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Grand Chinese Design: Blockchain Regulation as Move for Crypto Yuan

Anna Zhygalina

On October 19, the government top-level internet watchdog Cyberspace Administration of China (CAC), published a new draft called "Management of Blockchain Information Services Regulation". On the one hand, it looks like the Chinese governments categorically separate the cryptocurrencies and blockchain, while completely prohibiting the first and actively encouraging the second. But is it really so, and what is the main and highest purpose?

New draft: centralized national blockchain

Despite the fact that the Chinese authorities have banned cryptocurrency trading and ICO, the blockchain is officially inscribed in the state plan from 2016 to 2020 as one of the key directions of economic development. Following the trend, the Chinese registered 3,078 blockchain companies in the first half of 2018, which is 6 times higher than last year. For comparison, 817 projects were registered in the USA during this period, and 335 - in the UK.

In a country with such a fast-growing economy (GDP for 2017 is more than $12 trillion), the government is intensely restraining the outflow of capital, which is provoked by cryptocurrencies and blockchain startups related. At the same time, DLT-companies are actively supported within the country. In April 2018, the government launched the Xiong’An Global Blockchain Innovation Fund in the city of Hangzhou with $1.6 billion (10 billion yuan).

It is not surprising that the Chinese government takes control of this market: 23 articles of the new draft have already been proposed for public consultation and comment on the official CAC page. But whether Beijing will take into account the recommendations of the blockchain ecosystem participants, and when the government actually plans to implement this regulation policy, is not clear now. It is only known, that the ability to make comments is available until November 2.

At first sight, the project looks adequate to the stated goal: to regulate the activities of blockchain-based information services and to stimulate the healthy development of DLT-providers and improve the standards of their services. If a company develops new blockchain products or applications, it is obliged to provide an analysis and assessment of their security to the State Council Information Office (SCIO). This is especially important for users of blockchain providers in the healthcare and education fields.

In accordance with the draft, all startups would be obliged to register on the market within 10 days from the date of their appearance and specify the category of services, their application, the form of service and server address, using their real names and national ID card numbers. There would also be annual checks, and in case of the rules violation, the blockchain provider would have receive fines in the amount of $719.46 to $4,316.73 (5000 to 30,000 yuan).

However, there is a very interesting article of the draft to think about the consequences of such regulation. According to the article number 9 the companies “shouldn’t use the information blockchain services to create, reproduce, publish or distribute information content prohibited by the laws and regulations of China”. In other words, the internet censor of the country wouldn’t only regulate, but will fully control the blockchain information space and limit the freedom of speech as such.

This draft entails not only restrictions and control of suppliers, but also users of blockchain services: authentication will be carried out on the basis of an national ID or phone number. In case of refusal to provide such data, user wouldn’t be able to use the service. Such restrictions are already observed in the Chinese payment system: to make transactions for more than $143.99 (1000 yuan) in the WeChat Pay system, you need to register with a bank card or national ID.

Moreover, the article 14 states that providers will be required to register all users information, content and journals they published on the blockchain, as well as to keep backups for six months in order to provide them to the relevant law enforcement agencies, if necessary. In fact, this provision excludes one of the main principles of the blockchain - confidentiality.

However, this step was quite expected, taking into account all previous prohibitions and reforms. It is unlikely that the Chinese government seeks to completely destroy the crypto market and stop the development of the blockchain. More like that it takes everything under its strict party control.

Bans, bans and bans again

The first step, which was the shock of the entire world crypto community, was well remembered official ban on ICO, which People's Bank of China (PBoC) published in September 2017. After that the bitcoin rate fell from $4418 (even if you take the minimum mark) to almost $2900 for a couple of days, that is more than 30%.

In total, the PBoC closed 88 stock platforms and 85 ICOS that were suspected of illegal financial activities, which have “seriously disrupted the economic and financial order”. And it obliged the companies and individuals, who managed to hold an ICO, to return the funds to investors. Following this, regulators forced several exchanges to close, recognizing their operations with cryptocurrency as illegal financial transactions that encroach on interference in state affairs.

