China's Crypto Ban... Why Now? | Sahil Bloom (SotN 9/28)

Transcript

hey bankless nation welcome to another state of the nation david and i are super excited about this david it's great to have you back uh state sides we could talk about this this is a talk that we've wanted to do since like last week evergrand made the headlines there is some a lot of stuff going on in china that i think we want to unpack today it is affecting macro markets it's affecting crypto as well and we have uh sahil bloom who is an expert on the subject to talk about it with david how are you doing man you feeling refreshed from all your conference travels oh my god extremely it's so nice to be back in my actual apartment with my actual setup i hate recording uh podcasts on a laptop uh so it's good to be back and good to be back

in the swing of things making more content out of the bankless ecosystem content never stops around never stopping no that's okay you know what and uh like events never stop either crypto never stops so why are we talking about evergrand today why is that important to the crypto story and um yeah what's uh what's the tl dr here so there's so many puzzle pieces floating around the world right now we have united states as a nation state being very hostile to crypto we have evergrand which is a very large real estate like gargantuan in the chinese markets and china is also becoming really really hostile to crypto meanwhile the the uh quantitative easing and loose monetary policy continues and also now we have apparently a

catalyst for a potential catalyst for a excuse me a global contagion event we're going to see if that uh if that description description is still relevant a week later but there's so many different puzzle pieces that are like floating around hanging around in the air and we're trying to see how it settles right so we what we're trying to to discover today is does this ever grand uh real estate um uh what's the word like uh crisis i guess uh how much is that going to impact the future of monetary policy out of china how much is that going to impact our crypto industry and how much of that is if impacting the markets as we see them right now uh these are this is one of those events where like in

hindsight we'll be able to uh kind of explain exactly what happened but in the moment we're still trying to figure it out and that is what we are talking about with uh today with sahil yeah and absolutely also recently i mean on friday it's news that china has banned crypto again so how does that impact things is that related to evergrand in any way are these isolated incidents or maybe there's some sort of tie that binds all of these things together so guys this is going to be a fascinating conversation gotta tell you about what's going on in the bankless nation uh wow releasing podcasts we had this fantastic podcast with uh ariana simpson from a16z all about crypto gaming what's the total addressable market for crypto gaming david

uh i mean anyone listening did you not play games as a child so you which means everyone basically everyone it's eight billion people guys that's exactly what uh ariana said in the podcast listen to that one if you want to get up to speed on crypto gaming also our friends and sponsor tracer dow they wanted us to let you know that they are crushing it when it comes to perpetual products on layer two this is on arbitram they've got almost 20 million dollars locked in their contract so this is a way for you to go leverage long eth or bitcoin if you want you can go long you can go short if you so choose maybe trade on some of the macro news coming out of china i don't know all of these

positions are tokenized though there's no liquidations there's a mining program and of course our favorite it's all bankless no banks involved over here so go ahead and check that out we will include a link in the show notes to tracer dao and what they're up to but david i've got to ask you the question i ask every week before we get in that is what is the state of the nation today sir the state of the nation is correlated and that's a great way to trade the markets again back at racerdale if you want to trade how correlated we are because this china news came out and then and then we dumped and then this federal reserve insider trading news came out as well as this debt ceiling a lot of macro things

are happening that is pushing the crypto markets around which as a crypto native guy really really frustrates me i prefer to be a self-sovereign from the macro markets but all markets are tied to each other one way or another so ryan the state of the nation this week is correlated we are correlated yeah i was i was hoping david in 2021 we would leave all of that macro market correlation in the dust and behind and crypto would have it run on its own and it has to a great degree but of course we are still tethered to what happens in macro and definitely evergrand and china band is part of the story there so guys we will be right back to talk about all of this and more with sahil sahil bloom but before we do we want to

thank the sponsors that made this episode possible when you shop for plane tickets you probably use kayak expedia or google to compare ticket prices so why would you limit yourself to just one exchange when you trade crypto when you make your trades you want to make sure that you're getting the best possible price on your trade and that you aren't paying high gas costs that you could have otherwise avoided that's why you should be using matcha matcha routes your orders across all the various defy exchanges on ethereum polygon binance smart chain and gives you the best possible prices without taking any commission matcha has smart order routing that splits your order across multiple liquidity sources if matcha sees that it gets you better pricing trading on matcha is super easy because it pulls the liquidity for me into a single easy to use platform and

that has even saved me multiple times from accidentally picking the wrong decks to trade on and accidentally getting a bad price matcha also allows for you to make limit orders on chain so you can set and forget your defy trades and they will go through automatically while you're away new to matcha is an integrated fiat on-ramp you can purchase crypto directly with your credit or debit card and have that fiat be instantly traded for any token that has liquidity when you're making a trade head over to matcha.xyz bankless and connect your wallet to start getting the best prices and most liquidity when you trade your crypto assets arbitrar is an ethereum scaling solution that is going to completely change how we use defy if you've been using ethereum for the past 12 months you've

probably noticed the high gas fees and the slow confirmation times that have been plaguing d phi too many people want to use ethereum and it doesn't have enough capacity for all of us that's where arbitrarum comes in arbitrarily is a layer two to ethereum which means arbitrary can increase ethereum's throughput by orders of magnitude at a fraction of the cost of what we are used to paying when interacting with arbitrary you can get the performance of a centralized exchange while tapping into ethereum's level of security and decentralization this is why people are calling this ethereum's broadband moment where we get to add performance onto decentralization and security if you're a developer and you want to save on gas costs and make an overall better experience for your users go to developer.off

to get started building on arbitrom if you're a user keep an eye out for your favorite defy apps building on arbitrage arbitrary has been working with over 300 teams including ethereum's top infrastructure projects and will be opening up to all users shortly there are so many apps coming online to arbitrom so you may want to pack your bags in preparation for the great migration to the arbitrary layer 2. to keep up to speed with arbitrary follow them on twitter at arbitrom and join their discord hey guys super excited to be back with sahil bloom uh sahil is a writer and content producer focusing on money finance macro economics you may have seen some of his twitter threads they are like world famous many of them go

