Central Government and Blockchain in China

This article is an excerpt from Silicon Road's China's Blockchain Landscape Report which is available for subscribers to download.

The central government believes that investment in blockchain will support its goals of sustained economic growth and international influence. Blockchain's inclusion as a core technology in top level plans highlighted to local officials that supporting the industry would likely be linked to rewards and incentives. Local governments compete to achieve central recognition and prestige for regional blockchain initiatives. This has led to an ongoing competition for regions to offer the most attractive support policies to strengthen local ecosystems and encourage startups to relocate. It has also boosted the adoption of blockchain in e-governance and urban service provision.

Blockchain was included in the 13th five-year plan (2016-2020) which encouraged "strengthening the research and development" of blockchain. The centre also seeks to highlight successful use-cases of blockchain implementation to encourage the replication of effective initiatives. These include the Ministry of Information and Industry's 'Trusted Blockchain Awards' which are awarded to projects which it believes use blockchain effectively.

Cryptocurrency Regulation

In 2013 the China Securities Regulatory Commission issued the "Notice on the Prevention of Bitcoin Risks" to restrict institutions from dealing with Bitcoin. By September 2017, various departments released warnings about token financing activities preventing the popular ICO (Initial Coin Offering) financing vehicle for startups. Startups which had already launched tokens have continued to operate, though new token sales are prohibited.

Public policy has encouraged the private sector to focus on industrial applications of blockchain rather than cryptocurrencies and tokens. The central government instead retains control over the development of a digital currency.

Digital Currency

There has been significant global attention on the possibility of China developing a blockchain-based cryptocurrency known as the Digital RMB. The project, undertaken by the People's Bank of China, is working to create an electronic version of cash that could represent an alternative to using Alipay and WeChat. The widespread adoption of digital payment tools has meant that much of China's money is in commercial bank accounts (M2) rather than cash in circulation (M0). However, the tight central control of the network means that it is has little in common with leading international cryptocurrencies like Bitcoin or Ethereum. While the network is portrayed as a key element of China’s blockchain strategy, it runs adjacent to other efforts.

Blockchain Service Network

With the Digital RMB unlikely to use true blockchain technology, a far more significant central technology is the Blockchain Service Network (BSN).

This government backed network is designed to reduce the costs associated with setting up compliant blockchain networks, in some cases by up to 90%. The project will help to steer developers towards blockchains that comply with central rules while also allowing governments and state-institutions to adopt blockchain without needing to hire expansive blockchain teams.

The network was a collaboration between government think-tank the State Information Centre (SIC) alongside state-owned telecoms giant China Mobile and China UnionPay.

It was initially trialled in Hangzhou following the government's "policy innovation" approach to governance. Following the success of the trial, in April 2020 it was expanded out to partners across China. The long-term ambition for the network is that it will be adopted globally. Outside China, there are signs that the network will support decentralised blockchain protocols including Ethereum and EOS, though such platforms remain restricted in China.  

Role of State-Owned Enterprises

The central government has shown a willingness to allow private technology companies to take the lead as national champions for blockchain technology. In general, large internet companies lead in patent applications and successful implementations of blockchain technology.

Among SOEs, China Unicom has filed the most patent applications related to blockchain (more than 200), closely followed by Chinese banks. Internet financial research company 01Caijing found that between 2016 and 2019 the Industrial and Commercial Bank of China (ICBC) filed 50 patents based on blockchain, with Bank of China filing 40 patents. These figures are dwarfed by Tencent backed WeBank which filed 288. State owned enterprises play an important role in the blockchain sector, though the true blockchain national champions are China’s internet companies. The state has shown a willingness to allow these private companies to outcompete SOEs likely reassured by their close links with the state and strict network regulations.

The Central Government steers the blockchain economy

The central government is working on developing the fundamental digital infrastructure for a blockchain-powered economy. Maintaining control over this helps to ensure that any data stored on Chinese blockchains can be viewed by the state to protect national security and domestic stability. The combination of a requirement for registering blockchain networks, and a state-backed platform for running blockchain projects help provide assurance to the private sector that networks comply with the law. This has been essential in encouraging institutional investors and enterprises to invest in the space.

This article is an excerpt from Silicon Road's China's Blockchain Landscape Report which is available for subscribers to download.

You can also read more about the role of Local Governments or discover an overview of the Chinese blockchain sector.