A behind-the-scenes look at the impact to and recovery from China’s blockchain industry following the initial coronavirus outbreak.
The COVID-19 pandemic is threatening to plunge the world into the deepest crisis since the Great Depression and could deprive global economies of $5.5 trillion over the next two years. China’s economy shrank for the first time in 44 years. China’s gross domestic product fell by 6.8% in the first quarter compared with last year. The pandemic was, naturally, to blame. More worryingly, year-on-year retail sales fell drastically in March. Shops, offices and factories are now starting to reopen, but people remain anxious and movement is restricted.
However, China’s business is currently recovering from the horrible financial hangover caused by the virus. In this report, Cointelegraph Consulting talks to the leading players in the Chinese blockchain industry to find out whether the surge is relevant for them or not.
Bitcoin (BTC) and other currencies have bounced up and down since the pandemic started, yet it might be white noise hiding the real change in the crypto landscape: surging interest both from the masses and governments.
The pandemic has highlighted the fragilities in the traditional financial market, so users may shift their attitudes toward cryptocurrencies. Rather than being alarmed by the crypto market, people can anticipate it. There are three main reasons for wider crypto adoption: inflation of traditional money, decrease of the interest rates of traditional assets and greater control of the levers of the economy by authorities.
As governments pump billions of dollars into their economies, inflationary pressure will grow in the next few months. For the population, it means their money will gradually depreciate. “Naturally the question arises, how do I maintain the value of my assets?” said Josh Goodbody, the director of growth and institutional business for the European and Latin America regions at Binance. He added that “people will start seeing crypto as a viable solution to this problem.”
Many governments have eased their monetary policies in response to the coronavirus crisis. Central banks have cut interest rates to zero or near-zero rates, and investors who eke out greater returns might turn to the world of crypto. “More assets will shift from low interest-bearing traditional investment vehicles to crypto ones for higher returns potential,” said Alysa Xu, the chief strategy officer of OKEx.
The need for serious government intervention in the economy is currently justified by the conditions the crisis dictates. Governments all over the world have taken control of areas that have been liberalized, from prices of specific products to the selection of industries that are allowed to continue working during quarantine. However, the reverse measures might not be that rapid. Cryptocurrencies may be a silver lining to this.
As for the authorities, the ongoing coronavirus pandemic has accelerated the development of central bank digital currencies. While cash and ATM use is plunging due to the potential infection risk factor, government stimulus packages imply cash giveaways. Looking for the alternative to cash, authorities have been reevaluating their strategies in favor of CBDCs. “Politicians in the U.S. and Europe think about how a central bank digital currency could work in practice — this is hugely encouraging for the crypto industry,” said Goodboy.
Blockchain has been a part of Chinese news coverage since October 2019, when President Xi Jinping backed the technology and set a course for the country to “seize the opportunity” presented. The virus has failed to slow this notion down, with major national initiatives regarding consortium chains and a central bank-issued digital currency continuing the enthusiasm.
One major announcement came in the form of a national blockchain network set to launch in April, as it was initially scheduled. The Blockchain-based Service Network was backed by an alliance of Chinese state-owned companies, government agencies, banks and technology companies. The BSN is expected to reduce the costs of doing blockchain-based business in China by 80%. By the end of 2020, the project may cover more than 200 cities and become an example for a global standard.
Chinese authorities are also steaming ahead with their plans to launch their own digital currency. The People’s Bank of China has already completed basic function development for a digital yuan. This past week, images of its new digital currency/electronic payment wallet leaked on social media, indicating that it has every intention of pushing the digital currency into institutional and consumer markets.
Despite the economic fallout, China has also been continuing the intellectual race. While major multinational companies including Microsoft, Walmart, Mastercard, Sony and Intel had applied for a total of 212 blockchain patents as of the end of March, their number of patents was inferior to the number from Chinese companies in 2019, and it is expected that this trend will continue. The overall number of blockchain patent applications might not exceed last year’s result of 5,800 filings, yet getting close to that figure in such a turbulent year would testify to the healthy development of the technology.
