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Bitcoin, Blockchain & Co.: What you need to know about China’s regulation measures and strategy

An introduction to recent events

· miscellaneous

{{{Gerald Pollak & Andre Ringdorfer}}}

On 31 October 2018 the cryptocurrency Bitcoin celebrated its 10th anniversary since the release of its white paper in 2008. Although Bitcoin, blockchain and co. have been terms that were mainly used by a smaller community, cryptocurrencies and the underlying technology had a popularity breakthrough in 2017. Because of the fast spread of cryptocurrencies and the easy means of spreading them, countries all over the world were facing the challenge of regulating this sector. Consequently, China also agreed on the necessity to create rules and laws to tame this market.

Regulation and the underlying reasoning of Chinese lawmakers

Yet, to understand Chinese lawmakers and their policies it is important to be able to differentiate cryptocurrencies, such as Bitcoin, from Blockchain, which is the underlying technology. A blockchain is a digital chain of immutable transactions, which are mutually agreed on and validated by participants spread all over the world. This means that once a transaction is completed it is apparent for all participants and not reversible. To exemplify this, when a person wires money to another person a bank acts as intermediary and validates the transaction. Using blockchain technology the intermediary could be omitted. But this is only one example for the application of this technology. Blockchain could also be used to sign and validate contracts or could also protect intellectual property of publications. A cryptocurrency on the other hand is a digital or virtual currency that uses cryptography for security. Cryptocurrencies use blockchain technology, but blockchain itself is not limited to cryptocurrencies.

Since 2017, China implemented several guidelines that prohibit the Chinese to engage with cryptocurrencies. These guidelines banned online trading platforms for cryptocurrencies, the mining process, whereby computing power of computers is used to validate transactions, and Initial Coin Offerings (ICOs), which describe a funding process using cryptocurrencies. Moreover, events and any kind of marketing related to cryptocurrencies is forbidden as well. One reason for forbidding cryptos is the high energy consumption many of them come with when they are mined. But one could also argue that China banned them because they displayed a threat for the country’s capital controls. For better understanding, a Chinese citizen is only allowed to buy 50.000,00 USD every year, which is supposed to protect the exchange rate. Another reason for the ban is to counter corruption. As of now, cryptocurrencies can be used anonymously which means that it can be used for corruption purposes. The graph below depicts the fall of the trading volume of Bitcoin executed in Chinese Yuan.

Bitcoin trading

China’s attitude towards blockchain going forward

Contrary to the government’s position towards cryptocurrencies, the country sees great potential in blockchain technology. Xi Jinping, president of China, mentioned that blockchain, AI and IoT have the potential to transform our economy. Moreover, blockchain has been mentioned in China’s 13th 5-year-plan, which can be seen as a sign for the importance of the technology. In May 2018 the ministry of industry and information technology of the people’s republic of China published a 157 pages long white paper that focuses on the blockchain industry and the progress China has made in this sector. According to the white paper, China files the most applications for blockchain patents worldwide, which can be seen from the table below. Interestingly the People’s Bank of China was leading the ranking in 2017 when they tried to implement their own blockchain to increase efficiency.

Blockchain patent rating

In 2017, 178 blockchain companies were founded in China, which means that at the time of the publication there were over 450 start-ups specializing in blockchain technology and its application.

The government has increased interest in applying blockchain in the health sector, in e-government, digital identities, the internet of things (IoT), poverty measures, and in finance. It needs to be highlighted that the purpose of these implementations would be to create trust for government institutions, organizations and the persons involved through transparent, quick and reliable transactions. In contrast to the original ideas of blockchain-projects, where people sought to achieve decentralization and anonymity, China is on the way to using blockchain while eradicating decentralization and anonymity.  Especially anonymity is a thorn in the eye of the government. Hence, in autumn of 2018 the national internet information-bureau published a 23 paragraphs long draft law that should combat anonymity and other pain points for the Chinese government. An important draft bill paragraph contains that blockchain services are ought to be ruled by the network-safety law, which means that users need to register with their names and identity cards. Furthermore, blockchain companies need to register their blockchain service, and are only allowed to operate them after government approval. In addition, companies need to save the user data, which will be made available in case of investigations.

In order to foster innovation in this sector the government has not only brought about regulating rules but also financial programs and subsidies. For example, an investment fund of 1,6USD billion was started in Hangzhou in April 2018, of which 30% of the investment came from the government. Shortly thereafter an 800USD million fund was raised in Shenzhen, which also enjoyed government support. Cities like Beijing, Shanghai, Guangzhou, Chongqing, Shenzhen, Jiangsu, Zhejiang and Guizhou have all launched initiatives that promote blockchain projects in these regions.

Summing up, it can be said that although the industry evolved rapidly in China and other countries it is still in its infant state. Consequently, one can expect to see a myriad of projects concerning blockchain technology in China in the future. The fast development of the industry will need quick decision making and execution on a political level in order to steer the industry towards a direction and to avoid grey areas. The political system in China fulfills the right prerequisites to achieve this.

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