viral he has this gift of distilling things down to their essence he also has a masters between public policy from stanford he's recently been focused on this evergrand crisis everything that's happening in china and keeping us all informed sahil it is fantastic to have you on bankless how are you doing today i'm great man thank you for having me i appreciate y'all and love what you're doing man uh like likewise and we especially appreciate the the light that you've you've kind of shined into what's happening in china with this evergrand incident we're going to talk about that we also want to talk about china's crypto ban how this all plays out in geopolitics but first can you give us like for somebody who hasn't been paying attention for the last couple of weeks

on the evergrand crisis but they've they've heard a headline they're worried about contagion this sort of thing can you give us like the 101 on what actually happened like timeline of event style yeah yeah for sure let's set the stage i guess to start um and the first rule of all of this is do not put the word ever in your name you had like the ever given thing with the boat that got stuck in the sweats canal now you've got evergreen it's just never a good idea so stay away from that if you want to start a business you hear that evernote sorry i think they might already be dead unfortunately i don't know we might just not know it yet uh so evergrand what is it um it's a fortune 500 chinese property developer it's based in shenzhen china founded in 1996 by this guy uh hoi kyan

apologize if i'm butchering his name but doing my best you know it really started to boom in the 2010s the founder came up in the manufacturing industry he really built this thing from the ground up it's a big business call it 100 billion plus of revenues 5 billion ish in net profits last year has about 1400 projects across 280 or so cities around china the simplest way to think about the business is that it's a home builder they buy land they develop the properties on top of the land apartments homes etc and then they sell the finished products to and customers who are buying and occupying them the challenge with this type of business is it has a really long cash conversion cycle so what do i mean by that you know

it takes a while to go from where they invest the money to build these properties buy the land build the properties pay the contractors do all the construction to when they're actually receiving cash when they sell the properties on the back end with the exception of small upfront deposits that people might have to pay in order to kind of lock down a unit there's a very long time between when they invest and when they're actually receiving cash so that's the challenge with the business how do you solve that really it's with debt you need some sort of financing mechanism for this the cheapest way historically for them to do that has been with debt there's equity capital much more expensive so they've been using debt um the problem for evergrand which we're going to get into obviously is they used a whole hell of a lot of

debt along the way even by property developer standards they've been going above and beyond in terms of the leverage profile of the business you look at the chinese property development sector they were far and away the most over levered property property developer maybe the most in the world actually if we were to look at it so they had ended up accumulating 100 billion dollars of debt for this business as they continued to grow it over the years along the way the founder who had come up and was kind of a modest living standards in his childhood became a billionaire over the last couple of years since 2018 i saw an estimate that he took about five billion dollars of dividends as one of the major shareholders of the business all the while they were accumulating an insane amount of leverage and debt on this

business so pretty crazy just like backdrop to the whole situation and honestly not that crazy that they took debt in principle but the amounts and the quantum that it reached became quite mad and we've talked about it i'm sure you've talked about it on the show debt is a double-edged sword in the in the best sense of the word on the good side it's great you can grow with really cheap cost of capital you can go and borrow money to spend rather than having to invest your own that's great when it's working on the other end of it it's not so great when you get caught by the other edge of the sword so a couple things happened that led to them getting caught quote unquote in the last while number one china started to place some restrictions on leverage levels within

the property development sector why did they do this we're going to get into it as we dive into some of the things around crypto but in my mind it's power they want to control they want to have more control over these sectors they don't want the kind of crazy spending that the property development sector and other sectors have grown accustomed to so they placed some restrictions on leverage levels net leverage ratios liability to asset ratios etc that evergrand was on the bad side of and so all of a sudden evergrand can't borrow at the same levels that it previously did in order to continue to fuel the growth and the way these things work it's not dissimilar from a ponzi scheme as you think about it because what you're looking at is you're having to borrow more and more money to fund your growth you keep having to borrow money

in order to fund the same amount of growth and as soon as that growth slows it starts getting much harder to pay the interest payments on that to service the debt and that's what happened to evergrand about a year ago they had to send a letter to local provincial government basically saying we're worried that we're not going to be able to make an interest payment on some of this debt that we have outstanding and by the way we posed a systemic risk to the entire country if we go under because we've borrowed so much money and we have all of these homes that we are building for all of these chinese consumers and they basically said we're a systemic risk which i think is like a pretty cheeky move in general because you're putting a pretty strong arm under the government to say if you let us go under and it does

collapse the economy we told you so and if they do nothing you know and and that ends up being the case it just it looks really bad so you're sort of in a cheeky way strong arming them for the future while also at the same time the u.s it worked in the us right i think it works which is the funny thing i mean people have it's this moral hazard problem right where there's a few levels of moral hazard here there's one where you're borrowing money to fund all this growth and so you're buying properties you don't really care what you're spending to buy these properties or to buy the land because someone else is financing and it's not my check that i'm writing it's some bank or some hedge fund or whoever it is that's giving me the money in this case they are

borrowing from literally everybody i mean they were borrowing from employees they were borrowing from the retail sector it's really really bad when you get into the weeds of it but basically all of a sudden they couldn't borrow to just keep growing they weren't growing quite as quickly they were having trouble meeting these payments and then you start getting this cycle it's the deleveraging spiral that people talk about and there is both a technical side to it i.e not being able to meet payments and a psychological side to it which is suddenly the narrative starts building that oh evergreen's not so healthy maybe they're not going to be able to deliver these homes maybe they're going to go under and then all of a sudden it gets more expensive to borrow people start demanding payments quicker your vendors start asking for payments quicker

suppliers start asking and the whole cycle starts to build the media starts reporting on it it becomes a story and it just starts to spiral both the technical and the psychological and that's what happened to them and when you look at it to me it's like the finest example of this thing called dornbush's law which is this amazing thing that not many people have heard of which is with any great crisis it takes a lot longer to happen than you think it will but then it happens much more quickly than you ever thought possible and so it's like this gradually than suddenly thing with with bankruptcies or with unwinds and that's really the case here i mean people who have been observing evergrand for years have known this was a hot mess for a long long time but all of a sudden you're getting hit and in