Alibaba subsidiary Ant Financial also grabbed the spotlight by announcing its new consortium chain called OpenChain. It is targeting the highly competitive consortium chain market, which includes nearly all the major tech companies in the world. Ant Financial’s platform Alipay is one of the largest mobile payment processors in the world, with a well-established offering of financial services.
Overall, the pandemic hasn’t hindered the development of the Chinese blockchain industry severely, so a quick recovery will happen easier than for other industries. However, a deeper dive into the sectors can reveal the effects and responses of businesses there.
Industry segments, blockchain platforms
The COVID-19 crisis gave platforms a strong wake up call regarding risk and budget management. For those that fail to adequately manage the situation, the threat of insolvency is a strong possibility. In early April, the public blockchain platform Factom failed to receive additional funding and was moving toward a possible liquidation of assets.
For other platforms with better-managed cash flows, the COVID-19 crisis has been less detrimental. Here’s a closer look at how four platforms with offices in China have managed the crisis:
With a focus on enterprise use cases, VeChain has acknowledged the challenge that COVID-19 is posing to many of its clients. The virus had an unavoidable impact on client development, allowing teams to turn resources toward other areas of growth. VeChain took the opportunity to focus on its core software offering, such as a new version of its ToolChain blockchain-as-a-service platform, which helps clients verify products and grant insight into a product’s data, manufacturing and supply chain processes. VeChain’s chief operating officer, Kevin Feng, told Cointelegraph that:
“The COVID-19 outbreak has raised public awareness on product authentication and transparency of the supply chain management especially on those products that are related to consumer daily life. We have observed a significant shift in consumer behavior, and people now have a greater appetite for buying products online and mobile applications.”
Feng also recognized that the COVID-19 crisis was exposing pain points in industries all over the world, especially in areas like management, digitalization and implementation. Even with the increasing awareness of blockchain adoption, Feng believes that the financial challenges of the pandemic will make pouring more investment into new technologies a tough decision for businesses to make. This operational freeze gives VeChain more time to secure its position in the market and prepare for when businesses decide to move on innovation. Feng concluded:
“Under the unprecedented demand for cloud-based services and IT services, the blockchain technology that serves as the underlying infrastructure powering digital transition has emerged as an advanced option for enterprise decision-makers.”
Ontology is another major platform tackling enterprise blockchain use cases. During the initial outbreak in China, the company swiftly adopted a work-from-home strategy and relied on its global network of offices and partners to continue operations with minimal disruption. Its decentralized project structure meant staff were already accustomed to working remotely, which helped maintain stability. Like most of China, Ontology’s employees are currently required to disinfect offices, wear face masks and record temperatures daily.
From an operations perspective, Ontology is committed to completing its 2020 technical roadmap. Named “Aristotle,” it includes many important milestones such as cross-chain functionality with Ether (ETH) and Bitcoin, distributed identity solutions and making sure its blockchain virtual machine is compatible with the latest smart contract frameworks, such as Wasmjit.
Ontology’s co-founder Andy Ji believes that the lockdown in China may have created physical distance compared to office work, but on the other hand it surprisingly has brought more motivation, efficiency and energy to its daily operations and has allowed the company to be more focused on achieving its goals.
Ontology took up the fight against COVID-19 by sending masks to blockchain charities in China and joining the #cryptoCOVID19 campaign by donating funds to bring the crisis to an end. In addition, the company has continued to offer online courses to developers and students worldwide and even partnered with freelance work platform Microworkers to speed up workers’ payments.
PlatON is a public blockchain platform with a focus on data exchange and privacy. During the initial outbreak in Wuhan, around 5% of its team was locked down without access to proper working facilities. The team developed an online control system to make sure it was on track while working remotely. It also recognized that a lot of community and freelance developers were available, so it aggressively adjusted its development grants.
The company’s chief technology officer, James Qu, believes that the decentralized culture of blockchain helped make the transition smooth. The company focused on stability and technical upgrades early on, helping to get its operations up to speed. It has also been eyeing the lucrative consortium market now that government and enterprise demand in China is continuing to rise. Its technology has already been used in a number of successful consortium chain projects in the country.
