The Breakdown - The View From China: Crypto, Crisis and Digital Currencies Feat. Matthew Graham

Episode Date: March 3, 2020

When everyone wrote their 2020 crypto prediction pieces, China featured prominently in everything from the exchange business to enterprise blockchain to the potential impact of a forthcoming digital yuan.  Coronavirus erased those issues from focus. On this episode of The Breakdown, @NLW is joined by Matthew Graham, CEO of Sino Global Capital. For the past 7 years, Matthew has lived in China and for the past several years, his exclusive focus has been on crypto and blockchain.  In this episode, they discuss: What Chinese crypto and blockchain investors were focused on before Coronavirus The shift in the crypto and blockchain narrative in China post-Libra  What living through the Coronavirus has actually been live (and how it differs from the media narrative in the US)  Why enterprise blockchain is poised to be one of the most dominant focuses for China-centric investors this year 

Keeping the fact that I work in China, crypto in mind, I have to tell you, this is the craziest thing I've ever seen in my life. Yeah. Corona. I mean, it's just nuts. It really has been like out of a movie. Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond with your host, NLW. The breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Monday, March 2nd, and today we are kicking off the week,

kicking off the month, with a special interview with Matthew Graham. Matthew is the CEO of Sino Global Capital, which is based in Beijing, and he has an interesting perspective as someone who is an American investor, but based in China. Now, I think this perspective gives Matthew a really unique vantage point on a number of issues as it relates to the crypto markets, right? This is an industry that is from the get-go being birthed and growing up in different places differently, even though they are interconnected. And Matthew sits at the intersection of some of those different perspectives. So I wanted to have him on for that reason alone, but obviously in the context of the world and the markets where they are, coronavirus is an overwhelming point

that we just have to address. And so in this interview, I ask Matthew a little bit about his perspective, having watched how the China around him that he knows that he spent the last seven years in has reacted to coronavirus and how is it or isn't it different than what our perception is here in the US. We discuss further the perception of Chinese investors in both the crypto and the regular markets around what the impact of coronavirus might be. But we also talk about more more crypto-specific issues. We talk a little bit about what the difference is between 2020 and 2019 in terms of where the crypto industry in China is, what their focus is, what their level of maturity is. We talk about the Chinese digital yuan, the decept that is forthcoming and

what that might mean for the markets as a whole. We talk even about enterprise blockchain and why it's likely to be a huge area of investment for crypto companies once things start to come back online and why the enterprise blockchain movement in China might look a little bit different than it did in the U.S. So a pretty wide-ranging interview and not very long, again, I think that Matthew's perspective, just as simply as someone who is from one place but based in another, is a really valuable vantage point to understand the global realities of the crypto markets. So with that, let's actually just dive in and hear what Matthew has to say. All right, we are here with Matthew. Matthew, thank you so much for joining us.

Hi, Nathaniel, great to be on the pod today. We're going to dive into a lot of topics today, I think, in rapid succession. But just for context, can you share with the listeners just a little bit about who you are and maybe I think also just how you ended up investing in crypto from China? The first part of my career was Wall Street, TMT-focused hedge fund. But personality-wise, I've always been very driven to be in the engineering. of change. So if I had been a little older in 82, I'm sure I would have gone to Tokyo. In 97, I would have gone to Silicon Valley. But after B-Squah, I really wanted to be where the action was.

And to me, that was China. For similar reasons, I was very attracted to blockchain, to crypto. So I've been in China about seven years now. And for many years, we've represented international technology companies in China for strategic partnership and investment. The concept then was always that we would naturally and organically develop a sector competency. And once you start getting involved with blockchain, you can't help but becoming more and more involved. And so very naturally and organically, we became focused on blockchain. Investing in international projects with Chinese strategic angles and such. How long have you been investing in or involved in the crypto sector,

the blockchain sector, specifically in China? So we've been exclusively focused in blockchain for more than two years now, and we've been involved in blockchain in one facet or another since 2014. I remember, I think it was on Reddit when I first heard about crypto, and it was like the pizza thing. I think that's the first time I learned about crypto, and I've always followed it since then. The pizza that turned into a $10 million or $100 million pizza or wherever it was. Let's take a suspension of reality for just a second and talk pre-coronavirus.