the last two three weeks the narrative has materially accelerated and you're in this environment where they're very quickly you know having the rubber meet the road on all of this zahil can you help us measure the amount of systemic risk that evergrand poses to the to the chinese economy i think it's pretty funny that they write it write an email to the chinese government saying like hey we're a systemic risk implying that they definitely knew that they were a systemic risk and they took on all this debt anyways which is kind of like i mean you know an fu to you know everyone around them right but like how how much of a systemic risk are we talking about yeah i mean the question when you evaluate something like that is are they just saying it because they

want to have a bailout in the event that they go belly up or are they actually a systemic risk to the economy um you know is this the lehman moment that everyone's been calling it when i look at it just on a kind of pure numbers basis you have 100 billion dollars of debt here give or take 300 billion or so of liabilities when you compare that to like you know the financial crisis 0.709 you were talking about the trillions of dollars of cdos that were outstanding it was a different quantum and a different magnitude of overall exposure in the economy not to mention the multiples that came off of that on side bets and whatnot and how that played through the whole economy the similarity which people want to draw upon is housing right you're like looking at the housing you're looking at real consumers

middle class working class consumers in china but the level and the quantum of this is just muted relative to what we had seen back then so i actually think what they did by saying that was much more of a play to get bailed out because it's better for you if you get bailed out right you don't lose all your money as an equity holder maybe the bondholders don't lose all of their money it's just a better situation but the reality of what they're facing now is dire and it's really a mess and it's embarrassing for china i mean you have something like 1.6 million unfinished homes that they are on the hook for have accepted some deposits for and seem like they will probably be unable to deliver that's like 200 billion dollars worth of home value or something like that

they've been offering up these wealth management products they started getting creative basically when they were running out of money and saying hey you employee or hey you retail investor give us some money we're going to give you a high yield investment product for that in reality they were just taking that money and using it to fund their losses and trying to pay off debt you know take money from one person to pay off the other guy i've seen that movie before and it's ugly it's just an ugly situation they were like advertising for that in elevators in the properties that they had developed it's really a pretty embarrassing situation and it's a black mark on on china right now i believe okay so you said they have 300 billion in assets and only 100 million in outstanding debt which feels like an a pretty safe ratio right sorry 300

billion in liabilities oh okay well yeah okay they are they are way over levered yeah no it is it is an ugly situation for sure and it's not clear that there's really a an easy way out of it you know and when you look and if you're if you're in the the you know chinese policy makers shoes right now and you're looking at it there's sort of two options right you're you're cut in a tough spot you basically can either bail this out um and the downside of that is you're condoning financial excess right this founder has made five billion dollars on dividends over the last several years while a bunch of chinese consumers are getting blown out having homes that they paid for that they're not able to get all the vendors suppliers the bondholders etc are getting smoked

you can bail them out and condone all of that and say it's fine do nothing you can do nothing and let kind of let everything unwind just let the whole system fall apart let the chinese consumers get stuck with no money let everyone get kind of wrecked right my best guess is that they end up shooting the middle they kind of adopt a middle ground where basically they find a way to obviate the moral hazard which is probably wiping out most equity holders making sure the founder whoever the largest shareholders are feel real pain associated with it china's pretty good at that make sure that that happens but the consumers and probably some of the senior bondholders people kind of further up the waterfall

end up being made whole or close to whole so that you don't have this like massive systemic thing flowing through the economy and so that china can continue to you know create this aura of power and control over what is an economy that i think is really on on loose footing so there are a ton of parallels here that we're seeing with 2008 except for the fact of the size the magnitude is orders of magnitude uh much smaller instead of happening in america it's happening in china and importantly in this scenario in the evergrant scenario we already had 2008 right we already had these lessons to learn uh and so and also the another main difference i would say is like like like you alluded to the disposition of the

chinese government is going to be very very different than the disposition of the american government in 2008 when the crisis was a first time crisis and also orders of magnitude higher um and so you're saying that like and something i'm actually hopeful for is that these people would have maybe they don't use this term in in china but in america we would have used the term golden parachute right like uh suite you levered up your company you extracted a lot of the money you paid yourself a big bonus and then you crashed the economy and then you got a bailout from china hopefully uh china actually is seeing that behavior and like you said going after those key individuals in specific rather than um just like allowing allowing the market to clear having a lot of pain for the individuals and and

for the normal equity holders yeah yeah no i mean i think your your uh characterization is all correct uh the question i would have is like is this the tip of the iceberg right if even if this one event is not the lehman moment maybe this isn't the you know size or scale where you could have it uh become the massive downfall is this one of the precursors to that is is china you know sitting on a really unstable footing where this is one of the things and then several other cards fall and all of a sudden you have this spiral of of the overall debt bubble that's that's been happening there for a while um the fact for china that's different than the us is this is going to be a precedent setting event for them in some ways of how they choose to handle on a

large international scale uh something of this of this magnitude um you know the u.s you watch the big short anyone that's seen that movie at the end of it they have that whole tongue-in-cheek scene of like all of these guys went to jail right and then you kind of get the dot dot dot nope not a single person that you know had taken on all this ridiculous risk and made all this money off of all of the consumers who got screwed not a single one of them went to jail i mean we were in the u.s in one of the richest countries in the world super successful there were these people making tens of millions of dollars uh you had real consumers who lost their homes who were tragically crushed for the next decade and those guys got off not a single one of them went to jail and china has a

moment in time where they have to decide and they have to take a position on what's going to happen with this type of you know obvious financial access and this type of risk-taking behavior and they need to set a precedent for whatever it is in the future the scary thing is it you know it goes on behind closed doors right who knows where you know the founders where the where the key stakeholders in this are going to end up what's going to happen but the world is watching you have the entire world's media now really hyper focused on this situation and so china has a big opportunity it's also a big risk of how they're going to handle it and what's going to end up coming from it yeah you said the world's eyes are definitely on this and you also said earlier sahil that you know china

