DeFi with Chinese characteristics? How China may centralize crypto finance

As Wild West DeFi surges to new heights with Chinese capital, China wants to build a separate digital finance network — in its own, tightly controlled image.

DeFi may be too big of an opportunity to pass up for the Chinese government, despite its decentralized nature and Wild West reputation. One solution that China may be exploring: absorbing DeFi and turning the industry into CeFi — “centralized finance.”

“The [Chinese] government is going to be taking a very, very close microscopic look at exactly the DeFi space,” said James Gillingham, co-founder and CEO of Finxflo. “They want to be able to essentially create capital controls, inflows and outflows out of China.”

james gillingham

Singapore-based Finxflo is a DeFi aggregator platform and cryptocurrency brokerage firm that allows users to trade on the platform using the company’s native token.

With the amount of total value locked into DeFi reaching US$10 billion at the time of writing, it’s no wonder China may be willing to find ways to enter the business on its own terms despite its current ban on cryptocurrency trading, initial coin offerings and the use of cryptos as legal tender.

DeFi allows for peer-to-peer lending and financial services that were previously the domain of banks. Since DeFi operates on smart contracts on blockchain networks, activity is hard to track and trace.

See related article: What China’s New Era politics means for the digital economy and decentralized finance

“China wants this [activity] to be centralized. So that’s where we anticipate the market moving within the next 3 to 6 months,” Gillingham said, adding that he anticipated China will build its own DeFi network.

Finxflo is not the only company that is working to bring DeFi or CeFi to China. Forkast.News recently interviewed Eden Dhaliwal, global managing director of the permissionless blockchain network, Conflux, who said that his company is working with Chinese authorities to create a DeFi bridge from the East to the West.

But China has its own turbid history with peer-to-peer lending, resulting in numerous scams and over US$115 billion in losses according to Guo Shuqing, chairman of the China Banking Regulatory Commission. Could the Chinese government be learning from that experience in attempting to exert strict controls over the sector?

“China actually went against the ICO [initial coin offering] market, they actually banned it,” Gillingham said. “I don’t really see that happening within the DeFi space.”

Find out more about the changing world of DeFi and how China aims to expand its role in the field by watching the full video interview with Gillingham and Forkast.News Editor-in-Chief Angie Lau.

Highlights

  • Is DeFi legal in China? “Decentralized finance within its nature is actually anti-governmental, anti that centralized approach. So what that essentially means is that the government is going to be taking a very, very close microscopic look at exactly the DeFi space.”
  • Current DeFi trends in China: “We’ve seen huge amounts of capital inflows coming from China. We are pretty certain that it’s going to get even [stronger] realistically because technically, the Chinese in the DeFi space — a lot of Chinese clients of ours and partners, they very much like speculation. But they like calculated speculation and people are kind of speculating now that this is going to evolve into some of the world’s largest markets, especially within crypto.”
  • How vulnerable will Chinese DeFi be to hacking? “When the smart contracts are launched, deployed, it means that their code is already penetration tested. It means that there’s no longer going to be the hacks.”
  • Become your own bank with DeFi: “I really feel as though the value being added is essentially the peer-to-peer nature of this and the fact that you are able to dictate your terms. So essentially, you can become the bank. You can lend and loan your assets out and you can receive interest. You’re all fully secured via the smart contracts.”

Full Transcript

Angie Lau: Is China getting into this [DeFi] party? What will the impact of DeFi mean on the mainland and vice-versa? We explore that and more in this next episode of Word on the Block the series that takes a deeper dive into blockchain and the emerging technologies that shape our world — at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m your Editor-in-Chief and host Angie Lau.

Well, since President Xi Jinping basically proclaimed that blockchain was China’s next priority, China has kind of dropped our jaws with its initiatives — from BSN (Blockchain Service Network) to all of those blockchain companies that arose from that announcement. Last count, it was in the tens of thousands. And of course, China is leading the way in the race for a CBDC. But right now, nothing is rocking the Block like DeFi: decentralized finance.

And so we’re curious about what’s happening behind the Great Firewall. To tell us about the state of DeFi globally, what investors are thinking, and specifically all of that buzz of activity that might be happening in the mainland, joining us right now is the CEO of DeFi aggregator and crypto brokerage firm, Finxflo, James Gillingham. Welcome, James, to the show.

James Gillingham: Thank you.

Lau: It’s great to have you. Alright, so Finxflo — this is a very young company you launched or you began late last year. You launched your platform just this July, but really tracking this trend that we’re seeing in DeFi. Tell us about the platform and how you’re hoping for the platform to help investors gain access to the DeFi market.

Gillingham: So Finxflo, we are a DeFi and CeFi [centralized finance] aggregator. We’re a hybrid between the two. Essentially, we bridge into the traditional markets and bring lots of traditional investors moving into the defined CeFi space. The way that we do this is by an aggregation model. We aggregate the protocols as well as the decentralized exchanges and non-exchange liquidity. I think our benefits and value add is really ensuring that our investors are essentially secure and robust. We have compliance. We’re basically bringing the traditional markets to the DeFi space.

