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Moving Ahead on Blockchain Innovation

January 16, 2020
China's blockchain industry
China is quickly outpacing the rest of the world in patent applications for blockchain-related technology and financial investment on enterprise blockchain

China pursues a pragmatic approach to blockchain technology.

As a tamper-proof way of recording every digital transaction, blockchain technology could soon play a key role in everything from commercial finance and the Internet of Things, to artificial intelligence (AI) and 5G networks. As the Chinese government is well aware, it has the potential to be both hugely disruptive and immensely valuable.

For this reason, China is now working hard to dominate the blockchain space and has been for some time. The country currently accounts for a quarter of all new global blockchain projects, while some of the biggest companies in the blockchain and cryptocurrency community are Chinese.

As companies around the globe explore new uses for blockchain, China is quickly outpacing the rest of the world in patent applications for blockchain-related technology. According to Tokyo-based research firm Astamuse, China filed around three times as many such patents (7,600) as the U.S. between 2009 and 2018, while data compiled by Japanese legal services firm NGB reveals that Chinese e-commerce giant Alibaba, which uses blockchain technology to power its Alipay e-payment platform, has filed more than 500 patent applications over the same timeframe.

Chinese firms are backing up their patent applications with financial investment. China's enterprise blockchain spending is expected to reach $2 billion by 2023 (up from $304 million in 2019), out of a global total of $15.9 billion, according to market research firm International Data Corporation. The firm sees trade finance and post-trade transactions as two areas where the application of blockchain technology could potentially be most disruptive in China, ahead of international payments and settlement.

"So far, China's focus on blockchain has primarily been as a practical financial instrument," says Juncheng Zhang, who has worked for blockchain startups in both the U.S. and China and is currently writing a book on cyptocurrency competition. "A blockchain-based international financial system involving the yuan (RMB) has the potential for widespread international adoption."

China's blockchain industry infographic
A look at China's blockchain industry
China currently accounts for a quarter of all new global blockchain projects, while some of the biggest companies in the blockchain and cryptocurrency community are Chinese.

A 90-degree turn

Back in 2017, Beijing announced an official ban on all initial coin offerings (ICOs), and cryptocurrency exchanges and online posts concerning cryptocurrency were blocked soon after. Disturbed by the frenzied speculation around bitcoin and a burgeoning number of other cryptocurrencies, the Chinese government took steps to counter the perceived threat of tax evasion, money laundering and capital outflow.

Yet this move should not be confused with a blanket hostility toward digital cryptography. As far back as 2016, blockchain was included in China's 13th Five-Year Plan, indicating the level of economic importance attached to its development.

"The Chinese government's crackdown on the 'fast money' aspects of cryptocurrency gave the world the impression that it had adopted an anti-crypto stance," says Zhang. "In reality, Beijing has always held a very positive attitude towards cryptocurrency and blockchain innovation.”

He continues, "I spent the whole of 2018 attending Chinese cryptocurrency conferences and blockchain discussions. I can tell you the Chinese cryptocurrency community is at least as vibrant as the one in the U.S."

In late October 2019, when Chinese President Xi Jinping declared China should "seize the opportunity" blockchain technology presents, the global crypto market surged and many commentators described the move as an about-face. Yet many experts with intimate knowledge of China's cryptography space see things differently.

"There were headlines about the Chinese government performing a complete U-turn on the whole blockchain issue," says Zhang. "At most it was a 90-degree deviation."

"A blockchain-based international financial system involving the yuan (RMB) has the potential for widespread international adoption."

-Juncheng Zhang

Man on a laptop conducting a blockchain transaction
(Photo credit): Singad/EyeEm

Wide-ranging applications

Beijing's support for blockchain technology is rooted in both practical and political considerations. China has already invested huge sums driving homegrown technologies forward in an attempt to reduce dependence on Western companies and gain a competitive edge in foreign markets (this is already working with 5G and AI)—blockchain is no different. The current trade war with the U.S. has only served to redouble the Chinese government's resolve in this regard.

Blockchain technology could also help China overcome myriad domestic challenges.

