Is China leading the blockchain innovation race?
By Kevin C. Desouza, Chen Ye, Xiaofeng Wang
According to the report by Jingdata, a research institution focusing on blockchain development in China, the amount of financing on blockchain-related projects in January 2018 in China has already reached RMB 681 million (USD $100 million), overtaking the record total of RMB 468 million (USD $70 million) in 2016. In the Chinese ecosystem of blockchain technology, there are currently four actors engaged in achieving the nation’s ambition with the innovation: private industries, the central government, local governments, and academia. This first of two posts will cover private industry and central government.
Startups and powerhouses
For investors, there has been an explosion of startups since 2016. Leading startups cover dozens of sectors including finance, energy, supply chain, medical, internet of things, cryptocurrency, entertainment, social media, medical, legal service, agriculture, and philanthropy. Energy Blockchain Labs, founded in 2016, created a carbon-trading platform that records transactions on blockchain. Participants can track their carbon footprint and better understand when to buy or sell their carbon assets, while regulators can better monitor progress against quotas to ensure participants meet mitigation goals. Ziggurat, known by its Mandarin Chinese name Zhigui, uses blockchain technology to register copyrights for music, videos, photos, or other works uploaded by customers. They can then access the record loaded on the blockchain and demand credentials at any time.
Meanwhile, the major Chinese internet powerhouses Baidu, Alibaba, and Tencent also compete on blockchain technology. Compared to startups, these companies have more funding and personnel to devote to developing blockchain-based technology and applying it to their existing businesses. Alibaba is one of the world’s leading enterprises in terms of the number of blockchain patents; it has also created a blockchain-based logistics system to track information such as details of production, transport methods, customs, inspection, and third-party verification. Tencent is working with local governments to test a blockchain-powered platform that prevents prescription tampering. Baidu issued China’s first blockchain-backed asset-backed securities on the Shanghai Securities Exchange last September.
Low profiles and high hopes
Despite a spate of enthusiasm for blockchain business, many companies are keeping low profiles for their involvements in blockchain-related products owing to policy uncertainty. The central government’s policy toward cryptocurrency is very explicit, as it banned initial coin offerings (ICOs) in September 2017 and later prohibited all cryptocurrency exchanges from operating in China. Yet the regulation on blockchain, the technology behind cryptocurrencies, remains unclear. Business operators must be cautious, given the difficulty of determining if blockchain products are fully compliant with government rules, even when no cryptocurrencies are involved.
Despite the ICO ban, China neither discourages venture capital from pouring money into funding startups nor dampens tech giants’ enthusiasm for adopting blockchain-inspired technologies and platforms. The ICO ban, issued by People’s Bank of China (PBOC) and six other government agencies, barred both organizations and individuals from raising funds through ICO activities, and stated that no banks or financial institutions should do any business related to ICO trading. Prior to that, major venture capital flocked to cryptocurrency businesses with high yield and high risk alike. According to a report by the National Committee of Experts on Internet Financial Security Technology, in the first half of 2017, approximately 65 ICOs raised RMB 2.6 billion (USD $400 million). The report also warned investors of fraud and illegal behaviors in some of fundraising schemes.
Apart from policy uncertainty, blockchain-based businesses face a lack of explicit regulatory frameworks. Neither PBOC nor the Ministry of Industry and Information Technology (MIIT) can claim itself as the centralized regulator. Consequently, the industry is testing the government with a wait-and-see approach. Li Lihui, the head of Blockchain Research Working Group at China’s National Internet Finance Association, suggested to Chinese government to create a standardized framework for blockchain use, and establish a third-party entity as an authority to encourage innovation and support talents that specialize in blockchain.
The central government of China has also included blockchain development on its agenda. Blockchain appeared in China’s 13th Five-Year Plan for the development of information technology, which notes that artificial intelligence and blockchain will build a strategic technological advantage. Realizing its importance, the state encourages companies to develop innovative research in these areas. In a recent meeting with members of the Chinese Academy of Sciences and the Chinese Academy of Engineering, Chinese President Xi Jinping listed blockchain as a breakthrough technology in his speech addressing the need for China to become the global center of science and innovation.
Chinese authorities try to maintain control over blockchain and encourage innovation by launching their own initiatives. According to People’s Daily, PBOC topped global blockchain patent counts with 68 in total in 2017. The central bank started to organize symposiums on digital currencies in January 2016 and have plans to later set up a research institute. Former central bank governor Zhou Xiaochuan remarked that digital currencies seem to be inevitable. PBOC is working with industry partners on research into a digital currency, which could be based either on blockchain or on the existing electronic payment technology.
MIIT is creating a National Blockchain Distributed Accounting Technology Standardization Committee in order to develop state standards in specific areas including a blockchain reference framework, data format specification, interoperability, and smart contracts. It is worth noting that this new committee will promote standards not only domestically but also globally by contributing proposals to establish international standards in blockchain technology. Prior to that, an MIIT affiliate launched a blockchain lab which conducts research in the area of blockchain and creates a platform for entrepreneurs and experts to share their knowledge around this technology.
Sorting out the regulatory uncertainty with blockchain is key to the future innovation trajectory. More and more Chinese entrepreneurs advocate clear regulatory guidelines for the entire industry to follow.