This episode is sponsored by NYDIG.

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

“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.


What’s going on guys? It is Thursday, September 16. 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 draw-downs 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, hashrate 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 Block’s Wolfie 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 a contractor suggests 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 Inner 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’re 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 U.K., to Singapore, to the Cayman Islands. They also are 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 U.S., presumably to ingratiate Binance 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 the 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 Binance will be able to outrun their own tail, but you got to give him props for trying.

One last interesting note on the story: whenever a source is Chinese-aligned media, there’s 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, 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 dispose of its media assets, including the SCMP, so who knows. Make about what you will.

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,É lectricité du Laos.

There’s another context that makes this makes sense, which is the loss of tourism during COVID-19. Importantly, this isn’t just the 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 Mekong River to get that hydropower. 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 and 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 Abuza, 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 Laotian 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, anytime a government, small or 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 Schaaf, who is Advisor to the Senior Management of Market Infrastructure and Payments at the European Central Bank, said that a digital euro is not guaranteed: “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.” Schaaf also argued that they can’t move as quickly as someone like the Bahamas, which released a CBDC called the Sand Dollar in 2020, or do some wild experiment like El Salvador: “Money in 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.”

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 seeking entrance to the national futures association, which is the U.S.’s best known derivative self-regulatory organization. Coinbase announced that it has filed an application to register as a futures commission merchant saying: “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 Block’s “The Scoop” podcast with Frank Shapiro. Most interesting thing about this is that its timing coincides with its big battle with the SEC, clearly fighting different regulatory fronts in different areas.

Now lastly, how about one big ol’ fundraise: Polychain and Three Arrows Capital have pumped $230 million into the Avalanche ecosystem. This is interesting in so far as you’re watching the serious Layer 1 DeFi battles between Ethereum, Polygon, Solana, Avalanche, etc. Avalanche previously announced an $180 million incentive program, and part of this $230 million dollar raise is meant to bring liquidity to Avalanche’s DeFi ecosystem. Indeed, it is very clear that in this Layer 1 battle, liquidity is the name of the game. Said Avalanche founder Emin Gün Sirer: “To make anything at Avalanche scale, you need large scale capital. To provide a DEX that operates efficiently, to provide liquidity pools 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, skip and a jump across the world how governments are looking at and interacting with crypto, what’s going on with Binance 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!