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Ethereum, Vitalik Buterin’s Chinese connection: How deep does it go?

Business

Steven Stradbrooke

Ethereum founder Vitalik Buterin’s ties to China are raising questions about the independence of this prominent blockchain and the foundation that oversees its operations.

A growing number of blockchain detectives have been posting what they purport to be evidence of undue Chinese influence on Buterin, Ethereum, and the Ethereum Foundation. This includes claims that Ethereum/Buterin are financially beholden to Chinese conglomerate Wanxiang Group, which has close ties to China’s government.

Buterin’s personal interest in all things Chinese is well documented, including his efforts to learn the language and his commitment to issuing a Chinese-language version of the Ethereum white paper in January 2015, six months ahead of the blockchain’s mainnet launch on July 30.

But Ethereum almost didn’t make it to that launch date. As detailed by Dr. Xiao Feng—vice-chairman and executive director of China Wanxiang Holding Co, Ltd—he first encountered Buterin over WeChat messages in December 2014. They hit it off well enough that they agreed to meet face-to-face in Shanghai in April 2015, during Buterin’s three-month stay in the city.

Xiao said he and Buterin met “often” to discuss blockchain matters “and of course, how Wanxiang could work together with Ethereum to promote the developments and applications of blockchain technology in China.”

Buterin showed up for one of these meetings looking particularly haggard, which Xiao learned resulted from a “night-long meeting” that centered on the Ethereum Foundation’s bare financial cupboard. Concerns were mounting that Ethereum’s mainnet launch might not happen due to its developers’ inability to fund their operations.

Recognizing the “huge pressure” Buterin was under, Xiao said he had the idea that “if we could actively fund the development of Ethereum at this critical moment, we would not only become a major participant in this revolutionary project, but we could also leverage this opportunity to guide and implement Wanxiang’s blockchain strategic planning.”

Xiao proposed donating US$500,000 to the Ethereum Foundation in the name of Wanxiang Blockchain Labs (WBL), a company that didn’t exist then. The donation would actually be made by DataYes, a Wanxiang subsidiary founded in 2013 to provide data and investment management solutions for financial services entities.

But Xiao’s generosity didn’t stop there. He also pledged that Wanxiang “would continue to fund the foundation over the next year, so that the developers could focus on their work to help the Ethereum mainnet go live as scheduled.”

While Xiao’s $500k ‘donation’ was later converted into over 416,000 ETH tokens—currently worth nearly $700 million—there’s never been any public breakdown of what Xiao/Wanxiang received in exchange for their additional funding of the Foundation.

The ties that blind

There’s no doubt that Buterin made an impression on Xiao. Buterin was named WBL’s ‘chief scientist’ when the firm launched in the second half of 2015. A 2016 Facebook post cited Buterin as one of WBL’s co-founders, along with Xiao and Bo Shen, co-founders of the Bitshares decentralized exchange.

Shen was instrumental in connecting Xiao and Buterin, with Buterin staying at Shen’s Shanghai home for a month during Buterin’s stay. Both Shen and Buterin were listed among the original general partners of Fenbushi Capital, a Wanxiang-funded, blockchain-focused venture capital group announced at the same time as Xiao’s Foundation funding.

Buterin announced he was stepping down from an active role at Fenbushi in January 2018, although the fund’s website continues to list him as serving in an advisory capacity. Shen remains at Fenbushi to this day.

Another blockchain-focused Wanxiang offshoot, Hashkey Capital, is run by former Wanxiang investment manager Deng Chao. Deng claims to have been the one who convinced Xiao to make that original $500,000 donation to the Ethereum Foundation.

Hashkey has invested hundreds of millions in blockchain projects, with Deng singling out Ethereum as an area of particular interest. “Since 2015 we’ve been interacting a lot with the developer community, especially in the case of Ethereum.”

In 2015, the same year that WBL was launched, the first Wanxiang Global Blockchain Summit was held in Shanghai. To help kickstart the event, Xiao said, “Wanxiang worked closely with the Ethereum community to widely promote cutting-edge blockchain topics on a global scale.”

