The Secret Business of Amazon Cloud in China's Cryptocurrency Circle

Written by: Oil and Vinegar

Edited by: Xuan Ning

Source: Pinwan

In a presentation in March 2021, Zhang Wenyu, President of Amazon China, announced the "three-horse carriage" strategy for AWS (Amazon Web Services) in China: local Chinese customers, foreign enterprises' businesses in China, and Chinese businesses going overseas are all advancing together, which is fundamental to AWS's development in China.

As the business that transformed Amazon from an e-commerce company into a tech giant, AWS has actually not received much attention in the Chinese market. Amazon's previously operated C-end e-commerce business and even the Kindle business were more familiar to the public than its cloud business. However, after actively shutting down the core services of these two businesses and increasingly straining relationships with Chinese cross-border sellers, AWS became the only remaining "growth business" for Amazon China to present its performance to the outside world and to its U.S. headquarters.

Zhang Wenyu, who joined Amazon in 2013 and became President of Amazon China in 2016, transformed into the Executive Director of AWS Greater China after Amazon shut down its e-commerce business in China in 2019. During the promotion of the "three-horse carriage," a market report that contradicted many people's perceptions was widely circulated alongside Zhang Wenyu's statements—according to this report produced by iResearch, AWS has jumped to become the second-ranked cloud in China's IaaS cloud market or IaaS+PaaS cloud market—if the overseas business is included.

However, reports from organizations such as IDC, Canalys, and the China Academy of Information and Communications Technology indicate that the market share of China's cloud market has long been dominated by Alibaba Cloud, Tencent Cloud, and Huawei Cloud, and the biggest growth momentum in recent years has not been AWS, but rather the three major telecom operators—China Mobile, China Unicom, and China Telecom's cloud services "national team."

Nevertheless, this has not prevented many reports from describing AWS's achievements as Zhang Wenyu's "good report card" during his leadership of AWS China, giving it an advantage that other Chinese companies "cannot match."

Behind these Amazon China-led statements, many insiders and informed sources revealed another version of AWS China's "growth" story to Pinwan:

Under the so-called "three-horse carriage," according to those directly involved in related businesses, many blockchain projects entangled with virtual currencies are actually the true revenue pillars of AWS China today. Amazon China has hidden many projects that are strictly prohibited by Chinese law under the shadow of AWS.

Pinwan learned from several AWS China employees that 70% of its overall revenue last year came from overseas business. The local customers and foreign enterprise businesses that were prioritized in the "three-horse carriage" together accounted for only 30% of total revenue. The severe tilt in business structure was obscured in this statement.

One employee further indicated to Pinwan: the revenue from blockchain business within this 70% is expected to exceed half.

A major account manager in a certain region of AWS China mentioned that the external revenue figure for AWS China last year was 15 billion RMB (approximately 2 billion USD), but considering that the top client ByteDance spent over 800 million USD in the past year, the 15 billion RMB revenue figure may not be accurate. ByteDance had previously collaborated with Alibaba Cloud on international business but was forced to turn to AWS and Oracle after being investigated by the U.S. However, according to a previous report, ByteDance's overseas 800 million USD was not entirely absorbed by AWS but was shared between AWS and Oracle.

The inconsistency in AWS China's internal and external "caliber" has an obvious reason: China's strict regulatory ban on cryptocurrencies.

As early as 2017, the central bank and seven ministries issued a document prohibiting all forms of token issuance and financing activities (ICO), characterizing them as unauthorized illegal public financing activities, involving illegal sale of token vouchers, illegal issuance of securities, and illegal fundraising, financial fraud, pyramid schemes, and other illegal activities. Since then, theoretically, cryptocurrency exchange projects have had no room in the domestic market.

In May 2021, the 51st meeting of the Financial Stability Development Committee of the State Council explicitly pointed out the need to combat Bitcoin mining and trading activities, firmly preventing individual risks from spreading to the social field. Domestic Bitcoin mining projects began to be cleared.

Four months later, the People's Bank of China and other departments issued a document clarifying the illegal financial activity nature of virtual currency-related business activities, stating that overseas virtual currency exchanges providing services to domestic residents via the internet also constitute illegal financial activities, and requiring financial institutions and non-bank payment institutions not to provide services for virtual currency-related business activities.

