D. and euro. So in this context, the China decept, the digital currency and exchange protocol, makes a ton more sense. It seems clear that China wants to get the actual advantages of a digital currency before anyone else. In other words, they believe that there are actual feature advantages to this type of digital currency that will cause some number of people

to switch their behavior to a Chinese digital currency rather than one of these other global reserve currencies. That thesis is of course yet to be tested, but I think that it's hard to see how this is anything other than an attempt to pry away percentage of reserve currency status from the dollar and from the euro. I believe that when China does launch its de-sept, which will be radically before either the euro or the U.S. have any sort of even consensus on whether there's going to be a digital version, the key number to watch for in this competition will be whether we actually see them pry away reserve currency percentages from those other two currencies. Anyways, guys, that's it for today's episode on the business of geopolitical competition.

Let me know what you thought on Twitter at NLW, and if you're enjoying this show, please go rate and review me on iTunes, it makes a huge difference. But until tomorrow, be safe and take care of each other. Peace.