Your Investment News From China to Wall Street

PERSPECTIVE: China Embraces Blockchain, Not Bitcoin

China’s central bank is using a blockchain-powered system to digitize paper checks, and initiatives are being launched throughout the country to develop both technical advances and applications for the system.

Sara Hsu
    Jun 11, 2018 6:00 PM  PT
PERSPECTIVE: China Embraces Blockchain, Not Bitcoin

While cryptocurrencies are certainly not welcome in China these days, the underlying technology, known as blockchain, is being fully embraced.

Indeed, China's central bank is using a blockchain-powered system to digitize paper checks, and initiatives are being launched throughout the country to develop both technical advances and applications for the system.

For the central bank, the system has been constructed to combat the problem of check fraud, which has arisen due to the presence of many intermediaries that can issue checks, increasing the potential for fraud. Transactions are verified on the blockchain using smart contracts and can be supervised by government regulators. Although China's government has taken a negative view of cryptocurrencies, it joins Saudi Arabia and Singapore in using the blockchain to improve financial supervision.

While some have viewed China's embrace of blockchain as a change of heart toward all things crypto, this doesn't appear to be the case. Chinese regulators banned initial coin offerings (ICOs) and Bitcoin trading for their potential usage in fraudulent and illegal transactions, but blockchain was never slated as a financial threat. In fact, the use of blockchain reduces security threats by recording transactions on a distributed ledger.

Blockchain supported by government

The Chinese state at the central level has been supportive of blockchain endeavors expediting a national standard for the technology. China set up the Trusted Blockchain Open Lab through the Ministry of Industry and Information Technology. The lab carries out research on blockchain uses. Some of the uses in the coming years are expected to include product traceability, copyright protection, bill verification, and healthcare.

China's state television, CCTV, has called blockchain "10 times more than that of the internet." Even President Xi Jinping has endorsed the use of blockchain as a means of advancing China's technology, calling the blockchain a "breakthrough" technology.

Local governments have also picked up the use of blockchain. Plans for the Xiongan New Area outside of Beijing include the use of blockchain to create a smart city. The area, which serves as a development hub to Beijing-Tianjin-Hebei, will be home to high-tech industrial clusters. Hangzhou recently opened a blockchain industrial park with $1.6 billion in backing, with the park acting as a startup incubator for blockchain companies.

In an example of a public-private partnership on blockchain, Tencent has been working to help the Shenzhen National Taxation Bureau establish the "Intelligent Tax" Innovation Laboratory, which will carry out research on providing the city with the use of blockchain applications for invoicing. The municipality intends to use a blockchain-based platform to improve blockchain-based tax revenue collection and forecasting.

China's Attitude Toward Bitcoin, ICOs Hasn't Affected Blockchain

By contrast to China's benevolent attitude toward blockchain, regulators have been tough on ICOs and Bitcoin. Last September, the government declared that ICOs were illegal and shut down cryptocurrency exchanges. Then in January of this year, the government asked local governments to guide Bitcoin mining companies in shutting down. Chinese officials are concerned about fraud in the use of cryptocurrencies and ICOs.

The governor of the People's Bank of China stated this March that "we do not currently recognize Bitcoin and other digital currencies as a tool like paper money, coins and credit cards for retail payments. The banking system does not accept it."

ICOs continue to be banned, but they are still happening. ICOs not backed by businesses, called "air coins," have risen thirtyfold, according to China Central Television. In addition, cryptocurrencies have been traded on private, over-the-counter exchanges. After President Xi's statement about blockchain, some analysts called on the Chinese government to once again allow the operation of Bitcoin exchanges.

This seems unlikely, however. Even though some investors have engaged in illegal trading, Bitcoin exchanges have moved overseas as a result of China's ban. For example, Huobi, once a large China-based exchange, has set up shop in Japan. Okex moved to Hong Kong. Bitcoin miners have also moved overseas to locations such as Malaysia, Kyrgyzstan, Belarus, Canada, and Iceland, which are more crypto-friendly.

Blockchain is a global trend

So while cryptocurrencies and ICOs are not welcome in China at the moment, blockchain is poised to thrive. China joins other countries investing in blockchain. Saudi Arabia recently signed a blockchain deal with U.S. firm Ripple to help banks settle payments via blockchain software. Like China, Saudi Arabia's central bank has warned its citizens about the use of Bitcoin but has embraced blockchain technologies.

Singapore plans to use blockchain innovations to promote financial inclusion. Minister of Finance Heng Swee Keat stated in April that Singapore would use fintech to improve access to finance. Singapore's neighbor, Malaysia, is also implementing blockchain technologies for trade finance. Nine banks are currently working with the government to develop necessary software.

China's government is on trend, therefore, in promoting the use of blockchain. As cryptocurrencies and ICO's take a back seat to the distributed ledger technology, financial fraud looks set to remain a target of government regulation and supervision. Better record-keeping through use of the blockchain will help to maintain this theme.