The Greatest Power Grab in History
The threat/opportunity of decentralization...
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Hello Everyone,
This newsletter was initially created to serve as a medium to communicate with a small group of investors interested in what I had to say about startups, and has quickly evolved into a community of intellectually curious folks interested in business, startups, and emerging technologies; so shout out to all of you. If you like it, I would appreciate it if you would share it with your friends who may like it as well!
By no means are we abandoning startup breakdowns and investment memos, but after a lot of positive feedback, I have added another layer of analysis surrounding the protocols shaping the future of the internet.
Two weeks ago I sent out a letter discussing what Web 3.0 is and why it matters. Since then a lot has transpired in the geopolitical crypto ecosystem and I have had a slew of people reach out with questions about what's going on and what the implications might be.
Today we will look at China and the threat decentralization poses to totalitarianism, how the United States should address crypto regulation, and the opportunity that exists for the US to position itself as the global front runner in an emerging, digital frontier.
Let's get into it.
Over the last nine months, modern day China, under the rule of the Chinese Communist Party (CCP), has increasingly drawn parallels to Nazi Germany. Allegations catalyzed by a complete disregard for human rights, nationalization of the country’s most valuable assets, and ultimately a cruel, overreaching authoritarian government. All done with the proclaimed rationale of striving towards “common prosperity”.
Xi Jinping and the CCP believe the most efficient way to build a society that is less corrupt and more equal is to do it themselves through authoritarian rule and by commanding the eradication of anyone or anything that stands in the way. Even if that means kneecapping the country’s most successful private companies.
For years China championed the growth of domestic tech giants like Alibaba, Tencent, Baidu, and Huawei because they created hundreds of thousands of jobs and contributed to an improving quality of life for Chinese citizens. These companies grew to contest their American and European competitors and validated that China was not just a “developing” nation but a player on the global tech stage.
The domestic peace that was created by increased prosperity at the hands of corporations gave the Chinese people a reason to take pride in these tech giants.
But now the CCP fears Big Tech presents a threat to the party’s quest for absolute hegemony. Late last year Chinese regulators blocked Ant Group’s IPO, one that was projected to be the largest in history. This year they have issued a massive antitrust fine to Alibaba, blocked app downloads of the ride sharing giant, Didi, after they IPO’d in the United States, and outlawed all edtech companies from generating a profit.
“Xi Jinping is always worried about political loyalty: to him, the Communist Party, and the party’s ideology,” says Susan Shirk, chair of the 21st Century China Center at UC San Diego.
These corporations have governance structures allowing them to know more about Chinese citizens than the CCP does. The enormous stores of data at the disposal of rich and famous tech titans is too big of a risk to leave unchecked. Recently, an editorial by the state-run Global Times said Didi (who owns 80% of the Chinese ride-hailing market) holds sensitive information about citizens’ personal travel and habits. It said the government won’t let internet giants “become rules-makers of data collection and usage,” and went even further to say ”the standards must be in the hands of the government.”
Though masked by efforts of consumer protection, China is not concerned with what kind of data is being held, they’re worried about who is holding it. Data has become one of the most critical resources of the 21st century and Xi Jinping does not want big tech to maintain exclusive access to it.
But why does this matter?
The common denominator in the actions of the CCP is an assertion of unprecedented control over the Chinese people. This point was underscored with the most recent crackdown on cryptocurrencies, banning all transactions within China’s borders. But it’s not merely a currency that causes Xi and the Chinese government to worry.
China is in fact testing its own digital currency, the digital yuan. The digital yuan stands in stark contrast to decentralized currencies like Bitcoin, Ethereum, and others because it is controlled by a centralized body, the Chinese government. This should serve as validation that even the greatest opposition is a proponent of the technology; having an official digital currency will allow China to better monitor citizens’ economic activity and enforce rules accordingly, essentially creating the greatest all-encompassing surveillance the world has ever seen.
In an Op-Ed, the Human Rights Foundation’s Chief Strategy Officer, Alex Gladstein states, “Communist party officials would be using blockchain technology to prolong the lifespan of a regime built on cruelty and fear.”