In May 2016, Xiao and eight colleagues joined Buterin for a stateside ‘blockchain expedition’ that started in San Francisco. Later that year, Xiao convinced the Foundation to move its Ethereum Developers Conference to Shanghai by offering to sponsor the entire event, with the added bonus of revenue from ticket sales and other sponsorships going directly to the Foundation.

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The X/Twitter personality known as TruthLabs claims to have identified close ties between digital wallets belonging to Wanxiang and those of Buterin and the Ethereum Foundation. While the legitimacy of these claims has been disputed, that’s just one of Ethereum’s inherent mysteries, resulting from the controversial premine that preceded its mainnet launch.

Around 10% of the circulating ETH supply—roughly 12 million tokens—was allocated to Ethereum Foundation members and early project contributors. Buterin alone reportedly received 553,000 ETH through this ‘friends and family’ distribution.

Ethereum’s initial coin offering (ICO) proved equally problematic. Despite 60 million tokens up for grabs—roughly half of today’s total ETH supply—the Foundation showed little interest in establishing any real guardrails to prevent individual buyers from carving off more than the stated cap of 12.5% of the pie.

In the end, all that was required to participate in this cattle call was an email address and a willingness to exchange BTC tokens for ETH. According to Nansen data, the result was that 100 of the 8,800 wallets that took part in the ICO held 40% of the available ETH. ‘Decentralization’ at its finest.

In April 2018, securitization lawyer Preston Byrne analyzed the ICO and found that the BTC “flowed in with the mathematical precision of a power function, 24 hours a day, 7 days a week, for two weeks straight.” This metronomic pattern led Byrne to conclude that the bulk of the tokens were likely sold “to one person or, more likely, a handful of close associates working in concert.”

TruthLabs has claimed that Wanxiang was used as a conduit for members of the Chinese government to purchase large amounts of ETH via the ICO. If true, combined with Wanxiang’s significant investments in Ethereum-based infrastructure projects, China would have a truly outsized influence over the blockchain’s future.

That is all the more concerning given Ethereum’s recent transition from a proof-of-work consensus mechanism to one based on proof-of-stake. To serve as a ‘validator’ under the new regime, one must lock up a stake of 32 ETH worth around US$60,000, well out of the reach of most rank-and-file users.

However, individuals, entities, and nation-states linked to Wanxiang could easily clear this hurdle. And with validators in charge of deciding which transactions make it into the next block on the chain, the opportunity for skullduggery becomes all too apparent.

Ethereum’s ICO was quickly followed by a deluge of similar token sales. Enticed by the ease of creating new token projects on Ethereum, scammers preyed on the public’s growing interest in 2017’s artificially inflated digital asset price bubble.

Ironically, Wanxiang’s Xiao spoke out against ICOs in early 2018, calling for a prohibition on trading tokens immediately after their initial public sale. For what it’s worth, that opinion was expressed only after China formally prohibited ICOs as an illegal fundraising mechanism in late-2017.

Can you premine copper?

Wanxiang is considered one of China’s largest ‘non-state-owned’ conglomerates, although the Chinese Communist Party (CCP) has ensured it has a say in the operation of all domestic companies through the presence of so-called Party Committees on private firms’ boards of directors. Over two-thirds of private companies now formally acknowledge the presence of Party Committees implementing “corporate governance with Chinese characteristics.”

Wanxiang founder Lu Guanqiu was a delegate to the Chinese National People’s Congress through the late 90s, after which he was promoted to full NPC deputy. Following his death in 2017, the CCP publicly lauded Lu for having “always actively accomplished all that is advocated by Party committees and governments at all levels.” The CCP expressed its confidence that “people at Wanxiang”— currently led by Lu’s son Lu Weiding—will “always listen to the Party and follow the Party.”

Formed in 1969, Wanxiang Group originally made its name in auto parts, but its rapid rise led to a diversification into insurance, banking, asset management, and—controversially—importing minerals from North Korea.