I'm really interested, you know, obviously China since Libra has taken on a different role in the global blockchain ecosystem, right? Or they've at least been intentional about shifting their own narrative within this. Can you just kind of give us your sense of, before we get into the coronavirus changes, how you saw the blockchain narrative and the digital currency narrative evolve from your perspective in China over the last kind of six months, nine months? You know, I think it's important to understand that there are many different ecosystems and many different constituencies that play into something like that. So I think for some of the crypto-o-Gs in China, it's just a question of what even is this?

Is this crypto? Is it not crypto? How do we interact with something like DeSep? And people choose to do that in a number of ways. For some people, they saw it as an opportunity to introduce new people to crypto through kind of a halo effect. For other groups of people, they saw it as a business opportunity where they could sort of, service, many of the companies such as Alibaba and Pingon, which is a huge insurance company that are trying to find ways to integrate blockchain into their business. For companies like Tencent and Alibaba that have huge existing digital payments, businesses with AliPay and with TenPay, which is WeChat Pay.

I think there's a little bit of an undercover story, which is that the Chinese government with DSEP is potentially competing with their enormously lucrative digital payments, businesses. So there are a lot of moving parts here that are all kind of interacting. But the one thing then in common is that there are more eyes on blockchain and on crypto, both in China and internationally. as a result of Dicef and, of course, Libra as well. It's been fascinating for me to kind of sit and watch. When I talk about this about Libra with people, I feel like Libra was the starting gun, but really the thing that made governments care in a lot of ways

was China's response to Libra more than Libra itself. China shrugged it off, like the U.S. initially shrugged it off. It would be a very different conversation today. Sure thing. As backdrop to that, by the way, it is important to understand that the Chinese government had been researching and working on this behind the scenes for years. So they had four or five years where they were doing testing and research. And I wouldn't say self-move because many people, including us, knew about it, but they in a very low-profile way were working on DSEP for four or five years. and it was a question of timing, the Libra announcement may or may not have

stopped their timing, but this is something for sure that was going to happen. As opposed to just they saw Libra and they felt threatened or felt like they had an impetus to do something and then they made an announcement and then started. It was not like that. It was already in the works for four or five years. It created context for them to kind of hurry up and finish, it feels like, in a lot of ways. We could talk about that a lot. But I think this is kind of relevant.

We were, you know, beginning of January, turn of the year, everyone's writing their, you know, prediction post for 2020. And a lot of the conversation is around. We all have to rewrite that already. Yeah, right? It's why they call them unexpected, right? But so, you know, it's all kind of Libra and Decept

and whatever it's going to be in the digital currency battles. And then coronavirus happens. What has your experience been just as someone who's living there and having watched it unfold? But then I'm particularly interested. in kind of, you know, the weird schizophrenia that we've had, not just in the crypto markets, but in the larger markets as well, of not reacting, not reacting, not reacting, at least in the U.S., in Europe, while this hugely significant event is taking place in China.

Walk through the story, you know, of how you saw this unfold or your perspective on it. So as backdrop, I mean, we both work in the craziest industry, right, is blockchain, as crypto. and being in China as an international person is also very exciting, so we say. Keeping the fact that I work in China crypto in mind, I have to tell you this is the craziest thing I've ever seen in my life. Yeah. Corona. I mean, it's just nuts. It really has been like out of a movie.

As backdrop, the stories that filter out into the West, if anything a little under, under-exaggerated. And I think it's important to understand. This is nuts. So what happens, initially, obviously, we had a few news reports start to trickle out, and there was a situation in Wuhan, which is a city probably a little bigger than Chicago, even though it's not one of the very largest cities in China. It still has probably offhand, I want to say, 10 million people. We had some initial news reports and we had some concerns and things like that. And then we had Chinese New Year coming up, which is the biggest holiday of the year and you get, you know, more than a week off. It's also the biggest migration period of anywhere in the world on an annual

basis because you have tens of millions of people that go to their ancestral home and they spend time with their families, et cetera. So you had this vacation period coming up, and you had a few news reports about something may be wrong in the city of Wuhan, and then all of a sudden, just boom, where it just exploded. And it's been all, the coronavirus exploded, and in terms of attention, in terms of what was the national discourse here in China, it exploded as well. and it basically hasn't stopped for five, six weeks now. That has been the topic of the day every day. And I think it's also important to understand that the country,

for most of that period of time, the country with the biggest population in the world, $1.4 billion, it has just stopped. Many, many people have spent that entire time indoors, like literally just having food delivered and not leaving, I mean, people are scared. And this is all across China. I'm about 1,500 kilometers from Wuhan now.