Lau: And so right now, in terms of institutional and more traditional investors globally, what are you seeing in terms of the pick up of interest in DeFi?

Gillingham: So, DeFi has taken a huge amount of interest to many of the larger institutions. Initially, back in 2018 was when it first essentially launched. It’s taken some time to really get some traction. But earlier this year, around February, we’re really starting to see a large amount of capital inflows. Until right now we currently have a US$13 billion market capitalization. So it’s growing, growing, growing. The issue obviously is that there’s a lot of downsides here. There’s been lots of hacks and lots of other security breaches. But this is something that’s slowly and steadily stabilizing.

Lau: It’s a really robust market, volatile, to be sure, and China seems to be starting to get in on the act. Curious, though, because, with capital controls on the mainland, the Great Firewall, there really seems to be, at least an official regard, as to how they want to control as much capital internally as possible. DeFi really kind of breaks that down. What is happening in China and what is the state of play with DeFi in China right now, from your perspective?

Gillingham: So China’s evolving pretty rapidly, as everybody knows, as you mentioned before, the BSN network. They have also had their eye pretty much on DeFi for a prolonged period of time. They have now just moved with Huobi. So Huobi has created a DeFi network and they’re actually supporting that with the Shanghai College. They now have their full support. So they’re actually backing it through Huobi. So, they’re now moving into the space, but by using non-governmental vehicles, they’re using the private sector to be able to do that.

Lau: So China is, of course, very much disciplined about the control that it has in the banking space. These are state owned entities — some of the biggest financial firms in the world are owned by China. These are the biggest banks. ICBC, to name just one. Are they starting to apply that strategy in the DeFi space?

Gillingham: Well, we’re slowly seeing the adoption, I think it’s a little bit too early to say, “Are they yet gung ho in this particular space?” Especially the major banks. We’ve actually seen the new wallet infrastructure that was released by some of the Chinese state banks, which suggests that the CBDC is getting closer and closer. However, with regards to the DeFi space and moving into it, I’m not really too certain that China is yet ready from an infrastructure standpoint.

However, if you look across the region, if you look into, say, Thailand — Thailand is now actually creating their own DeFi network, especially within the bond space. So they have their Thai bonds and they’re also creating their own decentralized finance space. So, essentially I believe that China will also move with this new decentralized finance approach. I think that they will probably look to create their own ecosystem in order to keep the capital within their remit.

Lau: And so what about outside investors or foreign investors who are looking to get into this China DeFi space? Do you see access there or the ease of access there?

Gillingham: Well, that’s that’s normally not too much of an issue, getting into the space. There’s absolutely no problem. Getting out of the space is normally where people normally incur the issues with China. Setting up, normally, you would have to have some kind of Chinese partner. Again, you have to make sure that you do the correct due diligence.

That’s where somebody like ourselves would really come in to help ascertain the market or approach the go-to-market plans and just make sure that you’re secure with entering and obviously exiting the market as of when you so choose. 

Lau: And so, I note that Finxflo is also partnering with protocols as well to gain ease of access. Tell us some of these protocols that you’re working within China and what’s the strategy there?

Gillingham: So, China has been a little bit behind the curve when it comes to actual protocols and the creation of protocols. The reason realistically is because of the Ethereum network and Ethereum 2.0. Most DeFi protocols are Ethereum-based. However, we’ve now seen Binance and we’ve also seen Tron. They have now entered the DeFi space. So we anticipate there’s going to be some very interesting principles coming out very shortly.

However, none of them have really reached the capacity where they’ve come and breached the top 10 within DeFi polls. As soon as they come into the top 10, that’s when we really look to start aggregating Chinese protocols. We believe that the intelligence and the knowledge base in China means that there’s going to be rapid adoption. We would anticipate that there should be some top 10 DeFi protocols entering the markets sometime soon.

Lau: As in this region and especially in China, the regulatory weight is actually the only voice that truly matters. And so, politically, what do you think is happening right now behind the scenes as these protocols are starting to set up shop in DeFi?

Gillingham: Well, decentralized finance within its nature is actually anti-governmental, anti that centralized approach. So what that essentially means is that the government is going to be taking a very, very close microscopic look at exactly the DeFi space. And they want to be able to essentially create capital controls, inflows and outflows out of China.

So essentially, as I previously mentioned, I believe China will have to move into the DeFi space in a big kind of way. They’ve already done that with Huobi. And we also anticipate that there’s going to be potentially a new Chinese DeFi network. They want to be able to ensure the amounts of capital leaving China. DeFi is essentially set up through smart contracts.

Smart contracts means that essentially, it’s peer to peer. It’s very, very hard to track and trace. Well, obviously, China wants this to kind of be centralized. So that’s where we anticipate the market moving within the next 3 to 6 months.

Lau: It’s an interesting strategy in that, if you can’t beat them, join them. And so, within the infrastructure and the architecture of some of these DeFi protocols, will we be seeing the influence of China and the state within some of these protocols, you think?