Wanxiang reportedly enjoys an exclusive importation contract with North Korea’s Hysean Youth Mine, a major source of copper. Wanxiang has also partnered with North Korea on the Hyejung Mining Joint Venture Co, entitling Wanxiang to all underground mineral resources—including copper, tungsten, and molybdenum—in Yanggaang Province.

Other Chinese companies that have been caught importing minerals from North Korea—including Hongxiang Industrial—found themselves facing harsh U.S. economic sanctions. But Wanxiang somehow managed to dodge this bullet, despite sources claiming its dealings with the North Korean regime dwarf that of Hongxiang’s.

Wanxiang’s North Korean connections aren’t so out of step with that of Ethereum, given the fact that Kim Jong Un’s ‘crypto’ hackers used the blockchain’s Tornado Cash coin mixer to wash their stolen tokens clean.

Don’t forget Ethereum developer Virgil Griffith’s ill-fated trip to North Korea in defiance of U.S. government warnings that visiting Pyongyang to educate local officials on how to evade U.S. sanctions was a no-no. Griffith ultimately got 63 months in prison for that escapade.

And yet, Buterin refused to see his comrade as guilty of anything, claiming that Griffith didn’t give North Korea “any kind of real help in doing anything bad.” This raises all sorts of questions as to what else Buterin might be willing to let slide in the name of expanding Ethereum’s reach and adoption.

Stealing fire and raising hell

Wanxiang’s apparent ‘get out of sanctions free card’ recently came under fire following complaints by some members of Congress regarding the unfriendly stance the U.S. Securities and Exchange Commission (SEC) has adopted toward most blockchain projects—with the notable exception of Prometheum Ember Capital LLC.

Prometheum made headlines in May when the Financial Industry Regulatory Authority (FINRA) approved the company’s application to serve as a special purpose broker-dealer (SPBD). While it had yet to actually commence its operations, Prometheum claimed to have developed a model under which all the digital assets it traded would be registered securities. This stood in stark contrast to the likes of SEC whipping boy Coinbase (NASDAQ: COIN), which claims to this day that none of the assets on its exchange are securities.

The anti-SEC faction in Congress—primarily on the Republican side of the aisle—raised holy hell when they learned that Prometheum had entered into a ‘strategic partnership and joint development agreement’ with Wanxiang in 2018. Prometheum later claimed that the joint development of blockchain trading software was halted in October 2021, but Wanxiang continues to hold a 20% stake in Prometheum.

Wanxiang’s involvement and deceased founder Lu’s ties to the CCP prompted a group of Republicans—including House Financial Services Committee chairman Patrick McHenry—to write letters demanding transparency from both FINRA and the SEC regarding the process that resulted in Prometheum’s SPBD approval.

It probably didn’t help that in early 2018, Wanxiang struck a ‘strategic cooperation’ pact with the Massachusetts Institute of Technology (MIT) to “advance scientific and technological research and development.” This occurred almost simultaneously with Gensler becoming a blockchain-focused professor at MIT. For what it’s worth, Gensler was already on record saying ETH was an unregistered security. Was Wanxiang hoping to change his mind?

The obligatory Hunter Biden reference

Even before Prometheum got under Republicans’ skin, Fox News questioned a July 2014 meeting at the White House with then-Vice President Joe Biden, Wanxiang America President Pin Ni, and Wanxiang Resources Co. president Youhong Han.

That meeting followed Wanxiang’s February 2014 purchase of Fisker Automotive, a failing U.S. luxury electric vehicles manufacturer. The deal involved converting an abandoned manufacturing facility in Delaware, Biden’s home state.

Biden’s controversial son Hunter purchased a Fisker vehicle in early 2014, but it proved a lemon. This seems to have come up for discussion during the White House meeting with the Wanxiang executives because a week later, Pin Ni emailed Hunter to say, “It would be our honor to get your Fisker fixed.” Hunter replied that he’d already sold the car back to the dealer, prompting Pin Ni to say he’d “make sure your next Fisker will exceed the expectation.”