We have a regional office in southern China, and I've been hanging out here. And despite being 1,500 kilometers away from the epicenter of the virus, this is also a city of millions of people where I am, and the streets are deserted. It's just like, it's really like a movie for weeks. and I know people who have literally not even left their apartment during that time. I've never seen anything like this ever.

I was not, obviously, in China I was not here for SARS, but from what I understand, this is something very, very different. Picking up from that, what is the conversation like among Chinese investors, right? How is it differing from the conversation that we're having in the West? Investments are on hold, and everywhere, one's trying to understand what's going on. As with much of the supply chain, which is impacting things internationally, as with much of China, just things are on hold. For example, a VC buddy of mine, he's one of the most famous angel investors in China. And so he's doing things like organizing

seminars with medical professionals so he and his circle can have a better understanding him almost like teach-ins from epidemiologists and other public health experts. He's almost having teach-ins, you know, like they do at Google, where they'll have famous people come in to educate on different topics. So he's been doing things like that, as opposed to, you know, focusing on investments. And I think in many ways that's what much of Chinese society is doing right now. everything's on hold. Only in the past few days have there been some small signs of people starting to be a little less afraid and wanting to get back to normal life. Only in the past few days

have there been signs of that. I mean, has that been kind of shared? I mean, I don't know if there's any different perspective among Chinese crypto investors, if they're seeing this differently, or is it all just part of the same thing at this point? Certainly different elements of society. are viewing this through different angles. I do think that Chinese crypto investors, they're trying to see to some extent if this is something that they should be speculating on, should they be going long or short? And people in China all of a sudden are watching S&P 500 futures, which, you know, to trade crypto and you have all kinds of things going on. But I think it's, everything is Corona. that's just everything for weeks.

I feel like this is a continuously evolving scenario. So let's, to the extent that we can look beyond Corona, I'm interested in your take, how the markets are evolving in general, right? Like what is different about 2020 crypto, 2020 blockchain, as opposed to 2019? We were talking just before the show about a couple of the things that are interesting to you.

Sure. So I think in 2018 and maybe 2019, I think people were still a little bit hung over and wondering what the heck happened into all their money in 2017. I think it was a transition period for sure. And people were trying to say, well, ICOs obviously didn't prove sustainable. What if we do IEOs and things like that? And from our perspective, it's very healthy that we've moved on from all of that

because I don't think there was a big difference between IEOs and ICOs, to me, that's the repackaging. So I think there's been a transition period, and I think that finally we're really starting to see signs of a healthier market in many ways. For example, the transition from visionaries to cowboys to speculators and now professionals, professionalization, when I say professionals, that's not, necessarily better or worse. I think visionaries are probably the most amazing people and cowboys are the most interesting, right? But the new phase is that we're really starting to see professionalization of the space, which is a very healthy part of the maturation process. And I think we're really starting to see tremendous real innovation, especially in terms of the decentralized finance, despite the set packs that we have here and there with different attacks

and such that's ultimately only going to make these platforms and these protocols and these innovations even stronger. So it's been a turning of the page overall. I think things are really developing recently in a healthy manner overall. So what are you guys looking at? Like what are you interested in from an investment standpoint if you're allowed to speak about it? So the most important aspect to us is the potential Chinese strategic angle. And so we are always laser focused on investments where it makes sense for China and where we can add strategic benefit. That's what we never compromise.

We tend to be agnostic on many different other aspects in terms of seed versus series A or B, in terms of the different focus on of the project, but we never compromise on. Does this make sense for China? Is this something that's potentially undervalued or something that potentially could have a new gross trajectory because it could be introduced to the Chinese market? That's what we really want to see.