doesn't really like to doesn't like being embarrassed right uh this is an embarrassing situation and they don't like being embarrassed um this is how it first came on on my radar and many many folks in the west were these kind of these protests that we saw this is why david's parallel with uh with 2008 i know others have made it seem so apt because we saw all of these images of um chinese citizens the consumers that you're talking about the consumers that are getting hurt from this incident like storming i think the evergrand offices and i i'm just curious so from the perspective of one of these consumers one of these protesters uh almost like an occupy wall street type microcosm moment

are they basically getting screwed out of their homes so they put some sort of a down payment expecting evergrand is going to provide them a home and now suddenly there's this creeping realization that they're not going to get a home and they're not going to get their down payment back and so they're pissed off and they storm the building and my impression is china doesn't really like protests like these right like it's like let's be quiet about this right we're an organized society we don't operate this way and when i say china oftentimes i mean the ccp uh yeah especially but like what is the uh outrage felt by a consumer are they just getting totally screwed right now uh from this deal yes

i wish there was a better answer than that i mean the reality is is kind of two-fold or three points i would make here um and it's it's bad and it gets the worse so the bad side is they they put up money for these homes and when you do that you expect you're actually going to have the product delivered you know if i go give someone money to do work at my house if i you know pay a contractor to do some work at my house give them ten thousand dollars come fix my bathroom i expect that that person is going to show up do the work finish it then i'm going to pay them upon completion whatever the remainder is and there's a bond there's a trust that's built up in that and that's what the economy thrives on we need trust in

these systems in order for the economy to work suddenly if i go pay the biggest property developer in china some money to come and build this house for me and i give them my life savings up until that point and then i'm going to go buy the rest of it when it gets done a few years later that property developer no longer exists and that house that i thought was built is like a you know ball of concrete that's sitting there unbuilt with grass growing all over it et cetera it looks really ugly and i didn't get my house where does that trust go how do you continue to have trust in the economy and the government etc when that type of thing happens at scale it's really scary to think about and that has lasting effects as you think about playing that out over

the coming years because that consumer now i don't have trust in large institutions if that was a big company that told me to trust them and told me to give them their money and now this happens and then overlay on top of that this whole thing they did with creative financing which i hate as a phrase but it's the reality of what they did was then they said okay shoot we're running out of money let's go borrow money from everybody that we can and so the way they did that was they said oh here's this high-yield investment product that you can buy from evergrand and oh we're a safe company we're the biggest property developer in china trust us we're good they put up you know papers in the in the elevators of properties that they had already developed where people were living and you're living in the property so of

course you trust it you're like oh this is real this is a real company i can invest in this is fun and they get people gave them real consumers who had invested a lot in the homes already or retail investors who were just looking to have some sort of yield gave them money they strong-armed employees into it they said oh if you want to get your bonus at the end of the year you have to give us this money and buy one of these products otherwise you might be in jeopardy of not getting your bonus so what do you do as an employee you give the company your money and now suddenly they're missing payments on it already right because they're going under and they don't have the money to pay it they were promising 10 plus percent interest rates and it's gone i mean the money who knows where it

went they used it to fund some losses elsewhere they used it to pay interest payments on some other debt um and so the consumer in all of this is getting totally screwed and that's what china has to really contend with and that's the biggest risk in my mind from a power struggle perspective is they need to prove to their own population and to the world who is looking on that there is some level of control over this and that they can actually support their people in a meaningful way who have gotten really taken advantage of in this situation there's a frequent saying that if we had public auditable open permissionless blockchains running our financial system in 2008 2008 wouldn't have happened because of the level of transparency that blockchains bring to financial

markets like one of the big messes of 2008 was there's this gigantic spaghetti network of financial contracts that no one could parse apart uh do you think that if is there any amount of and you're talking about all this trust that needs to be established in institutions is there any amount of just like this is happening because these markets are inherently obfuscated or black boxed or just difficult to read or was the information that caused this crisis more or less open to everyone and people just weren't paying attention is there something that the is there something to open transparent blockchain financial systems that could have fixed this yeah absolutely right trustless systems where you no longer need to trust

whoever's the counterparty on this because there is a system that sits in between that can create that um will clearly help this type of thing um you won't have the type of like rampant uh activity that leads to this type of cycle in the same magnitude that we've seen it the reality here is like there's nothing really new about evergrand i hate to say it right like i wrote a bunch about it the one thing that jumps out at you if you've been around or if you've studied financial history is there's nothing new under the sun this is the exact same thing that happens over and over again in history you get into these bull markets it's easy to borrow it's really cheap to borrow so you start borrowing more you grow a bunch because of that suddenly you're not growing as much i can't pay my interest like you start

having the unwind this happens the thing that's making it more interesting is the overlay of the geopolitical side with china all of this creative you know fraud borrowing all the stuff they did where the consumers are getting screwed over and you have this massive public spectacle of all of it that's that's playing into it and i think that's the most interesting part of it because the reality of the situation is this thing has played out time and time again will blockchains crypto all of that help in the future with you know developing more trustless systems around all of finance absolutely no doubt um i still think we're probably a few years away from that becoming more mainstream and as we've seen with what china did last friday i think we're a ways away from having china wanting to adopt anything like

that well you know another another reason my people might point to is um just debt is so cheap i mean if you're ever grand why not just keep stacking up that debt right like interest rates are close to zero percent uh and central banks have had this easy monetary policy for like the last you know 10 years and continuing to uh decrease things decrease risk and so do you think that this played a major role in this and maybe this is also why it's it's not just evergrand maybe evergrand is the first kind of rotten egg that we discover but maybe these rotten eggs exist in china and all sorts of other economies because the cost of capital is so low and things have just moved down

