Long Take: The battle for Chinese Fintech as China highlights blockchain in Five Year Plan, ramps up Ant and Tencent regulation, phases in e-CNY

Hi Fintech futurists --

This week, we look at:

• China’s Five Year Plan, the industrial logic of the system, and its ramifications for blockchain and fintech in the country

• The regulatory challenges faced by Chinese tech companies, including the resignation of Ant Group’s CEO and the anti-competition fines for Tencent

• The growth path of the e-CNY digital currency, as well as Beijing’s enterprise blockchain powering the city infrastructure and governance

• Footnote: Stripe worth $95 billion, closing $600 million investment

For more analysis parsing frontier developments every week, podcast conversations on operating fintechs, and new mental models, become a Blueprint member below.

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Long Take

We live in a simulation.

Or so you may deduce from being in charge of something with a population.

A powerful government official or mega-corporate CEO may see the mathematics of human activity in the physical world. The creation of certain incentives or barriers will lead to various social and economic structures forming in the wind. Somehow, people funnel themselves around ideas, economies, and technologies. If you make a Federal Reserve utterance or lay down regulations, the agents of change buzz around to create new outcomes. The animal spirits driven to creative madness by the invisible hand.

You don’t have to be in charge of very much, however.

You can be in charge of a sketch in the generative art software Processing. And you may create simply a simulation of various critters, giving them DNA and utility functions. You may give them programmatic goals and randomize their ability to achieve those goals. And then you can watch them flock to that goal through trial, error, and the passage of time.

There are some core things you learn from watching a simulation play out, and its inhabitants rushing to optimize against the rules.

The first is — barriers matter. In financial terms, we can call these regulation. Laying down corners and blockers and choke-points very much controls where the agents go. If you want to control the flow of the creative energy, including its momentum, speed, and clustering, control the layout of the space which they inhabit. Decide how one goes to jail, or accrues capital, or is deemed successful by peers.

The second is — utility functions matter. Some agents may be anti-social and have issues being next to others. Other agents may be risk-seeking and smash into walls. Yet others may look for novelty and find new corners to cut. Utility functions are both internally determined and culturally learned. Depending on your university system and various government subsidies, people may choose to go all into investment banking and law degrees, or into Internet meme farming of crypto NFTs.

The third takeaway is — lineage and timelines matter. The choices you have made about the state of the world yesterday will materialize in the state of the world today and tomorrow. Those choices echo through both the environment, and the agent. If you have the 2008 financial crisis, kids from that time will remember their parents’ situations, and make choices that are in opposition. If you didn’t want Bitcoin to attack the sovereign currency, you shouldn’t used sovereign currency to hold down interest rates for subprime mortgage lending.

And most of all, you should understand that there are different approaches to this metagame. The rules of structuring the simulation — and the world-wide variables that control how the simulation is allowed to progress in complexity — are definitional to what types of outcomes you can get. A useful visual reference is cellular automata, where a core mathematical rule echoes into the formation of a standalone living world. Very slight variations in the rule can lead to wildly different outcomes. Scientists like Stephen Wolfram believe this to be the very structure of our universe.

China’s Planned Ecosystem

We start with the abstract to prepare for a summary of fintech and blockchain developments coming out of China’s plenary sessions.

China is organized according to a different social and structural DNA from the United States. It lives on different myth. Yes, the agents are all human beings arranged in the millions. But, if we were to look at the color and nature of the cellular automata, they would be unfolding from different rules.

The Chinese Communist Party generates country-wide economic plans every five years. This is a hang-over from the planning practices of the Soviet Union, and also of every McKinsey and Goldman Sachs strategist in the hyper-capitalist markets of the United States. Top-down planning is something that most people default to when dealing with large, complex systems. It is a simplified model of the complex. We bring this up because just recently, the 14th such plan was publicly announced and revealed.

The American Congress sets a budget, but that budget is for the spending of the government apparatus. There may be prioritized iniatitives or rhetorical flourishes about what is important, but it has been a while since the US articulated a coherent philosophical position about the sciences and the economy. Telling the world that the nation is going to the moon is quite different from debating loan forgiveness.

Alright. So in the 14th Five Year Plan, a number of key things stick out for us from the Technode coveraage.

• Blockchain is declared to be a key technology, in the same league as AI, IoT, and AR/VR, and is seeing large national prioritization.

• Fintech is mentioned several times, once as it relates to blockchain development, and also within sections on regulation and financial reform.

• Financial holding companies are the likely containers of tech-fin balance sheets and businesses, which are to be treated similar to other banks.

For a while, the metagame of Chinese tech appeared to be a race to acquire market share and experiment with open systems. Technology companies like Ant Financial and Tencent raced forward to build ahead of what regulators and government actors could understand. They, in fact, raced so far ahead, that they out-competed their Silicon Valley comparisons by creating super apps that engulfed all of commerce.

