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The Chinese State Blockchain As a Tool To Control Nationals

Anna Zhygalina

Earlier, we wrote about the CAC project "Management of Blockchain Information Services Regulation", that is now opened to public comments in China until November 2. We appealed to the representatives of the blockchain community of the country to make clear the situation in the Chinese crypto market from the inside. Our questions were answered by co-founder of China Blockchain Partners Robert VAN AERT and founder of blockchain technology advisoring company Starlings Global Stephane LAURENT. We will consider possible trends in the development of the Chinese market in the case of this draft adoption.

BNT: What do you think is the real motivation of the government to create a draft of blockchain regulatory guidelines?  

VAN AERT: For me this kind of regulations issued by the Chinese government are not really a surprise, as they wish to control as many areas of people's lives as possible. I also think it shows the true way of how the Chinese government aims to utilize blockchain. It wants to create a tool that can improve the surveillance of its citizens. But just think about it: by putting all the personal data on the chain - assets, properties, money - the government can get to know much more about its citizens and probably even start controlling it to a certain extent.

I expect the Chinese government, as probably other governments across the world, to aim for a private and permissioned blockchain. So yes, this goes pretty much against the core values of public blockchains, which are decentralized, with no single body in control.

Editor's note: The blockchain technology itself implies conducting transactions without the intervention of any central authority. All decentralized “public blockchains” that have the immunity to censorship, work by this principle. In the public blockchain, there is no division by access levels, and all users have the equal rights. A “private blockchain” is also a decentralized network, but it has limited access in data recording and reading. And transaction confirmation and database management are available to a strictly defined circle of people. This is a centralized system that does not imply full openness and equality, which are typical for the public blockchains

BNT: How can representatives of the blockchain community react? And what can be the consequences in case of this law implementation?

LAURENT: The upcoming regulations announced by the CAC promises to be quite stringent and I anticipate a very adverse reaction from the market. These regulations, if enforced, will impact a broad range of companies in the space and certainly conflict with blockchain's basic principles of privacy.

This could result in more service suppliers relocating outside of China in a similar fashion to local exchanges after the ban last year.

Does it mean that those companies will stop all operations in China? Possibly, but I think that what will happen next - is that a lot of those activities will go 'underground' just like many exchanges and projects have managed after last September.

VAN AERT: After all, the ICO ban last year also did not lead to Chinese projects not conducting an ICO anymore, as they just set up their companies abroad and still raised money. Projects kept promoting ICOs and coins on media platforms, social media and offline events.

I don't think the blockchain service providers have much of a choice to accept the new law. And even more. If strictly implemented and enforced in its current form it might definitely pose a threat on or even kill the innovation.

However, it is important to wait for the final version. In addition, there are many strict rules in China, but sometimes it lacks enforcement or Chinese entrepreneurs manage to find workarounds. But I think that this message from the government doesn’t look positive.

BNT: Can this regulation strategy, including the last year's bans on ICO, be a part of government plan to create a Chinese state cryptocurrency based on the fiat yuan?

VAN AERT: How this relates to a Chinese state cryptocurrency - is unclear. But whatever it was, I don't think that it will be a cryptocurrency in the sense that we know it now, as a bitcoin for example. I don't expect it to be a decentralized currency on a public ledger, but rather a centralized ledger whereas supply of the currency is still heavily controlled by the Chinese government.

I consider it more as a tool for the Chinese government to bring its surveillance of citizens to the next level. At this stage many people in China have money that the government doesn't know about or they didn't report it properly. So the blockchain based yuan might be a solution to this.

LAURENT: Yes, these steps might be a part of the strategy to release the crypto-version of the yuan. Chances are super high! These measures aim primarily at protecting the Chinese yuan from the threat posed by cryptocurrencies especially regarding to monetary policies and capital control. I agree that obviously, this currency would quite obviously be centralized and miss the key features of bitcoin. But at the moment there is too little information from the government about how it will be. The official release date has not been announced yet.

BNT: Can the crypto yuan become the №1 currency of the world?

VAN AERT: I also don't think that at this stage it will become the number one currency of the world. Even if the government digital currency is successfully implemented, it won't be easy to convert it into other currencies, as China heavily controls and regulates its foreign exchange and outflow of money.

LAURENT: The crypto yuan would prove easier to transfer at a global level and support the implementation of the “One Road - One Belt” initiative. However this project is not related to blockchain technology directly, it will be probably used to improve logistics and cross border payment.

Editor's note: “One Road - One Belt” is one of the largest economic and diplomatic projects in the history of Asia, which can completely transform the trading market of the whole region. It covers 65% of the world's population, about ⅓ world GDP and ¼ of all goods and services in the global market

VAN AERT: I think that China might definitely be one of the first countries to issue a blockchain based currency. Looking at the current adoption of mobile payments, this country belongs definitely to the top of the world. The Chinese use their phone already to pay for everything, and not just in the big cities like Shanghai and Beijing, but all the way to the countryside where you can pay street vendors with Alipay or Wechat. China is definitely on its way to become a cashless society.

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