the risk spectrum to uh to the most uber risky does that play a role in this and what's your take on that i mean artificially low interest rates play a huge role in risk-taking behavior because you're not getting yield here um you know if you're an investor and you're not getting yield on on uh you know on treasuries or on whatever is really low on the risk spectrum you start chasing it elsewhere and so you're starting pushing pushing further further out you talk about you know where stock markets have gone to and people everything that's priced in all the growth it's because people are going further out on the rest spectrum you know you have these artificially low risk free rates quote unquote on one end and yeah it drives irrational behavior it's a dislocation in the market i i personally am a pretty free

market guy i tend to think of myself that way and so the reality is when you start disrupting free markets by taking whatever actions whether it's explicit like in japan and you're going and actually just buying on one end of the treasury curve or if it's implicit where you're the fed and you're issuing guidance on what interest rates should be those things all artificially lower interest rates and so a company yeah if i can borrow it you know 1.25 versus having to put in equity capital that has 15 percent um you know implied cost that's a no-brainer as long as you can do it and as long as you're growing to pay it so is there a sense that like the central banks themselves have kind of created the problem and they've created the systemic risk that caused evergrand to happen like how has the ccp and the

central banks actually contributed to the conditions that caused this mess to begin with yeah and this is global so you can point to the central bank of china you know ccp you can point to the fed you can point to central banks globally i think there is a pretty widespread agreement now that um it's probably time to kind of get back to more market-based interest rates and start allowing these things to float more readily they took down interest rates a long time ago and they've never really come back up when you look at the long term chart of it we've been in a just like systemically lower interest rate environment for a really long time and it causes weird things to happen people take weird actions when that's the reality so i don't think that's a china thing the u.s

the fed i mean what they've done with interest rates and what it's done to risk taking behavior on the other end of the spectrum does it create bad actions yeah and that's the normal cycle if you go read ray dalio has his his kind of amazing tome on on market cycles and uh and market crises and it's incredible and it's played out time and time again you get you know an environment of really low interest rates and people start taking a lot of risks and it leads to excessive risks and they raise interest rates and suddenly you get a blow up and it comes back down and it's just a cycle that is played out time and time again throughout history and i think we're just seeing another version of it now the difference here is this is really a first on the public stage for china

absolutely and so i you kind of alluded to those your best guess on what china is going to do as a result of of this but yeah i'm curious if you could kind of re-articulate so yeah they could either i guess decide to to bail out their the existing investors the banking system or bail out the people or maybe sort of thread the needle and try to do a little bit of both what actions do you think they will take to try to uh you know fix this issue yeah it's all about power uh the whole thing comes down to power for them and the best thing they can do for their power both actual power and perceived power is to keep things as quiet as possible and handle it as quickly as possible and so

i tend to think that that is the solution they will push towards and what i think that looks like um if i had to guess would be something where um bondholders for the most part are okay and you kind of have the senior bond holders in particular that you know are sitting further up the waterfall and end up okay and bailed out and you have consumers that end up generally okay those consumers who gave cash or the wealth products basically people where you don't want these protests happening and to your point earlier you want to keep things quiet you don't want this to be all over the news you don't want those pictures out everywhere and so you figure out a way to bail out consumers you figure out a way to bail out those more senior holders but the equity for the most part gets wiped and people

that were the speculators in all of this including the founder and primary shareholder who has made a ton of money off this is the one that ends up on the hook and i think that that's probably the right middle ground solution for them to go with because it does obviate the moral hazard problem where you're not condoning this financial excess for future um and i won't be surprised to see the founder in some trouble um publicly and you know and made an example of in some cases where you send a message to other entrepreneurs and other builders that this type of financial access won't fly and if that's his fault or if he's just a you know a casualty of um of what is happening and the need to set a precedent in china um i don't know i don't really have a response to that but

i think that's probably what you end up seeing happen over the coming weeks and in china this this doesn't um require a legislative act or it's sort of a congressional uh act per se right so like it could be a few senior party members who basically dictate that this is the way it's going to be and then so it is yeah i i mean it's the downside of democracy if you will i think it was like winston churchill who said that democracy is the worst form of government except for all the other ones um you know in a free democracy you have to have public hearings about all of this you have to um you know really play it out have due process around all of it except it's messy it's out in though it's messy it's challenging you have to get a lot of people on sides around i

mean we've seen it with them trying to manage all the coved recovery bills and all the different you know money printing activity everything that they've done over the last year is challenging you get everyone weighing in on it you have two fed chairs that are having to resign because they were like insider trading or you know allegedly involved in those things like it's messy in china a lot of this can happen behind closed doors and you've already seen this in the last week there was a bond payment that was due there was some like really vague statement that evergrande put out that they had reached some sort of agreement no one really knew what the terms of that agreement were but they weren't in default and so things are happening behind closed doors as we speak um decisions are being made uh and my guess is that's how it plays out is

that it's going to be pretty hush-hush you're not going to get a whole ton of clarity around what's happening and the results will be what they will be well i think you may have just answered my next question but i'm going to ask it anyways is now that this event is roughly 10 11 12 days old is there any update we have anything new that's that's been added on to the story any progression at all yeah i mean they have a lot of bond payments coming due so there's going to be a lot of updates i think it's something like seven and a half billion dollars of bond payments that are due in 2022 um big chunks that are coming up due there was one last week i forget whether there's one this week but they definitely have several more that are due in 2021 at every

single one of those turning points there will be an update because people will want to know what the payment made um the way it works in china for most bond payments is that they're done through a clearinghouse and so like a normal payment it goes through a clearinghouse it goes to all the holders of it um when you hear in a statement that a bond payment or an agreement is reached outside the clearinghouse that tends to mean that there was some form of restructuring a payment plan put in place something where they didn't pay it in full and so last week when they made that announcement that was kind of the reading between the lines version of it was something happened behind closed doors some sort of agreement was reached and it was done outside the clearinghouse i would expect you see a lot of outside the clearinghouse