Chinese crypto-exchanges have moved to other growing markets: Singapore, Japan, South Korea and the USA. Binance, which became one of the largest crypto-exchanges in the world, moved to Japan and then to Malta after the ban. All this led to the fact that the share of the yuan in the total volume of global transactions with bitcoin fell from 23% to 1%. There are simply no legal ways to buy and sell cryptocurrencies anymore, which forced digital assets to move into the gray and black zone.

The Chinese regulators has imposed a ban on the circulation of major digital assets, eliminating a competitor within the country such as bitcoin. In January 2018, the Legal Affairs Department of PBoC banned providers from offering services for transactions with digital assets, obliging them to strengthen monitoring and close payment channels if they are suspected of crypto-trading. Also, soon they plan to curtail the activities of all miners in the country. Recall that in Sichuan province is still concentrated most of the computing power of bitcoin - about 80%, which contributes to the cheap hydro and coal fired power generation.

However, cryptocurrency trading has not been completely banned for the population, in addition, the national blockchain system is being actively developed. All this leads to the idea that China is probably preparing a reliable and centralized blockchain platform for the national cryptocurrency.

National cryptocurrency - Made in China

Chinese are very active in using online payments for any transactions and prefer digital transactions to traditional calculations. And if we add to this fast the popularity of cryptocurrencies among the population, it becomes clear why the People's Bank of China (PBoC) wants to create a national digital currency. This will allow to track transactions in the national economy scale and control the risks in the financial system. And in addition - it has to stop the outflow of money from the country.

It is obvious that the PBoC is not going to fight with digital assets, but rather seeks to implement it at the state level on its own terms. The need to create a national Chinese cryptocurrency was announced in 2016 in Beijing at a seminar on digital currencies. In the report, of the Chinese People's Bank representatives said that they will try to create their own cryptocurrency as soon as possible: “We are closely following the events both in the domestic and foreign markets. Digital currencies are much cheaper to trade than fiat. They promote trading, increase the transparency of transactions and reduce the risks of money laundering and tax evasion”.

In 2017, the head of the PBoC Digital Currency Institute Yao QIAN said that the financial regulator wants to make its own cryptocurrency a legal tender, which will modernize the economy in remote areas of the country, as well as increase the efficiency of the monetary policy of the People's Bank. "The digital economy is in great need of cryptocurrencies issued by state banks. They will be the pearl of fintech. We need to speed up research in this field and the process of their release,” said Yao QIAN.

And one of the experts of the People's Bank of China economist Zhou XIAOCHUAN believes that the appearance of the national digital currency is “just inevitable”, assuming that it will be based on blockchain. Of course, the official motive of such politics is to reduce fraud and create a more profitable payment system. However, some experts believe that the government's’ ambitions are much greater: if China manages to launch an official cryptocurrency issued by PBoC and provide it with 1:1 gold proof, then it could become the No.1 world currency and would be able to manage the global market.

It is clear that a number of steps have already been taken towards this goal. In March 2018 China Banknote Blockchain Technology under the PBoC authority, within the development course of cryptocurrency in China, launched the Blockchain Registry Open Platform (BROP) for the supply chain tracking. According to the head of the research center Zhang YIFENG, despite the fact that 1.5 years of the national cryptocurrency development and testing, the expected launch date is unknown. The ultimate goal of the research center is to create digital currency that will be supported by authorized services and state financial institutions.

What has already being developed is the technology that will allow to combine the national cryptocurrency, p2p-payments platform and personal wallet. This is evidenced by the blockchain development patents for 2017, that were filed with the world intellectual property organization (WIPO). According to WIPO, over the past year, China has filed 133 such applications. And some of them are about the user's wallet, which will store the digital currency encrypted with private keys from the PBoC.

If the draft, which was described above, would be adopted in the form it is published now, then on November 2, perhaps, CAC will have full access to all blockchain services in China. It remains only to assume that perhaps the next step will be the synergy of the centralized state blockchain platform and the launch of the long-awaited Chinese crypto-yuan on it.

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