QuarkChain provides an underlying technical solution for blockchains based on sharding technology. As a technology-driven company, it has managed to maintain operations while its 40 employees spread around the world have continued to work on an infrastructure that connects both consortium and public chain technology. QuarkChain’s chief marketing officer, Anthurine Xiang, reported that despite some client-side delays, it has had more time to invest in research and development.
Xiang said that following the outbreak, countries like China began to rethink how to build up more advanced infrastructure to better respond to large scale events like a public health crisis, adding: “We are providing the government with multiple project solutions for the public health system, such as blockchain solutions, resource management, and trading platforms.”
The pandemic threatens the sustainability of many physical business models, but for online models it has been an opportunity to connect with their user base and expand. Given the worldwide lockdowns, customer demand has been pushed from offline to online. OKEx’s chief strategy officer, Alyssa Xu, believes this will lead to wider acceptance of digitalization and ultimately benefit the popularization of the blockchain-driven economy. She stated in a conversation with Cointelegraph:
“Since the virus outbreak in January, the exchange has a steady growth in constant, while it estimated a 19% boost in terms of trading volume during early March.”
Xu believes that the pandemic is a test of how urgently a company can respond and adapt to changes in the market conditions of its customers. She was very pleased with how OKEx’s platform responded to the “Black Thursday” market crash on March 12. Despite a huge decline in the prices of crypto, the trading system maintained zero clawback and withstood the volatility and chaos. Xu now wants to take advantage of increased user volume to widen the company’s range of services, including crypto derivatives products and public chain-based decentralized finance applications.
Binance reported a robust first quarter performance, attributing it to the record high volume across its platform and the crypto market in general. With the strong user activity, Binance has responded by increasing its team across all regions by 100 employees.
Goodbody, Binance’s director of growth and institutional business, felt that the quantitative easing and stimulus packages from central banks could lead to economic instability. Politicians and world governments could turn to CBDCs as a method of distributing stimulus packages, which he believes is an encouraging sign for the industry.
With everything running smoothly, Binance was able to turn to philanthropy. Binance Charity launched the Binance for Wuhan initiative and donated $1.5 million worth of medical supplies to hospitals, medical centers, etc. In March, Binance Charity launched the Crypto Against COVID initiative, aiming to raise $5 million for countries worst affected by the virus.
Venture capital firms and incubators
As the global lockdown continues to last, company revenues can be undermined or cut off entirely. This is where venture capital firms and incubators become more important than ever, as access to cash and investments can be the difference between insolvency and survival.
Shanghai-based venture capital firm Hashkey Capital observed that many enterprises are struggling to raise capital, forcing them to lower fundraising targets. Its investment director Yu Zongmin noted that: “It is a great opportunity for us to find better value in the current market. For the operational strategy, we may raise the bar higher for recent investments and focus more on the commercial maturity and cash flow of the projects.” He went on to add that:
“A positive outcome from the crisis is the rising participation and connectivity of people in the digital world. People are minimizing in-person contact through mediums such as e-commerce, e-school, e-clinic and e-cash. This has played a pivotal role in containing the virus spread. The blockchain sector may greatly benefit from the booming development of the global e-cash ecosystem. We are very optimistic about this industry as always, and will continue to actively search for high quality and value driven projects to invest in.”
China-based technology incubator New Chainbase was working to accommodate many of its projects. Its operations levels have returned to normal, but it is offering a relief plan for start-ups renting office space from it. New Chainbase has a long-term financial interest in the blockchain space and has remained optimistic that industries will see the trust that blockchain provides as an essential technology moving forward.
Fenbushi Capital, another big industry player with offices in Shanghai, New York and Silicon Valley, is no stranger to working in a decentralized manner. Its operations have remained quite stable, but it has observed that companies in its portfolio have been performing certain cost controls, including staff reduction and lowering their operating costs. Fenbushi Capital partner Rin Huang attributes this to two factors: First, the crisis has forced a reduction in business volume and the companies do not need so many people. Second, the overall economic situation is uncertain due to the crisis and companies need to maintain sufficient cash flow.