activity from evergrand in the coming months and you know quite possibly six months so the last question because we want to spend some time on crypto here in uh china's crypto ban recently but last question is kind of like about contagion i mean should we be worried about this sahil like is this going to uh in fact other markets is this just sort of the the lehman moment as you will or can we just like stop worrying about this now what's your take i would say i'm less worried about it um than i was two weeks ago when i first started reading about it i just spoke to more china investors who have been really deep in this market and have a deep understanding of it um who had been observing it for a long time had kind of come to the conclusion that it was

relatively muted in terms of how extensive the impact would be if it unwound had come to terms with how china was probably going to handle it and so i would say today where i sit is i'm i'm less concerned about this being the single moment that leads to global contagion i think the concern i have is that this is the tip of the iceberg and there's a bunch more of these things sitting out there in china and otherwise that you know that we've been in a bull market for for 10 plus years now and so you're gonna start having these tales of financial excess and deleveraging spirals that when added up you know start to reach into the trillions of dollars it's not just the 100 billion dollar moment of an ever grant right the everyone's worst fear is that like because the bull market has gone on

for so long everyone has positioned themselves accordingly to number go up and when number stops going up then everyone gets caught with their pants down sahil we want to turn the conversation towards the crypto side of things why this is relevant to crypto obviously there's that recent china ban which uh we all have heard trying to ban crypto we've been here before but this one feels different so we're going to turn to that conversation next right after we talk about some of these fantastic sponsors that make this show possible living a bankless life requires taking control of your own private keys not your keys not your crypto that's why so many in the bankless nation already have their ledger hardware wallets which makes proper private key management a breeze but the ledger ecosystem is more

than just a secure hardware wallet ledger is the combination of the ledger hardware wallet and the ledger live app and if you're used to seeing all of your crypto services and favorite d apps all in one place ledger is where you want to be not only does ledger let you buy crypto assets straight from the app but it also hooks into decentralized exchange aggregators like paraswap which makes sure that you are getting the best prices on your trades without your assets ever leaving your control defy never stops growing and the ledger live app grows alongside with it so click the link in the show notes to see all the defy apps that ledger live has and stay tuned as more and more apps come online and if you don't have a ledger hardware wallet what are you even waiting for go to ledger.com grab your ledger download

ledger live and get all of your d-apps all in one place bankless is proud to be supported by uniswap uniswap is a new paradigm in asset exchange infrastructure instead of a cumbersome order book system where trades are matched with other humans uniswap is an autonomous piece of software on ethereum which is what ryan and i call a money robot no human counterparties or centralized intermediaries just autonomous code on ethereum input the token you want to sell and receive the token you want to buy something brand new in the uni-swap ecosystem is the unit swap grants program is now accepting applications for grants we have been saying this for a while and we'll say it again dows have money and

they are in need of labor if you think that you have something to contribute to the uni-swapped out apply for a grant to uni-swap just look at the size of the uniswap treasury it's almost 3 billion this mountain of capital is looking for labor do you have something of value to contribute to the uniswap dao no matter how big or small your idea is you can apply for a uni grant at unigrants.org and help steer unit swap in the direction that you think it should go that's exactly what we did to get uniswop to be a sponsor for bankless and you can do the same for your project thank you uniswap for sponsoring bankless all right guys we are back talking about china talking about evergrand now we're

going to continue the discussion and talk about china's latest crypto ban with sahil bloom this happened on friday so uh crypto industry i mean we we felt these bands before um like this has got to be like the you know 60th or 70th time this has happened although i will say there were elements of this band that maybe felt a little bit different uh and um you know one thing that came into mind came to mind is broadly speaking apparently there were 10 agencies including the people's bank of china that were involved in china's in this band so some insiders are saying this is a clear sign of the seriousness of the ban but it's also at the same same time there's no secret

that china doesn't like crypto doesn't want it inside of its borders just this summer uh sahil we saw a massive exodus of crypto mining from china and you know there was meat to that ban too in that we actually saw crypto mining facilities like completely leave set up jurisdictions elsewhere i wonder if you could set that kind of the high level picture from everything you've seen why do you think china is taking this hard line on crypto what's in it for them well i don't know if there are any dune fans out there i'm a i'm a sci-fi nerd but the you know the whole thing of he who controls the spice controls the universe this is like this is money right so for china money is at the heart of everything for

them and they need to control it in order to continue to have control over the people over their economy over you know geopolitical space in the long term and so for them crypto is a big risk um you know they view it in a really um close-minded uh perspective in my pre in my mind and the way they think about it is if if someone else is in control and is kind of a sovereign uh individual as it were that's scary to them um and so when they're taking these actions i think that that's the broad overlay to it is just having control showing power and the ability to do this and it sets the tone for whatever they're going to do on digital currency you know the digital yuan or whatever they're going to pursue in that regard that's all around this

same environment of trying to create control trying to create power the flip side of it i think it's a massive opportunity for the us from a geopolitical perspective to try to take the stance of being pro innovation and pro-crypto when you think about capital flows that's everything from a macro perspective right when you're looking at countries and there could be a massive capital inflow into u.s markets if you take a more accommodating stance on these type of new technologies and new progress so that's kind of my general thought and general perspective on it and the reality with these things um as i think about it just to use an analogy is like you take a hose uh you turn on the hose at full blast and then put your thumb over it that's like innovation you try to stifle it you put your thumb on it it doesn't last very

long suddenly it starts squirting out from around your thumbs and it goes nuts and goes everywhere my guess is that's what you're gonna end up seeing in china as it relates to crypto that makes a ton of sense we all everyone knows in crypto that crypto is money that's designed to be outside of the control of nation states right and china is like that's pick one country that doesn't like that the most and it's china but i think another question i want to ask is is why now because like china could have actually implemented a ban back in 2017 and stuck with it and people are drawing the associations between this evergrand crisis and people using crypto as capital flight vehicles to escape this crisis right is there any association between this evergrand crisis and the

crypto ban i think there's probably a couple ways you could think about this um you know one would be diversion where you're just like oh crap we're on the you know we're on the global stage for something not so great and we have this little crisis going on and so let's like throw out this band you know like press the press release whenever it was supposed to go out and shoot down now because we want to divert everybody it's like i saw this great tweet the other day that just said um it had like a you know ccp party uh calendar and it was like issue press release banning crypto and it was like last friday of every month uh and i thought that was so funny because it does feel like you know deja vu suddenly okay another ban on crypto i get it you