This means that the connection between blockchain and cryptocurrencies within China has been completely severed. Prohibited matters also include the business connection between cloud servers and mining.

Alibaba Cloud had already cut ties with cryptocurrency-related cloud businesses as early as August 2020, and Tencent Cloud issued a statement last June prohibiting customers from using Tencent Cloud services to directly or indirectly engage in virtual currency-related businesses or activities, including but not limited to virtual currency mining, registration, trading, settlement, and clearing.

However, according to several informed sources, unlike these Chinese companies, AWS has designed a sophisticated system for blockchain projects involving virtual currencies in the Chinese market, attempting to mitigate the risks of related businesses it is still heavily engaged in.

In July of this year, a user on social media stated that they had opened a virtual overseas account on AWS to run Ethereum nodes and subsequently received a call from an AWS China project manager, who indicated that technical support could be provided and asked, "Do you want to connect to an exchange?"

Another customer planning to purchase AWS services in the second half of this year similarly reported that during communication with an AWS China project manager, the manager indicated that they could informally introduce some technical personnel, sourced from clients in the circle or third parties. When the customer inquired about issuing tokens, the project manager said they could help introduce people from exchanges.

"This project manager also expressed a desire for me to participate in a closed-door blockchain meeting, attended by Amazon's blockchain clients, including several projects that have already reached a certain scale."

In this informal manner, AWS China is introducing talent for blockchain clients, establishing a "circle," and assisting small clients in their initial incubation. On the other hand, after these blockchain clients grow, they will be moved into another regulatory evasion safe zone.

An AWS China employee revealed to Pinwan that the overseas Chinese blockchain business team initially connects with domestic project teams, and once the business grows significantly, these clients will be transferred from the local business team.

"Some will belong to the FSI (Amazon FinSpace) team, which is the financial team."

"Amazon Cloud cannot engage in large-scale financial businesses domestically. The so-called financial clients it can work with are somewhat related to the crypto circle, along with some overseas P2P businesses," this employee told Pinwan.

The uniqueness of this FSI team lies in the fact that it does not actually fall under the management scope of AWS China. Since many of the clients it connects with are involved in businesses not permitted in mainland China, the labor contracts of the personnel in this team are not signed with AWS China.

"Although they are in China, the labor contracts are signed with the Singapore side," this employee told Pinwan.

In this situation, this FSI team is essentially a group dispatched by Amazon Cloud's Singapore company to China, attempting to circumvent the policies that prohibit approaching crypto-related businesses in mainland China—although this team has been operating in mainland China from recruitment to client connection.

Moving the operational aspects of blockchain projects out of mainland China is a common method for AWS China to mitigate policy risks, as illustrated by a former major account manager who provided an example to Pinwan.

Around 2020, a blockchain project team using AWS as a cloud service provider was headquartered in Chengdu but operated a cryptocurrency exchange in Singapore. At that time, to comply with regulations, this project team placed its administrative and IT teams in Chengdu, and the AWS team in the Chengdu region directly connected and provided services to them.

Later, due to policy reasons, this client "was taken away," and although the headquarters was still in Chengdu, it became the AWS China Hong Kong team that directly served them.

"This client had significant spending on Amazon Cloud in a year; it is unclear whether it still belongs to Greater China after being handed over to the Hong Kong team."

From the ambiguous hints of project specialists to "yin-yang contracts" employees, and then to the transfer chain to Hong Kong and Singapore after project growth, a sophisticated system is continuously operated by various departments of AWS. Senior executives at Amazon China are also well aware of this.

Several AWS China employees revealed that although Hong Kong is not subject to mainland regulatory policies, it is included in the revenue caliber of Amazon Cloud's Greater China region. Moreover, among the eight executives who report directly to Zhang Wenyu at AWS China, one is specifically responsible for business in Hong Kong.

However, regarding revenue attribution, one AWS China employee partially refuted the aforementioned employee's details about the process of transferring blockchain business to the Singapore financial team. He stated that when these blockchain clients, which have already reached a sufficient scale or begin to involve exchanges or token issuance, are handed over to the Singapore team, the revenue from these projects is also stripped from Greater China.

