Discussion between Feng Han and Jim Glassman of JPMorgan Chase
On the afternoon of March 28th, 2018, JPMorgan head economist Jim Glassman and Visiting Scholar at Columbia University, Feng Han, met in the JPMorgan Tower to have a discussion about blockchain and digital finance.
Jim Glassman: If we’re talking about China, I guess I’ve always been skeptical that cryptocurrencies could compete with traditional payment systems. Initially, it was to transact more efficiently and the blockchain technology allowed you to do so. The problem is that regulators could have a major blow on this sector. Because of these regulations, banks must first know what the customer business is along with who your customers are. So, they are afraid of conducting transactions using cryptocurrency via blockchain. As far as this area goes, we don’t understand everything. So, I was always worried about the regulators because as you know, cryptocurrency is very powerful since you can avoid transacting in the existing financial markets. I was also told that the regulators have an ability to crack down on transactions if it’s believed or suspected to be financing illegal activities.So I was told about the danger cryptocurrencies possess.
For me, the real benefit of cryptocurrency is not about the payment aspect of it but in the evaluation of the blockchain technology itself. So, financial institutions can use this technology to adapt it to their own work. But I think that because the financial system is so heavily regulated, you’re fighting that instead and that’s where the danger lies. I don’t know if it’s true, but I always thought the big driver of cryptocurrencies, in my mind, were Chinese investors. I don’t know if it’s because this is a way to get RMB out and convert them into other currencies. Isn’t that the whole appeal for it? So the Chinese government may feel very nervous about it and is approaching it cautiously. I don’t know how much they can restrain.
Feng Han: At present, I know there may be some policies in China that will raise the price of electricity and limit the mining activities of Bitcoin.
Jim Glassman: I guess it varies with each cryptocurrency, right? What is the breaking point? Is it the issue we are discussing now?
Feng Han: Perhaps the central government had some announcements prompting the local governments to raise electricity prices, resulting in Bitcoin miners to abandon their mining pools. But I know that in some cases, some of the local governments actually like the bitcoin mining pools because it is an economic factor in the local area. They can’t transmit electricity through the power transmission line as the transmission cost is too high. A good choice would be to allow Bitcoin mining pools to exist in their area.
Other countries I know, such as Canada, welcome Chinese miners because they have a lot of electrical power facilities. There will be a large-scale Bitcoin mining conference in Vancouver this coming May which is also supported by the local government.
In the last century, the American dollar gave up anchoring gold, and now you’re the largest credit resource maker in the global economy. Soon after, most of the credit resources were controlled by a central authority, maybe by the Federal Reserve or perhaps the Chinese Central Bank. Some central institutions may be able to create credit resources for the global market but there are also many problems that come with it. For example, in China, most of the credit comes from the central government, and their interests are controlled by companies or organizations closely tied to the government.
For example, large scale state-owned enterprises or real estate companies have most of the credit resource but because smaller companies are at the opposite side of this spectrum, China produces many commodities but still cannot be sold in the Chinese market. So, they hope to export these goods to America in hopes of letting America create most of their credit resource in the global economy. Maybe the reason they do this is because the United States can print a US dollar at will that could help realize the future capital market. Because there’s a lot of money to be had in the states, Chinese goods get exported here the most.
But I suppose if the blockchain technology can be utilized to authenticate everyone’s data, big data could become everyone’s asset and the credit resource could be created from the base level of this market instead. We know that internet companies such as Facebook can collect their customer’s data and then use this data to then make profits for themselves. Chinese companies such as Alibaba and Wechat do the same thing. Almost all the internet companies around the world have the same business model to get their customer’s data and then sell it. Bitcoin is a paradigm shift in this regard because it’s a completely decentralized system with no central authority that lets you own your own digital assets by signing them with private keys. This lets consumers exchange value just by using the blockchain technology. If every customer’s data could become their own personal assets which only they control, I believe a credit benefit system would be established automatically which would be great.
In China, because the credit resources are only created by the central government and the central bank, we are faced with many problems. First of all, Alipay and Wechat payment in China are near perfection and work great as a payment solution. In order to improve our system in the global market, blockchain should not only be used to improve payment efficiency but also be used to change data into assets.
Jim Glassman: I remember a very primitive version from a long time ago. We used to have an academic community. All participants could see live dynamic documents and any changes you made would be locked down. Some people could observe these changes. I’m surprised it took such a long time to develop this platform. My question is: how can such documents possibly become assets?