know what what you're doing the other way to think about it is you know they've been playing this game uh for the last several years of like you know you see someone doing uh double dutch jump rope and they're like waiting to jump in waiting to jump in waiting to jump in um and i think china has been playing that game in terms of when to jump in and just take this strong stance in this ban the challenge for them is it's just gotten so big you know if they'd done it five years ago not many people would have talked about it it wouldn't have been quite as big of a news cycle there wouldn't have been as much capital flowed into it there would have been all the institutional capital that has flowed into it and that's a big issue now because now it's gotten to be

where like you know you talk about too big to fail like a lot of this stuff feels too big to fail you have life insurance companies that have it on their balance sheet you know what are you going to say like how do you manage that how do you do that they're college endowments so it's um you know just it's a it's a tricky situation for them now because i do feel like they've let it get pretty far uh before making this type of strong action on it yeah it's interesting i think there's another reaction from from people in crypto which is basically like why should we take this band seriously i mean we haven't seen much from the other bands why why should this one be uh any different and you know one of the things aside from the the number of agencies that were involved in

this particular ban that might be different is some of the language that was used so this from a uh coindesk article i'm going to read this is um directly from i think the uh the the the um the statement that uh china the ccp has made that um there are legal risks involving crypto activity any legal person unincorporated organization or natural person who is investing in virtual currency and related derivatives violates public order and good customs right so some of this language was a little bit stronger but the thing that really i guess made me think that this is um different than previous times is we we've also seen some of the major

exchanges start to react so um you know chinese based china-based exchanges like huabi is one um this is a look at their net outflows of ether from their exchange and you can kind of see this like tank all the way down so they had 1.3 billion dollars worth of eth that was removed from their exchange just on september 26th right by far the largest eth outflow to date um this is bitcoin and eth held on uh huabi over time it's courtesy of coinmetrics and you can kind of see like maybe some people were starting to front run what this would look like i mean it may be that that huobi is no no longer as

competitive as it used to be there might be other reasons for this outflow but a lot of yeah defy a lot of capital has um been removed from the from these chinese exchanges and this is the the token price of huobi as well and they have actually decided to um to close doors to any uh chinese customers as of um i think they're gonna phase them out so by just the end of december that they will no longer be accepting any chinese customers so this indicates to me it's like there might be a bit more to this than previous bands just as we saw like miners start to exit china in in earlier this uh this summer he knew china was serious about this now we're

seeing exchanges exit china um so that that might be some of the reason david i'm actually interested in your take because you've been you've been uh here for a lot of these as well these china bands does this one feel different yeah it does and it's because this is the first time like you said like the evidence actually the the charts and the data actually line up with the narrative right and the reason why we also started paying attention to that the proof of work ban out of china was because we saw the hatchery drop we actually saw pictures of miners putting their miners in boxes and from what i've gathered when it comes to understanding china china's like policy from the western point of view because

it's very much of a black box because most of us do not speak mandarin and do not have internal to china connections we just kind of have to wait for actual real evidence to actually emerge because china can implement a policy but it doesn't actually mean anything unless the local chinese markets actually react to that policy and so it's really the reaction to the policy that is the signal that the policy is actually real not the policy itself like when america does does policy and like you know makes a statement that is generally accepted as absolute truth but with china when china makes a statement it's not really true unless you actually see the people and the markets and the businesses in china actually reacting to

that thing because they are so much more tapped into the policy makers of china that like they know what to react to and what not to react to it's just a different world over there sahil any any comments on that yeah no i i generally agree with everything that's been said i view this through the lens of just like first law of thermodynamics law of conservation of energy it's it's not like this is getting destroyed it's just squeezing somewhere else and so all of those outflows that you pointed to that's someone else's gain and there's the opportunity for some other sovereign state to become accommodating around these things and become accepting and you know build innovation and businesses and it creates a ton of jobs as people are building web 3 around these different countries and so i think if china is not going to take

advantage of you know what could be the next version of technology web you know if web 3 is the natural extension of all of this then that's somebody else's gain and if it's the u.s and there's a lot of you know funding and accommodation around these new technologies protocols everything that's being built that's a huge opportunity economically you know but both with the actual currencies but more broadly with jobs with everything that's going to be built around it so i'm actually you know for me like i think long term this makes me um bullish on what other countries can do to become accommodating around these things and it's not a shock to me that china is taking this kind of stance on this they hate the idea of of any individuals having power uh over the state and being able to take control of

the money as it were yeah absolutely it's it so this this kind of brings us into maybe the geopolitics of of this so um there's there's definitely some i guess um geopolitical rivalry between the us and and china going on right and so but although i will say both governments do have an interest in uh some level of control right you might say you know the chinese government has you know a far greater level of interest and far more restrictions on individual self-sovereignty but um the us government i think i would argue also wants to be in control needs to be in control too and they've come out recently at least specific agencies have the sec in

particular uh and there have been murm rings all sorts of different agencies in the u.s about restrictions on uh crypto and increasing the tightening on crypto in various ways so i'm kind of interested in your take on um how china banning crypto and taking an even more harsh stance on crypto might impact what the us does next right because like there there's one way to look at this which just says yeah you know all governments are the same they all kind of want control and so the us is just going to follow uh china's playbook there's another way you could think of this in the lens you could think of this where it's just like everyone's in kind of this mexican

standoff right and when china goes left the us then immediately wants to go right it's kind of like you know republicans and democrats in this country a little bit right like oh you're gonna wear a mask oh i'm definitely not gonna wear a mask uh you know or or or the opposite uh do you wanna wear a mask okay like you know we're gonna add multiple layers of masks you know to just to do the opposite of what you do so um i wonder if the u.s might decide as a result to be more embracing of crypto uh given where china's going with this what's your take on how that plays out so i don't have a whole lot of faith in government in general um and i hate saying that because i grew up and had a