Using blockchain on a centralized network is weaponizing the capabilities of the technology and further ingraining governmental control.
Ironically (or maybe not), when governments regulate centralized crypto companies, they will propel the advancement of decentralized financial platforms. For example, when China cracked down on crypto, Huobi (like Coinbase) saw an enormous amount of capital outflows; DeFi apps, correspondingly, saw a massive influx of capital.
This shouldn’t be an incredible revelation. When overbearing governments censor their citizens, transferring assets to a censorship resistant platform is a logical move.
Greater oppression from authoritarian nations will only accelerate the flow of capital into DeFi protocols.
Decentralization is a feature of blockchain, not a bug. Its benefit is to create a parallel economy beyond the control of any singular entity.
Mandated centralization and its accompanying control stand in opposition to liberty and freedom. China has drawn a line in the sand such that nations resisting the transition to Web 3.0 are pledging allegiance to clandestine governance while the nations who support decentralization and encourage innovation are committing to transparency and general prosperity.
People want freedom and generally are not willing to settle for less.
When China last cracked down on cryptocurrencies in May, they banned miners from operating in the nation (miners refer to the computers validating transactions on the blockchain network).
The hash rate refers to the speed and efficiency of the computers on a blockchain network; hash rates increase with more miners validating transactions at greater speeds. Prior to the crackdown, China had the greatest concentration of miners in the world. When it was outlawed in May, hash rates fell more than 50% as miners literally packed up their rigs (computers) and relocated to more accommodative nations. This is represented by the gradual, linear recovery in hash rates on the network since the trough in July.
Think of decentralization in the realm of physics; the law of conservation of energy says energy can neither be created nor destroyed, only redistributed. Here we’ll coin the phrase “the first law of decentralization”, mining power on chain can neither be created nor destroyed, only redistributed. When oppressive nations crack down on crypto, the kinetic energy (hash rate) falls and turns to potential energy while the miners relocate to more permissive nations.
I am generally against preemptive regulation. The United States was built on innovation, not regulation. You must allow and encourage people to break things in an attempt to build better things unless the well being of the general public is in jeopardy.
Regulators and policymakers are not incentivized to be visionaries and promote “disruptive” (aka innovative) technologies because the benefits will not be realized during their terms. They are incentivized to be conservative and support the incumbent so that when the next election cycle comes or it is time for renomination, their positions are secure.
However, I’ll add another layer to the discussion. Web 3 and decentralization are still very much in the earliest days and are rightfully referred to as the wild west. The US government has the opportunity to partner with thought leaders in the space to establish an accommodative regulatory framework that protects consumers from scams and creates guidelines for developers to build within the confines of the law, but is also open, lenient, and encourages disruption.
Case in point:
In this Twitter thread by Coinbase CEO, Brian Armstrong, he makes the point that the SEC offers no guidance as to what is allowed and what isn’t, but threatens to sue if Coinbase rolls out a specific product.
If this “sketchy behavior” continues the US will fall behind and adoption will come from the bottom up. Developing nations are in desperate need of a better operating system and are more prone to immediately realizing the benefits of blockchain technology, i.e. El Salvador who just announced Bitcoin as legal tender.
I’ll go a step further and predict that if the United States continues to drag its feet in supporting the transition to decentralization, history books will remember the next few decades as the greatest, global power redistribution in history.
So far, US regulators have taken the position of covering their ears and hoping the future will go away.
On the other hand, potential future US Senator, Blake Masters calls for the US government to prepare for this potential future by buying a strategic reserve of Bitcoin.
In a recent piece, Anthony Pompliano breaks down the math of this asymmetric bet by saying that if the United States were to buy $20 billion (0.3% of the 2022 fiscal budget) at roughly today’s prices, the US would be one of the largest bitcoin holders in the world for less than 0.5% of one year’s national budget.
If Bitcoin goes to $0, the United States’ loss can be chalked up as a rounding error, but if the future looks like what proponents of decentralization envision, the United States will be in position to continue its reign as the leader in innovation and opportunity.
Whether nations view decentralization as a threat or an opportunity will shed light on how they view individual liberties and personal freedoms. I’m excited to see how it all plays out.
Until next time ✌️,
AC
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