How China’s Blockchain Technology Is Causing Restlessness In The US | Paul Schulte & Zain Jaffer

Paul Schulte is the founder and editor of Schulte Research, a company that researches banks, financial technology, bank algorithms, and credit algorithms. He has had a career in equity research which spans 27 years on both the buy and sell sides covering the Asian and emerging markets.

He also has five years of government policy experience in emerging markets. He has been frequently ranked in top-five positions in Euromoney, Asiamoney, and Institutional Investor. In Institutional Investor’s 2010 poll, he received top rankings in All-Asia Banks Team, Asia Equity Strategy Team, and Asia Economics, Team.

Mr. Schulte was most recently at China Construction Bank Intl as Global Head of Financial Strategy and Asia Banks Research and based in Hong Kong. Before that, he was Managing Director and Head of Multi-Strategy and Asia-Pacific Banks Research for Nomura International. Before that, he was Chief Equity Strategist, Asia ex-Japan, for Lehman Brothers.

He served from 2001 to 2006 as Portfolio Manager and Head of Research for GEMS equities at Big Sky Capital, a US$350 million global macro fund (Tiger Cub) of the Wynn Family funds in Los Angeles, California. At the same time, he was also a lecturer at the Hilton School of Business at Loyola Marymount University.

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How China’s Blockchain Technology Is Causing Restlessness In The US | Paul Schulte & Zain Jaffer

For this episode, we have Paul Schulte. He is based in Singapore and is a government and corporate advisor, runs his own research firm, and published a great book of many books he’s written, The Digital Transformation Of Property In Greater China. There is a lot of change happening in the world right now. It looks like the change started many years ago. We’d love to dive into what’s going on in China, specifically the great theme here with regards to the US and where the US is in relation to China. There seems to be a race. Most people aren’t aware of it. Set the context for us.

In 2014, China made a couple of big decisions. It pretty much threw the dice on a total technological rebuild of China because there was no dare there. China only came to the party maybe several years ago. It didn’t have that copper massive telephonic build-out that Europe and America had throughout the 20th Century.

It was able to build a lot of new technology from the ground up because there were no lobbyists and provincial state or local regulatory structures. There was no federal bureaucracy. There was nothing so these companies that came to the fore, Alibaba and Tencent, back in 2002. By 2010 and 2012, there was a sense that a lot more could be done.

There were also a couple of other issues. One was that Xi Jinping had been party secretary in Hangzhou in Zhejiang province for five years. That was from 2003 to 2008. That was when Jack Ma was building Alibaba. He undoubtedly has watched it very carefully. The second big thing was toward the middle of the themes. I’ve been trying to realize that there was a growing tension with America. A blockchain-based technological solution to the currency struggle between China and America.

The early thinkers at the top of the Chinese government for their five-year plans were basically saying, “Let’s build out blockchain. We think this is going to work. We think you can build an e-currency platform on top of it. You can interact in goods and services with the rest of the world without using the dollar.” This is now called BSF, Blockchain Service Network, and it was rolled out in 2021.

When China's Blockchain Service Network rolled out last summer, the explosion in cryptocurrency prices began.

When we look at where the US has come from, the US has gone through a lot. The US has been part of many wars. We’ve got an opiate addiction problem, a growing prison population problem, and school shootings happening. In your book and in other shows, you talk about how this has created a big problem for America. It’s been too busy fighting internal strife. On the other hand, China’s been pulling ahead. Talks to us a bit about that as well.

The foreword of the book is written by David Lee. David Lee is a colleague of mine. We teach together. We taught a course on the book at the university here in Singapore. David’s warning was, “Why did China lose out? Why was China in the dark ages in the 1st, 2nd, and 3rd industrial revolution?” The first one was the steam engine coal in the late 1800s. The second one was your electricity, telephone, car, airplane, light bulb, and then the third one was the ‘60s and 70s computer and the Apollo project, and so forth. China must stop because all during that time, China was in a civil war and it was fighting off colonial Imperial aggression and occupation.

David says when you’re engaged in civil war or profound civil discourse, that is ugly and hateful. You can miss out on these technological revolutions. David warns America that that may be happening right now. David lived in America, in San Francisco, for many years. He knows America very well, and he’s a Singaporean. He basically said in the foreword of the book, “America is a danger of missing out on this new technological revolution in blockchain and crypto the way in which new currency structures are being born.” You have the four years of Trump, which was just this weird, surreal dream.

The Fed, SCC, and the Treasury Department were not with the program while China was building out very expensive multibillion-dollar solutions for the Blockchain Service Network and also the People’s Bank of China’s e-currency. It was rolled out last summer of 2021. That was the beginning of this explosion in cryptocurrency prices.

A lot of that was because of what China did. China said, “We’re open for business. This is going to be crypto and blockchain-based. It’s a new way of doing business with China. We’re going to accept up to twenty cryptocurrencies as on-ramps to the BSN,” and that was like, “This is not expected.” China blew everybody away with how forward-looking it was.

PTVC 103 | China Blockchain

A) To have the blockchain service network. B) To offer crypto on-ramps for the network. C) To be so aggressive about how it was going to be rolled out. D) The PVOC e-currency, which was basically DCEP, Digital Currency/Electronic Payments. All of that was basically rolled out in 2021. Now, you see a big FOMO moment. We have a huge fear of missing out and every central bank is tripping over each other trying to roll out something to respond to China. That’s what we’re seeing in front of our eyes right now.