Huang noted that for her daily role, the crisis has had little impact. With traffic jams already back in the streets of Shanghai, her routine has returned, with the exception that many processes are now conducted online. She sees blockchain having more opportunities in enterprise situations such as traceability of medical supplies: “In order to prevent possible counterfeit medical device products, the government began to vigorously promote the supply chain of medical device products to be traceable on the blockchain.” Additionally, the technology can help in digitizing the industries:
“The digitization of the consumer industry in China has been well developed, and the emergence of the crisis has further promoted the electronic communication system within the management process of the enterprises. The main role of the blockchain at this stage is to hash the important information for internal communication on the chain.“
The Bitcoin mining hash rate has been climbing consistently, but the upcoming halving event and macroeconomic instability has led to uncertainty in the mining community. Nathaniel Yu, the international marketing manager of mining leader Bitmain, understands the importance of normalizing operations right now. He stated that while Bitmain is following professional advice for dealing with the pandemic, it is also exploring alternate methods of working in order to meet demand for its Antminer products. In a conversation with Cointelegraph, Yu stated:
“During these uncertain times, the best way ahead for the mining industry is to continue to adapt their operations to ensure the safety of all employees comes first. Miners will also need to assess their operations to ensure they are operating as efficiently and effectively as possible during this time.”
Like other online business models, many media sites are reporting a jump in viewers as people generally have more free time on their hands. Two major Chinese blockchain media sites, 8btc and Odaily, confirmed in interviews that they are both optimistic about the industry moving forward.
Gavin Qu, a partner of 8btc and the CEO of ChainNode, believes that the current situation can be advantageous for online companies with a healthy cash flow. Qu explained how ChainNode moved quickly to develop an online product release conference service to help business partners bring their offline conferences and product announcements online through live video on the platform. He believes that the importance of online events will become greater even after the pandemic, as China’s mobile internet infrastructure continues to move toward 5G technology.
Mandy Wang, the CEO and co-founder of Odaily, talked about how the company has shifted much of its operations to an online model since the pandemic began. One of her editors was initially locked down in Hubei province, unable to return to the company’s Beijing offices. She spoke about the challenges of conducting all interviews over the phone and moving all offline events online. On April 10, Odaily held an all-day conference with over 30 guests in an online streaming format.
With chaos gripping the global markets, she reported an increase in views by around 20%. She accredited part of that success to increasing the company’s operating efficiency and risk control management policies, which she believes will become a greater subject of focus for enterprises in China moving forward.
The next steps
For an industry built on a decentralized emerging technology, it’s no surprise that the blockchain world has embraced the remote working and video conferencing reality. Technology and agile management has managed to normalize many business processes, but disruption to other industries has made it difficult to raise funds, develop new clients and oversee physical implementation of enterprise services.
Outstanding issues in the aforementioned areas should be addressed as soon as possible to prevent the loss of clients and ensure budgets can withstand an extended period of reduced revenue and third-party investment.
With the bulk of major offline events in quarters one through three wiped out or moved to an online format, it’s up to marketing teams to find new ways to promote their businesses. After the initial shock and subsequent organizational restructuring, there’s been heavy interindustry collaboration in China, with platforms, media and exchanges organizing online events to connect with new users and their existing communities. R&D and technical development teams have remained mostly unaffected by the virus, needing only minor adjustments to organizational processes.
Rather than panicking at the thought of a potential economic recession, most industry players are optimistic about the long-term outlook, especially considering the reactionary fiscal stimulus policies that are being put in place by nearly every major government.
The companies see digital currencies as both a potential solution to monetary distribution as well as a sanctuary from inflationary currency policies. Finally, with China’s central bank and government agencies continuing to restate their commitment to blockchain technology and a national digital currency, there’s very little doubt that the companies that adapt and survive will find themselves in a very active and healthy industry in the future.