Feng Han: To achieve this goal, I believe that in the future, the blockchain industry needs not only a certain kind of chain but also a trustworthy operating environment, so we need Elastos. Such an operating system was created by a former Microsoft engineer, Rong Chen, twenty years ago. He is also Chinese, but he came to the United States twenty years ago to work with Microsoft for nearly a decade on the Windows operating system. But even twenty years ago, he gave Bill Gates some suggestions. An operating system like Windows is based on a PC or a mobile phone instead of the Internet. But how does Windows access the Internet? It only depends on each application, and then each application can become unreliable and they themselves can become viruses. If you get an email, it has a link and it is very likely a virus. Our internet is not safe now, because the operating system is based on the PC, so this is why the information is controlled by the big companies in the center. Because everyone thinks we have no information security, we have no safety on the Internet, so I only believe in a few centers, Google, Facebook, and so on. The others ones I can’t believe in.
Rong Chen provided Bill Gates with a new cloud computing-based Internet operating system, but Bill Gates did not believe it, so Chen returned to China because he heard news that the Chinese government hoped to have its own operating system. Terry Gou is the owner of Foxconn. He heard that some Chinese officials were allowing the creation of a new operating system, so he decided to invest 200 million RMB in the development of Elastos. Until 2015, there was a very big conference held in Guiyang City. Many officers of the Central Government went there. Guo knew this information and brought Rong Chen to the conference hoping to talk with those officials. He met with the Deputy Prime Minister and asked two questions.
The first question was: Are we Chinese? The answer was simply: Yes. You are Taiwanese, and Taiwan is a part of China, so you are Chinese. The second question was: Do you think that Elastos is the China’s own operating system? The answer was: What is the third question? Then Guo was very disappointed. In Shanghai, he told Chen that he gave up investing in Elastos. But he is a good man. He did not withdraw his previous investment, so Chen’s team continued their development. A year and a half later he met the blockchain and me. We talked a lot about the smart economy. We think the smart economy needs a blockchain-driven operating system like Elastos.
What is a smart economy? Because in China, I talked with some Alibaba economists. One of them was Zhou Zipeng, the financial consultant of Ali Finance. He said: Alibaba’s success makes sense, because 200 years ago, the industrial revolution was very big. The changes, right? We had a big bang of production. We could automate everything. Before such a revolution, people always did things by hand. Now it is much more efficient. But after the industrial revolution, humans can do everything with new technologies.
In order to solve the problem of one person’s (productivity) scarcity, they have increased the speed of production faster and faster, but they have not solved the second problem. Trade is still the same as traditional agricultural methods. He’s concerned how humans can solve the trade problem after the industrial revolution. This is the bottleneck of the global economy. But now Alibaba has automated trading through the Internet. We can trade for 24 hours a day. We can trade everything and use Alipay and Wechat to pay for everything. We can even pay automatically. This is a smart economy.
So the problem is, we still remember that two hundred years ago, in the Industrial Revolution, we needed trustworthy resources in the market because many products need to be sold. But historically, fortunately, in the silver mines found in Mexico and Central America, the Spaniards brought back many silver coins as a trusted resource. When American built their railroads it allowed their economy to grow, but you still need trustworthy resources. The second fortunate thing is that you have found a gold mine in California. Now the trade in China has become enormous, and we need more trustworthy resources.
So what is the new gold mine of the Internet economy? Big data.
Jim Glassman: I don’t think that young people will have this relationship. I don’t think people who use it will care.
Feng Han: But do they care when they know that big data can become their wealth? They will get used to it and know more customers care about their money.
Jim Glassman: I think Facebook’s problem is that they may not even understand themselves. Data is being collected and used to understand and build personal information for each of us, so they can more effectively understand what you like to do.
Feng Han: But do you think young people will care if they know how their data is being used? Because they don’t know about blockchains, the Internet giants can collects data from everyone, and the customers are unaware that this data can be turned into their own wealth through blockchain.
Jim Glassman: I’m not sure what the problem is because if you believe that you can make me think things, then many people will worry that the information about them will be leaked, and that feedback will only reinforce this same thinking that they already have. So I don’t think most young people are concerned.
Feng Han: Really?
Jim Glassman: It feels like if you were to go out in Los Angeles and recommend to people what they should do, people will do it. I think young people like the information that helps them narrow down choices. I don’t think they think it is manipulating their ideas. The problem is that the regulatory agencies are all the old generation. They don’t understand technology. They just make comparisons and their ideas are not in line with what we see.
Feng Han: But do you think that JP Morgan will jump into the cryptocurrency market?