How did we get here? A moment ago, it felt like the US and European firms had the upper hand and outsourcing everything to China. The US ultimately focused on its core innovation IP. Chinese developed a reputation as copycats. It felt like dynamics were completely in favor and it would put China in a position where eventually, as labor costs rise, you’ll go to the Philippines, India, or the next emerging market. It seemed to have happened very quickly where suddenly China is now innovating and that’s not what people expected. How did this happen?

I invested in a quantum software communication company in Washington, DC. I was talking to the guy who’s CEO, a very bright guy who has since gone to Amazon. What happened was China fired off a rocket and put a satellite in space. Only after the satellite was in space did China disclose that not only was China capable of quantum communication technology, but it was doing quantum communication technology in the vacuum of space. To give you a sense of how behind America was, America couldn’t even do a line of sight. Quantum communication barely. That was the freakout moment like, “WTF, what is going on here?”

A) They didn’t even know the rocket was being fired off. B) You didn’t know that China was as far ahead in quantum communications and is real. Quantum communications are unbreakable. This made the NSA completely freak out and panic. This means the NSA can’t get off your skirt and figure out everything. The NSA breaks every code on Earth. This is where you finally come up against one that’s unbreakable. That was the sputnik moment for America, probably in the summer of 2017.

Is there too much arrogance? Is that why you think we’ve ended up in this situation? The situation is what it is. Every country has its strengths. Is it the law of big numbers? China has a massive population. Its middle class is bigger than our entire US population. The moment you could say, “China is churning out five million stem candidates per year,” science, technology, engineering, and math.

It's the arrogance that is causing a sleepwalking conflict with China.

Many of these people come from some of the best universities, not just in China but in the US and Europe. That’s ten times bigger than the US at 0.5 million? Is it because China is invested in this or is it a law of numbers? The larger you are, the more ideas you’re going to have and the more you’re going to succeed. Is there an actual infrastructure that’s put in China where it is?

First of all, when you look back at China’s history, China has had periods of golden ages where they invent everything in that period. China invented paper money, cement, tar, construction materials, blood circulation, and everything over these periods of golden ages, surrounded by these terrible periods of dark ages, war, and civil war. That’s the law of large numbers. It becomes ungovernable then another place falls apart.

Right now, China’s in a golden age where the mojo is all in favor of confidence and success. When I was growing up in America, I felt that in the ‘70s and ‘60s. When I was a boy going into middle school, America had that mojo. We could do anything. China is there right now and America is going through this terrible midlife crisis of all these things you mentioned.

Is it too late for America? Do you think the frog is in boiling water that it’s a bit too late to jump out of it?

The old Christopher Hitchens, God bless him, he passed away, but he was with the British guy who wrote beautiful stuff about America. His greatest line ever was, “America is the only country that constantly rediscovers its virginity.” America will rediscover its virginity again. It’ll build up again, but it’s in a very dark political period right now.

It’s probably getting worse rather than better by giving a little bit of stability to the boat. I think it’s going to be in for a very rough time. Deep societal fissures that are very deep independent rancor in Washington, DC. I’ve been talking to a lot of people because a lot of weird things have been happening in 72 hours. I fear that America is sleepwalking into a conflict with China.

PTVC 103 | China Blockchain

This is what I’m starting to conclude myself. Not only does it have terrible rancor and lost its way, but arrogance is causing a sleepwalking conflict with China. I would not have said it before, but there’s a very dangerous hubris and arrogance that thinks China can be pushed around. America has been pushing around countries in the Middle East like Iran, Guatemala, Dominican Republic, Chile, Vietnam, and all these other countries over the last several decades.

China has never once at a single American soldier or any Naval base ever anywhere on its territory since its independence, and it doesn’t want that. It’s not interested in an American garrison in any way, shape, or form. It’s not going to happen. America doesn’t like that. What I’ve been talking about with American officials, other people in the intelligence communities, and other people I deal with in governments in my work, I see America fighting off an awful lot.

The North Korean Peninsula, Taiwan, South China Sea, and the Indian Ocean are going to be defended. You better figure out which one is a portrait because you’re committing so much that you are almost bound to fall into a conflict. China’s not some backwater anymore. China has got very sharp teeth. I hope this lunatic jingoism towards China can be toned down because I’m afraid they will sleepwalk into a conflict. I’m very nervous about that.

Define conflict because, in this world, conflict doesn’t have to be physical necessarily. It can be a lot of digital cybersecurity warfare going on and it happens all the time. Are you talking about an actual physical conflict here or are you hinting more towards diplomatic conflicts, sanctions, and things that will hold both countries back?

No, not at all. I was talking to some officials about this in one of the NATO countries. We were talking about kill switches. For the next conflict, you don’t have to fire a single shot, but the kill switches can destabilize and debilitate the economy by cutting off refrigeration. You can start a population by cutting off refrigeration and electricity. You can do it with air, land, and sea transportation, all three at the same time.

Air traffic control stations, electricity grids, and both sides have zero-hour bots that could cut off each other as oil supply, gas supply, electricity supply, refrigeration, transportation, and ship navigation are all there. It’s already been installed. The cake has already been baked. You got to have some negotiation to have both sides pull back and arrange for some Dayton about how they’re going to live with each other because I don’t think China is very interested in being pushed around.

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About Zain Jaffer

Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as “Forbes 30 Under 30”, “Inc. Magazine’s 35 Under 35,” and the “SF Business Times Tech & Innovation Award.” He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.