lot of opportunities in the u.s and i think it's it remains the greatest country in the world but we have a whole lot of deficiencies in government and so i have almost zero faith in our ability to be highly strategic and long-term oriented um in decision-making around these things i would say the most strategic thing and the most long-term thing we could do right now would be to take an accommodating stance on these things would be to embrace uh crypto would be to embrace all you know web3 become the central hub globally of web3 technologies and you know foster all of it in the same way we have with other technologies you know the same way we've provided subsidies for coal companies for a long time provide subsidies and tax breaks for companies that are building the future

of innovation the future of technology etc do i think that's going to happen no i think that the easiest solution is to continue to take a you know a more adversarial stance on all of these things you've seen gensler and what he's doing um but the reality is in a lot of ways the emperor has no clothes right like you're trying to take this moral high ground as the government and say oh crypto is you know this bad thing and it's dark and who knows what they're doing with this money and then you have you know two fed chairs uh having to step down because they were you know taking actions that were probably illegal in terms of their trading activity and so how do you kind of rationalize those two i don't know um and that's the the fundamental tension that our government is facing right now and its ability to

deal with these things but if you view it in a longer term lens there is a real opportunity that gets created when china takes such a hard stance on something and you just you just hope that there are enough you know forward thinkers in in congress and and in power in the u.s to actually take advantage of that i think private markets by the way and private capital is taking advantage of it i mean you're seeing some of the biggest forward-thinking venture funds in the world pouring so much capital into crypto into web3 some of the best technologists of the last 20 years are the ones that are leading the charge in terms of building this future but from a government perspective you don't have a whole lot of like smart technological thinkers in the government if you go look at the you know the roster of

congress and so that's a huge issue because you're going to continue to face these you know misunderstandings and inability to really comprehend what's being built and what's happening and it's going to hold us back in terms of taking advantage of it strategically so overall do you think a china ban is bullish for crypto i think everything is long-term bullish for crypto man i just think it's like the natural trend of progress and technology in society is where we are headed with these things and so i think that like these blips along the way these bands the different people that are gonna try to take control it's like trying to put you know a dam in front of a river that's moving it's just gonna find ways to pour around it and continue marching towards where it's ultimately going and we're going downstream

progress is being made real technologies and applications are being built and you can't stop that in in such a simple way and so i am i continue to be just long-term bullish short term who knows i mean governments do crazy things it causes price impacts um i don't really have a view short term ever on things but long term the technologies are real they're here to stay and there's real useful high utility stuff being built which at the end of the day is what matters yeah well said i think crypto is far more inevitable than than most people uh get give credit you give it credit for and so most of these things do end up being being blips um i'm curious as we draw to a close uh

in you've you've mentioned this several times that this this ever grand thing could be kind of just the start or like just the the tip of the iceberg um i i'm curious if you like what could happen next what might be the next um brick to fall or issue that we have if um if some of your concerns about the evergrand issue being more deep seated pan out could we see is it more real estate in china should be looking at or should we be looking at other corporations in general that have high amounts of debt or if things go wrong how might they go wrong yeah i think the first place to logically look is to other property

developers in china you think of like you have a you have a crisis you start kind of like expanding out from that core in terms of where you look to see if there's if there's spread or if that was the tip of the iceberg property developers in china there's probably a bunch that are over levered to some extent none to the extent of evergrand but it's still a risk and if you start losing trust in the property development sector in china and people start pulling their money or there's you know increase in the price of the debt those things can all have an impact where even if you're more likely levered you can be the next one to go as you start to expand out from that i think that's just you start looking to different sectors are there you know tech darlings that are over levered or

you know not grounded in in real functionality that have been priced up to the to the hilt that have a bunch of debt from you know an extensive number of the banks or from municipalities or from a bunch of the funds you start to just see all of these connection points in this like spider web of the global economy as as it has become and figure out are there other things you know that are going to start playing out and the reality is most of these things are known by somebody and someone has been looking about it or talking about it twitter is this incredible resource where when i went and i was researching there have been people talking about evergrand for the last year and you go back and search some of the things there were like real credible people that were saying this is a mess

this is a house of cards for the last year but the narrative only caught up to it a month ago three weeks ago and to my point on like the technical plus the psychological with these type of spirals you really need both the technical starts to play out but until the psychological hits that's when you really get this acceleration of these spirals so um you know i think it's about finding the technical looking through it if you're going to spend time on it figuring out where that exists and then biding your time until that psychological side starts to play through sahil bloom thank you so much for joining us this has been an absolutely fantastic discussion uh where can folks follow some of your work so i'm at saaho bloom on twitter it's just my name i've got a newsletter um at

www.saahobloom.substance.com i think also have a kind of podcast and show launching with my good buddy greg eisenberg soon so stay tuned for that it's going to be a blast and we hope to get you guys on there soon yeah absolutely can't wait you are a talented content producer sir and we look forward to future collaboration thanks for joining us so bankless nation some actions item for you follow sawhill on twitter you'll absolutely love the threads that he's putting out also we'll include a link to the curiosity chronicle so you can subscribe to that sub stack as well guys of course none of this was financial advice it never is on bank list bitcoin is risky eth is risky d5 is risky so is global macro investing you never know what could go wrong you

could lose what you put in crypto but this is the frontier it's not for everyone thanks for joining us on the bankless journey hey we hope you enjoyed the video if you did head over to bankless hq right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence we recommend joining our daily newsletter podcast and community as a bankless premium subscriber to get the most out of your bank list experience you'll get access to our market analysis our alpha leaks and exclusive content and even the bankless token for airdrops raffles and unlocks if you're interested in crypto the bankless community is where you want to be click the link in the description to

become a bankless premium subscriber today also don't forget to subscribe to the channel for in-depth interviews with industry leaders ask me anythings and weekly roll ups where we summarize the week in crypto and other fantastic content thanks everyone for watching and being on the journey as we build out the banklessness