Jim Glassman: What we are doing is jumping into blockchain. We’re developing something of our own. I thought it was an efficient system, but then I would wire some money to Pennsylvania, and it takes a long time to complete the transaction. Why? I’m getting everything automatically. It tells you that the financial system has become obsolete. What is happening now is that among all these fintech companies, there is concern that they will replace traditional financing because we are all regulated and we have a customer base. We use technology more easily than our customers. So I think that many of these technologies will be absorbed by these companies and they will have to pay a lot of money. This is much easier than fintech companies developing APPs. You have to deal with regulatory agencies and regulations.
Feng Han: So some people think that blockchain technology will destroy Wall Street.
Jim Glassman: Oh, I get it.
Feng Han: But this gives them more opportunities to manage customer digital assets. Data becoming an asset means that Wall Street will need to manage many other types of assets and capital.
Jim Glassman: The real value that Wall Street brings is trying to understand events and probabilities, and trying to deal with non-conventional things more effectively, so anything that provides more information can help you execute transactions faster. There are thousands of tools based on specific markets or specific assets and with this technology there is always a drive to understand what happened and what this relationship should be. These technologies provide you with better means of connection. Like big data systems, it can find patterns. This is what this industry does. It’s not just about the capital market, it’s trying to evaluate certain kinds of things and connections. It will displace a lot of jobs but it will also create new opportunities. I visited Amazon, and when you walk in, they have your image, so when you take something from the shelf, they know what you took and it goes in your shopping cart. I went to the store, there is no checkout, you just grab what you want and walk out and pay with virtual assets. Millions of people will lose their jobs, like cashiers.
Feng Han: But some argue that blockchain will decentralized things, which means that in the future, financial institutions may not need to make such business.
Glassman: No, because people have more and more data to manage. Financial assets are all reflecting the value of what people think is going to happen in the future, so technology can help you find patterns, and the more complicated it is, the more risk there is, the more that process opens up to capital and people willing to invest in their money. Anything you can do to help people understand, to put value on certain phenomena, that is the role of the financial system. To create a financial product with cooperation data obligations. You can see things and assign values to them. Create security, then someone will buy it and trade it. I think this process just creates more value for the financial system because the financial system’s economy has been growing over the past few decades, and many banks have created their own marketing tools that can provide more income from those who will purchase assets. The people there receive funds to those who need it, so it creates more opportunities.
Feng Han: Do you think regulators will use securities to monitor the digital currency market?
Jim Glassman: I think its value lies in the fact that many financial activities are beyond their regulatory scope, such as illegal activities and terrorism. Regulators will feel uneasy about this. If we do not understand, we must ask our customers what kind of business they have and how they explain the nature of their business. Using financial systems to highlight illegal activities is easy, and regulators are upset about them. This is difficult to figure out. If there are activities beyond their supervision, we may worry about how to use our currency.
Feng Han: I just learned that you worked for the Fed for many years.
Jim Glassman: Yes, but not the payment system. My friend Sam once worked in the payment system. Now he is a lawyer. He understands these steps more.
Feng Han: But what are your expectations for the future of the United States and the United Kingdom regarding cryptocurrency? What is the general attitude?
Jim Glassman: I’m a little nervous about understanding and controlling it. If they think there is a way to bypass the system and bypass capital, this is a problem. For the Chinese government, this may be an opportunity for people to make money outside and strengthen their capital restrictions.
Feng Han: Like a tyrant controlling everything.
Jim Glassman: As for the United States, it is more speculation because I don’t really understand the mining process and I don’t know how long it will take. You don’t understand how the supply side is affected. It’s hard to tell its value, and the miners are so excited about it. If the miners are able to keep moving forward, you start to worry that they have created a new economy at some point, and I think this is why economists don’t know this.
Feng Han: I think he wants to make the point that Bitcoin will create digital assets on the Internet. But in the future, we need the trusted resources of digital assets. Bitcoin can provide such value.
Jim Glassman: I wouldn’t be surprised if regulators got more involved.
Feng Han: This is a global issue. If just one country tries to control this issue, many people will leave.
Jim Glassman: It’s no different than this, if we hold this thing the supply will be crippled. But to a certain extent, it has a connection with a wide range of international policy goals, so we trust it. Like Germany 100 years ago, we trusted the Central Bank, but the problem is that if you understand how the mining process works and how the money supply works, it might generate confidence in the global community.
Feng Han: In short, we only trust mathematical and physical theorems. This is a hot topic at the moment.
Jim Glassman: Technology is really interesting because you have to keep up with its development. We have more people involved in this process. Maybe Americans do not like it because of fear of competition, but it is better to have influence than not. Imagine what people knew 20 years ago and what people are talking about today.
Feng Han: Many people like me think that the blockchain will bring a similar revolution to society like the Internet did, even more than the Internet. It will change everyone’s wealth and assets.
Jim Glassman: I think you’re right.