But this employee also mentioned that the Singapore team is responsible for many projects, including large orders, which may not be considered significant clients from the perspective of the mainland team. Therefore, they have no time to take on these "hot potatoes," and the blockchain projects related to trading that are rejected will remain with the AWS China team, which will obviously be recorded in Greater China's revenue.

"Last year, there was a blockchain exchange client at AWS China, which had already reached a considerable scale, spending around 100,000 to 200,000 USD with us each month. This client ultimately was not handed over to Singapore; it was still managed and operated by the China team," this employee told Pinwan.

Places like Singapore, which have a strong Chinese background but are offshore in policy terms, are becoming a cover for AWS China to develop blockchain businesses. Meanwhile, the business that is widely regarded as too small for the Singapore market is being aggressively pursued by the AWS China team, reflecting the awkwardness AWS China faces under growth pressure.

Image source: AWS China

A previous article introducing the strategy launched by Zhang Wenyu at AWS China described it this way: "Now, the product expert team, industry expert team, solution team, etc., at AWS in China were all newly formed after Zhang Wenyu took office."

After joining Amazon from Intel, Zhang Wenyu directly led Kindle and the Chinese e-commerce business before AWS, and the outcomes of these two businesses were quite similar—they both proactively exited the Chinese market despite still having many loyal users in China. Throughout this process, Zhang Wenyu continuously increased his power within Amazon China, first succeeding Ge Daoyuan as the new President of Amazon China in 2016, and then becoming the highest-ranking official of AWS in Greater China after Amazon withdrew from the Chinese e-commerce business in 2019, succeeding Rong Yongkang as the Executive Director of AWS Greater China.

In addition to the meticulously designed system for attracting blockchain projects, AWS China under Zhang Wenyu is also actively participating in price wars.

Seven days before the official shutdown of Amazon China's local e-commerce business, Zhang Wenyu became the head of AWS China, and coinciding with the announcement of the e-commerce business shutdown was AWS China's announcement of a price reduction for its Amazon EC2 instances, with reductions of up to 49%.

Amazon EC2 (Elastic Compute Cloud) is the first cloud product in AWS's history, launched in 2006, allowing AWS to differentiate itself from other vendors during the early productization phase of global cloud services. It supports different CPU, memory, storage, and network capacity configurations through various instance options, providing server leasing and hosting services for clients with different needs. Even now, EC2 remains one of AWS's core cloud computing services, with industry insiders speculating that EC2 accounts for more than half of AWS's total global revenue.

EC2 can be seen as a representation of AWS's technical strength and is the most core computing service provided by AWS to the Chinese market. However, the drastic price cuts upon taking office reflect Zhang Wenyu's judgment of the Chinese market—continuous price reductions of core products have become almost the only way for AWS to promote itself in the local Chinese market.

Various signs indicate that beneath the glamorous external statements of AWS China lies immense real growth pressure. An AWS account manager stated that the number of internal employees at AWS is still rapidly expanding, leading to increasing internal competition. This ultimately drives many employees to begin testing more dangerous tightrope behaviors:

Some employees have started trying to attract projects that cannot operate domestically due to legal issues back to China, as this repatriation of overseas clients is seen by many employees as the easiest way to achieve performance targets. Within AWS China, the postal code address of project payment bills directly determines the regional attribution of the project's performance, meaning that if a client manager successfully brings back an overseas client's order address, it will supplement their personal performance.

Of course, for AWS China as a whole, each repatriated project also smoothly becomes an important increment in revenue. According to informed sources, AWS China's account managers have indicated that they can offer up to about 30% fee reductions for repatriated orders, and the entire repatriation process will be completed by familiar agents from AWS China.

Last year, the name "AWS" was erased from the domestic market, and "Amazon Cloud Technology" became the new name for Amazon's cloud business in Greater China. This was seen as a significant move towards "localization." At the latest Amazon Cloud Technology China Summit on October 26 this year, AWS CEO Adam Selipsky stated via video that "China has always been one of AWS's most strategically significant layouts globally, and AWS is full of expectations for the future of cooperation with excellent clients."

However, as a cloud giant that controls 23% of Ethereum nodes and an entire Binance, how AWS defines "excellent clients" in China is clearly a question that needs to be explained more transparently.