While Fox appears convinced that the Biden connection is the reason Wanxiang has never faced sanctions for its North Korean dealings, it’s worth remembering that despite those North Korean mineral dealings surfacing just one month before Donald Trump was elected president, Der Donald also took no action against Wanxiang during his four years in office.

The middle blockchain kingdom

Ethereum’s Chinese connection is by no means limited to Wanxiang. An archived version of the Ethereum Foundation’s website shows a trio of individuals bearing the official designation of ‘Chinese Partner.’ (No other nation is afforded this perk.) Of these three partners—Jerry Liu, Bin Lu, and Houwu Chen—two appear to have worked at China’s Alibaba Group. Lu was an Alibaba developer, while Liu’s title was Senior Product Expert.

While China has a notoriously antagonistic attitude towards all things ‘crypto,’ this summer saw the Hong Kong-based Bank of China International Holdings (BOCI)—the global investment unit of the mainland’s People’s Bank of China—issue RMB200 million worth of tokenized securities on Ethereum.

Transacting via ETH on the mainland remains technically off-limits, but the BOCI’s move was viewed as a means of boosting Hong Kong’s growing embrace of digital assets. It may also signal a new favoritism for Ethereum by the People’s Bank of China—which formerly employed Wanxiang’s Xiao in its Shenzhen Special Economic Zone branch.

In August, Wanxiang offshoot Hashkey became one of the first exchanges to receive a Hong Kong license, allowing retail investors to trade select digital assets. A member of Hong Kong’s legislative council expressed the hope that this could lead to “interconnected” virtual asset trading between Hong Kong and mainland China in the not-too-distant future.

Nightmare fuel: an Ethereum-based internet

Xiao has likened Ethereum to the Highlander of blockchains in that there can be only one. Last December, Xiao gave a speech at the 2022 Global Blockchain Summit in which he predicted: “a scenario where a blockchain protocol stack will converge around the Ethereum network, like what happened with the Internet in the 20th century.”

Xiao explained how the early internet consisted of disconnected protocols that eventually “merged into the TCP/IP protocol stack … The current multi-chain phenomenon of blockchain is similar to the era when Internet protocols had not yet been not ‘unified.’”

Xiao declared that “among all blockchain protocols, only Ethereum has the architecture of acting as that blockchain protocol stack from the base layer to layer-1s, layer-2s and even layer-3s … according to the Ethereum Foundation, within 10 years, transactions on the Ethereum network will be able to reach 10 million transactions per second.”

Xiao predicted that all existing blockchain protocols would “gradually be prompted and influenced by industry players to merge into a single unified protocol stack. Other public chains interconnected with Ethereum may act as side chains, or shards and partitions of the Ethereum network, as we strive to achieve an ideal world of interoperability and interconnectivity in the universe of blockchain.”

So there you have it. Ethereum will be the only blockchain game in town, with other chains relegated to minor appendages of this unwieldy Rube Goldberg machine. However, if Xiao based his transaction forecasts on the habitually unrealized fantasies of the Ethereum Foundation, he—and any nation-states that might be betting on a single horse in this race—are bound to be disappointed.

While Ethereum contents itself with imagining what might be possible in 2032, the BSV blockchain continues to set new transaction records in the here and now. BSV blockchain handled a record 128 million transactions in a single 24-hour period this month and did so on a sturdy base layer, requiring none of the rickety and proprietary on-/off-ramps without which Ethereum can’t function.

And despite Xiao’s assertions, BSV blockchain remains the only blockchain with the scaling capacity to handle the dramatic increase in the number of transactions that a transition to Web3 will demand—and do so on a cost-effective basis—and will thus leave Ethereum in the dust.

Perhaps crucially, the BSV blockchain also lacks Ethereum’s apparent deference to a single country. Anyone who still hypes Ethereum’s commitment to decentralization should wonder why that commitment doesn’t seem to apply on a geopolitical basis.

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