Gillingham: I think that there is a possibility, as we saw back in 2017, 2018. China actually went  against the ICO [initial coin offering] market. They actually banned it. I don’t really see that happening within the DeFi space. I do, however, see some kind of partnerships and collaborations. They’re actually taking a much more academic approach. So with Shanghai College and the Science College, I believe it’s called? That they are, they are now partnering with, so they are creating some kind of adoption tactics. That’s going to be  very, very interesting to watch this space.

Lau: And you’re watching the space, too, because there’s just a lot of money to be had, what do you think, ultimately, the influence of China money and China capital into the DeFi industry could mean?

Gillingham: So personally, being based, in Singapore, we’ve seen huge amounts of capital inflows coming from China. We are pretty certain that it’s going to get even [stronger] realistically because technically, the Chinese in the DeFi space — a lot of Chinese clients of ours and partners, they very much like speculation. But they like calculated speculation and people are kind of speculating now that this is going to evolve into some of the world’s largest markets, especially within crypto. And if you look at the total value lot, it continues to increase and increase and increase.

We have seen a slight selloff in the last couple of weeks — pretty much linked with the more traditional markets. However, the past couple of days, there has been a strong recovery, and that’s very much trying to get back to an Asia focus. To begin with, the DeFi space really was just Europe realistically and a little bit of the Americas. But since the past six, seven, eight months, there’s been huge capital inflows. A large majority of that has actually been from China.

Lau: Well, of course, what’s helping drive the market is just this robustness and the increase of liquidity that’s going into DeFi. What we’re also starting to see is questionable — it’s still the Wild, Wild West — and the regulators are not necessarily in the space, nor is the DeFi industry doing that great of a job of policing itself.

There’s just still a lot of questionable behavior in this space. Do you think that has got to evolve as more institutional money comes into the space? Will it be demanded by the type of investors that are interested in this space?

Gillingham: Yes, it’s a very interesting question because it’s not actually the operators that are in the space. So essentially, the protocols are all in a race to get a new innovation; new ideas, new adoption, trying to get into the market as quickly as possible. Now, what happens generally when people rush is that they don’t always analyze the code. So when people hear of hacks or any penetration or any issues, realistically, in the DeFi space, it’s generally because there’s been some kind of shortcuts taken when they’re trying to launch — because they want to get out to the market as quickly as possible, to try to become the new kid on the block that has the most amount of value locked.

So, what we’re actually seeing now is the new networks that are now coming out where there’s going to be through Huobi. They’re trying to ensure that the DeFi space and that the DeFi protocols all follow the same process. So essentially rating it. So it means that when the smart contracts are launched, deployed, it means that their code is already penetration-tested. It means that there’s no longer going to be the hacks.

However, it is really going to take some time for this new methodology to take place within the markets. And there’s always going to be the chances. There’s always going to be the guys that want to launch really quickly without taking the correct, actionable code reviews that they should be doing in order to ensure that the hacks are no longer sustainable. However, we have seen a lot of hacks in the market so far.

That’s essentially why Ethereum had to fork. Ethereum Classic was actually created because they had to fork because of the hack within DeFi. So, there’s going to be time before it self regulates. I would imagine, again, they’re trying to rush this through. And as everybody knows, crypto moves faster than any other industry in the world. I would really think that within a couple of months, this could be structured.

Lau: Yeah, in just the time we spoke, it’s already changed. This is just the nature of this, it’s just a very young industry. Where do you see it going? What are the bets that you see Asia is making in particular to China?

Gillingham: I think it’s more about the peer-to-peer nature. I think that generally, it doesn’t really just focus on China here. I think globally there’s been a lot of issues with banks globally. Lots of people, whether you’re in Europe, whether you are in the U.S., or whether you’re in Asia or China, people are pretty much, sick and tired of getting the worst rates, getting the worst deals.

Whereas if you can actually go into the DeFi markets in a safe, secure manner, then you’re able to receive some kind of interest — some returns, some upside — like no other industry. That’s not available anywhere else. So, I really feel as though the value being added is essentially the peer-to-peer nature of this and the fact that you are able to dictate your terms. So essentially, you can become the bank. You can lend and loan your assets out and you can receive interest. You’re all fully secured via the smart contracts.

So essentially, I feel as though there’s going to be more and more capital inflows. It’s going to continue to grow. There’s most likely going to be a little sell-off, as in any growth market. There’s always going to be a short — taking breath, taking profits, having to review, watching the space. But as this continues to grow, more money gets pumped in. More people are essentially coming up with new innovation, new ideas. There’s essentially going to be more and more opportunity to take advantage of. You just have to make sure that you’re taking advantage in the right way, in a safe manner.

Lau: And I think the ironic thing as well as is that it holds the traditional markets to a level of accountability. If they see the liquidity bleeding into a market that is offering better terms, better rates, better yields — they’ve got to compete. Competition is a brilliant police, if you will, for lack of a better word. But competition really holds all of us to greater accountability.

James, we want to thank you so much for sharing your insights into both the interest that we’re seeing on the institutional side, the traditional side, and what the future of DeFi could mean for all of us.

Gillingham: Sure. My pleasure. 

Lau: Absolutely, and thank you, everyone, for joining us on this latest episode of Word on the Block, I’m your Editor-in-Chief and host Angie Lau. Until the next time.

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