In that context, how much of it is infrastructure versus end products? what I'm interested in is kind of where your sense of the stage of development that we're at. So that's where we can be very agnostic. We want to see something that makes total sense for China, is not in China yet, and where we can bring it a huge strategic benefit. We're agnostic on many other aspects. But for example, we announced today our investment into FTCS exchange, which we're super excited about. And to us, that's just perfect. because it has a world-class team that's enormously professional and that we've gotten to know extremely well. They've got a clear differentiation in terms of their product. We think it

has a great fit with industry trends. They are placing a huge premium on the Chinese market, but haven't fully captured that value yet. To us, that's a great example of what we look for. How do you think, from your vantage point today, what does that, how does the rest of the year play out for, you know, this kind of crypto or blockchain with the China-centric perspective? Are we through the worst? Is it still impossible to tell? Where do you think the real focus will be for, you know, the next part of the year? Sure. So for China specifically, I think that once we turn the page from COVID-19, I guess it's gold now, the primary focus will be integrating blockchain with different enterprise businesses in China.

I think will be a huge trend. I think it's very likely that China, by the end of the year, will be way ahead of much of the West in that regard. And a large part of that is because of the unique nature of China's economic system, where if the government chooses the strategic imperative, it's really a top-down economy, right? And so what we're likely to see is the same thing that we've seen play out in many other industries. such as solar, where the government decided that solar energy was a strategic imperative.

And we had this massive investment and overinvestment in solar-related businesses. It's going to lead to huge take-up. It's going to lead to a lot of waste. But it's also likely to lead to Chinese companies leading the way in terms of integrating blockchain into their enterprise business in many unique ways. I think that's going to be a massive trend that possibly hasn't been fully realized in the West. Yeah, that's interesting. I feel like in the West, the Enterprise blockchain idea is on, not just a narrative down swing, but is almost cynical at this point. Yeah, exactly, right? Everybody kind of like took a crack at it and they had mixed results and they

We did a lot of different test cases and things like that. And it didn't really seem like it was working too well for them. And a lot of people took a step back in the West, right? And that's quite different in China where the government is saying, look, 5G and blockchain, that's what we're doing this year. So you're going to go do it. It's a top-down economy. That's the way things work.

So I think many of those efforts will lead to nothing. category number two, a lot of companies, if they don't necessarily want to follow that, they will try to label things as blockchain that really aren't blockchain if you look under the hood. But then category three is that there will be a lot of very interesting real use cases that come out of it, if only because of the massive investment that's likely to result from this government strategic imperative. Yeah, I mean, if nothing else, it does create an additional external incentive to really try to do things. I mean, I think that the problem in some ways is that people's interpretation of the first enterprise blockchain boom here or in the West, in the U.S., was that it was sort of cynically trying to capture the larger excitement around crypto markets and just kind of get those FOMO dollars. And to some extent, you know, you are still talking about an external motivation, but.

At the same time, it does create a little cauldron for experimentation that could have more durability and potential for outcome. Yeah, I think there's definitely some overlap between those two types of incentives. But the bottom line, I think, is that if there's a lot of government pressure on major enterprises to incorporate blockchain into their business models, there are likely to be some unique things that result from that that we haven't necessarily seen in the West where incentives are more narrowly focused on the profit model. Interesting and weird times. It's so funny to almost like try to clear enough space in the context of the larger kind of macro activity right now to actually talk about these things as though they'll be coming right back on the pike.

But really appreciate you taking some time today to give your view from where you sit. and hopefully, you know, things starts to break in a more positive direction, although it doesn't necessarily seem likely just yet. Thanks, Nathaniel. Great to be on the part today. As I mentioned towards the end of that interview, it is really difficult in some ways to get beyond the overwhelming macro context that is shaping all of our conversations, right? Talking about enterprise blockchain in China as though, you know, huge parts of the economy

weren't still shut down is a little weird. but I do think it's a good reminder that this too shall pass, even if it passes in ways that are incomplete or devastating. And the world will go on and markets will go on and building will go on and entrepreneurs will go on. So getting that sense of where the emphasis might be once we get through this global challenge is, I think, really important. So I appreciate Matthew taking the time to join the podcast today. And I appreciate your time for listening. I think that this week, you know, there's no way to escape the continued shadow of the coronavirus, the corona of the coronavirus, all on our conversations, right? We're just seeing the first confirmed cases in New York

City, and it doesn't seem likely to stop there. So that will be a background text. But we also will continue to see just about and tell stories of how the markets continue to move forward and how crypto markets continue to move forward. So I hope that you hang out this week. I hope that you hang out this March. And until we're back tomorrow, peace, guys.