Walmart would like to be a super app. It’s not. It’s a store with a bank. Apple’s iOS is the closest we’ve got, and that’s worth probably a good trillion. Super apps wrap all of commerce in a payments and banking rail — a Google Search with money in it. That sure looks a lot like a precursor to Ethereum, if you ask us.

But the sovereign has caught up and is making its fintech moves. In a great report from the World Economic Forum (thanks @Richard Turrin!), its authors frame the development of digital finance services in China as (1) first a top down development path for state-run banks, then (2) a bottoms up garden resulting in the Ants of the world, and (3) now a mish-mash of a hybrid approach trying to mediate growth and control.

There is a 5-year cycle that sets policy in China, and trims the growth thereafter. The private sector has shown the way for the Chinese government. It has pointed to what a future-proof technological application of finance *should* look like in daily life. Now is the time of trimming.

Ant and Tencent are being clipped in their over-expansion. Rules prohibiting certain monopolistic behaviors, such as locking in merchants into a single provider if they are part of a technology modernization integration, are now being enforced. Another prohibited behavior is the blocking of content between media platforms (e.g., Douyin/TikTok content on Tencent). There is of course an irony in that a successful tech monopoly cannot restrict the media on its platform, while the government can restrict the media in its territory.

From a political science perspective, this at the core of the concept of sovereignty. You cannot have dual sovereignty. Only one royal calls the shots. It is also the opposite of constitutionalism, which forbids the sovereign from censorship but allows it privately.

As a result, twelve tech firms in China are now being fined for their approach to innovation at the maximum penalty currently on the books. The breach is for carrying out acquisitions that have lead to a market share over 50%, done without notifying the requisite regulatory body. The CEO of Ant Group is also stepping down from his role, to “pursue philanthropic projects” — and all the fintech activities of the tech firms seem to be on the path into financial holding companies with closer oversight.

Let’s comment on a few things. First, defining a market that gets you over 50% of that market is somewhat trivial (e.g., we own 100% of the Fintech Blueprint readers, or 0% of all newsletters). Second, having financial stuff in a financial box is the familiar Western solution to financial regulation, so we are not … shocked to see it. And last, communism is a governance system that believes that capitalism self-destructs through its own concentration over time. Seeing anti-monopoly regulation coming from a Communist party, which in turn prevents capitalist concentration and encourages competition in a market, creates some satisfying cognitive dissonance. What happened to the monopoly of the state?

Well, it’s coming. Now that the path has been made clear, the Five Year Plan clearly signals a move towards more nation-state blockchain in China. We have previously written about the Blockchain Service Network, which is the interoperable blockchain controller protocol run by China for public and private permissioned chains. Plug all the good stuff in there, and use the CNY as money on the network.

But wait, there’s more! We now know about Chang’an Chain, which is an enterprise blockchain for Beijing’s information systems and the city economy. The project comes backed by a 27 member consortium of government departments and industry participants — like the State Power Grid operator, China Construction Bank, the PBOC’s Digital Currency Research Institute, Tencent, and Tsinghua University, as well as semiconductor companies.

And of course, it will integrate into and run the DC/EP or e-CNY digital currency backed by the Central Bank. That currency has been in multiple retail tests, such as sending out 100,000 digital red envelope worth a total of $3 million in Shenzhen. It is now far enough along for coverage from the New York Times. Scalability and speed are the hard thing with Central Bank Digital Currencies, and so we expect to see experiments of increasing scale — leading up to the 2022 Beijing Olympics, where it will be made mandatory for the world.

The government’s digital wallet looks like a simple app for money.

That means it lags behind Ant and Tencent in user experience, which offer the entire economy inside the phone. But we expect all technology companies to integrate the CBDC as soon as it is suitable for consumption at B2C payments scale — $20 trillion per year. As a reminder, the US Automated Clearing House system runs at $35 trillion per year. When will the ACH run on blockchain?

One final note. The fintechs in China figured out the mobile phone as a digital wallet. Bitcoin figured out how to make a crypto currency that people care about. Without Bitcoin at $1 trillion in market capitalization, we would have no CBDCs. China has long discouraged crypto asset trading, but is now going after Bitcoin mining as well under the auspices of environmental goals in the Five Year Plan. Pushing out money printing competition is key to money printing.

India is following along, with a proposed ban on miners and traders again, after the country’s Supreme Court struck down the previous attempt. We expect a CBDC to follow shortly thereafter.

Key Takeaway for the West

We started out talking about systems design, and the seed inputs for simulations. The West has a very different starting point, and therefore is seeing quite different results. No Five Year Plan. Feels like no plan at all.

We have a SPAC boom in the public capital markets with fintech companies routinely hitting valuations in the billions. There’s embedded finance growing out of Silicon Valley, placing financial roots into attention economies, as Stripe reaches a $95 billion valuation. On the other side of the pond, the UK’s work on creating a favorable regulatory environment under the FCA has yielded companies like Starling, which are profitable neobanks worth over $1 billion. Transferwise, rebranded as Wise, is looking at a $5 billion IPO.

It’s a moment to cash in on the last decade in Fintech. A moment to sell.

It feels like China is buying.

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