"It could enable greater capillarization of financial institutions, which would allow the Chinese digital economy to reach a greater number of people," says Adebe Gasparini, a digital market analyst with China-based consultancy Daxue Consulting. "It could improve investment transparency, which would allow the Chinese tech economy to secure more funding. And it could even improve governance, thanks to improved communication between grassroots and authorities."

But perhaps the biggest prize that blockchain technology could deliver is to transform the yuan into a global currency.

Imminent rollout

The People's Bank of China (PBoC), which has established its own cryptocurrency research lab, has been developing a digital currency through a project called "DCEP" (Digital Currency Electronic Payment) since 2014. According to bank officials, the proposed currency may be similar to Facebook's Libra coin and will be used across all of China's high-volume payment platforms.

Many see China's new cryptography law—which took effect on January 1, 2020, and aims to "facilitate the development of cryptography business and ensuring the security of cyberspace and information"—as laying the groundwork for an imminent digital currency rollout. According to local Chinese news outlet Caijing, a DCEP pilot scheme began in the city of Shenzhen before the end of 2019.

"I think we can expect to see China properly launch its own digital currency within the next six to 12 months," says Edith Yeung, a fund manager and partner at blockchain-focused venture capital fund Proof of Capital. "This has been in the works for a long time."

Group of people talking in a co-working space
(Photo credit): Pongparnit
"I think we can expect to see China properly launch its own digital currency within the next six to 12 months."

-Edith Yeung

Going global

The first chapter of China's new cryptography law emphasizes the role of cryptography in the secure management of critical state information.

"This is typical of China's top-down approach to standardizing and encouraging the development of a technology," says Zhang. "One key takeaway from this is that the Chinese government intends to popularize cryptography-based technologies systematically and quickly, with state-led platforms such as DCEP leading the effort in commercial spheres. Such comprehensive support for cryptography businesses is currently lacking in the U.S. and Europe."

While the exact form of the digital yuan or DCEP has yet to be seen, experts believe it will diverge strongly from existing cryptocurrencies. As the only legal digital currency in China, it will be pegged 1:1 to the yuan, and is likely to be controlled on two levels—by the PBoC from above and the country's commercial banks from below. All Chinese merchants who currently accept digital payments (such as Apple Pay, AliPay and WeChat Pay) will have to accept DCEP.

The ultimate goal of this domestic rollout is to promote DCEP as a global currency. A digital yuan will mean China can facilitate international payments more quickly and cheaply, while the automated features of smart contracts will provide easier liquidity management and trading efficiency.

"Driving adoption of the yuan through DCEP is a smart move," says Yeung. "Imagine if China starts lending in DCEP for the One Belt One Road initiative, for example. Acceptance from countries that want to work with China is likely to be universal."

Leveraging an idiosyncratic market

China is embracing blockchain technology because it wants to be technologically dominant and boost Chinese currency adoption, not because it espouses libertarian ideals. Indeed, the Chinese government has already stated that blockchain in China is not about decentralization, but "de-intermediarization."

"There is an irreconcilable conflict between the nature of digital cryptography and China's political and regulatory environment," says Poppy Deng, vice president of business consulting at Singapore-based blockchain service provider Jenga BCG. "As a result, the Chinese government is trying to redefine cryptocurrency and establish blockchain 'with Chinese characteristics.'"

Despite this disparity, China's blockchain space is highly fertile, with large numbers of Chinese tech and internet companies now building their own blockchain ecosystems and overseeing projects in finance, logistics and supply chain. Western companies are also forming Chinese blockchain partnerships—Walmart has recently teamed up with Chinese e-commerce giant, and IBM has partnered with Tsinghua University to enhance food tracking, traceability and safety.

For Western blockchain companies, especially those involved in enterprise and financial blockchain technology, the Chinese market represents a demanding yet potentially lucrative opportunity. Compared to the U.S., where financial institutions and regulations are well-entrenched, the Chinese financial industry is far less developed and more open to disruption.

"To compete against Chinese companies in the Chinese market takes serious talent and a profound understanding of a dynamic local environment," says Zhang. "But the rewards are big for those who get it right."

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