Blockchain in China: Status Quo in the Land of the Rising Sun

Earlier this year, Deloitte released a report covering a global attitude to the blockchain. That was the second time Deloitte performed such surveys, but it will arguably become an annual tradition; blockchain dramatically broke into the modern landscape, and businesses’ view of that innovative phenomenon changes over time.

During the study, Deloitte surveyed enterprises from 11 countries, among which 200 respondents were from China. Surprisingly, Chinese respondents were the ones to demonstrate the highest confidence in tomorrow with blockchain: 73% of Chinese companies see blockchain as a top-five strategic priority in the foreseeable future.

And the fact that China now has an overwhelming number of blockchain-based projects —  more than 250 — confirms the vibrant interest in this emerging technology.

How are things going in the Chinese region? Will blockchain technology have a smooth way to mass adoption without considerable obstacles, or there will be stumbling blocks in the way? Let’s explore the current blockchain trends in China more deeply to find answers to these questions.

Blockchain in China: Welcome, Stranger

Government Stance

The rapid evolution of digital assets, in turn, caused regulatory movement in China. However, let’s not view that effect as a backlash — that’s how things go in this country. For the last several years, the Chinese government has been designing policies to restrict fintech innovation.

June 2018, China Banking and Insurance Regulatory Commission (the “CBIRC”) drafted a working plan to provide blockchain-enabled digital assets sovereignly as a legitimate monetary asset issued by the People’s Bank of China (the “PBOC”), the primary financial regulatory body in China. The CBIRC proposed to equate those assets to fiat currencies in value and use them as a medium of exchange.

It’s noteworthy that the plan ruled out all other digital assets, such as Bitcoin, and others, claiming those “non-sovereign” and thus, not legal and not authorized as fiat. This way, China intended to establish own “national” blockchain assets, yet the government hasn’t officially recognized and accepted the proposed classification so far. The only exception made is the recognition of Bitcoin as a tradable asset, but the status of other currencies is yet unclear.

Currently, official China’s cryptocurrency is still in development. The governmentally authorized task force explores the blockchain technology, but the launch date of the asset has not been announced yet. 

AML and KYC

The actual AML practices in China are largely based on the KYC system regarding clients’ sensitive data and transaction reports. As a result, the authorities can quickly identify fraud in financial procedures by attributing actions to corresponding actors and taking appropriate legal measures promptly.

However, when it comes to crypto, AML demonstrates its deficiency. The sources of these blockchain-powered investments are anonymous and thus hardly detectable and traceable. That’s why digital currencies are an appealing medium for swindlers who perform money-laundering. More to it, cross-border crypto remittances can be transferred without the State Administration of Foreign Exchange’s notice.

In that light, in 2013, the PBOC required financial institutions to enforce AML policies, as well as independently began assessing money laundering risks of digital assets and draw measures in response.

Undoubtedly, cryptocurrencies require a more intelligent approach in terms of regulatory oversight since, again, those assets are anonymous and untraceable, and — what’s more important — they’re encrypted and irreversible.

Blockchain Initiatives in China   

While PBOC reportedly began testing blockchain-based finance platforms and technological hubs, including Shenzhen, the Cybersecurity Administration of China released a list of registered blockchain firms earlier this year. The list included such Chinese retail giants as Tencent, Alibaba, and Baidu.

Another fact worth noting is China’s regulatory sandboxes. Those are special economic zones assisting companies that develop technologies. For instance, the Hainan sandbox provides government-sponsored incubators for startups, access to capital for innovators, direct communication with fintech businesses and developers, testing in a managed environment, and other benefits.

As of now, China has a diverse ecosystem of blockchain projects broken down by layers. The first, underpinning layer encompasses blockchain projects backed by CEOs and venture capital firms. There, the emphasis is put on tech aspects and product design rather than marketing issues. In a nutshell, project developers first seek financial support then develop use cases and prototypes, and finally move to promotion.

The second layer is a network of incubators and educational institutions contributing to technology awareness through hackathons and blockchain labs. This helps to source new talents and build an active tech community, with young people quickly adapting to innovations.

The final layer is a dynamic fintech landscape and dynamically changing regulatory environment. Though the gap between the regulated banking industry and DTL projects is still significant, the largest financial institutions, such as PBOC, already considering the ways of blockchain implementation in their current operations.

Despite the generally positive movement, China experiences adoption challenges complicating blockchain evolution in that region. We will dwell on the most persistent ones.

Challenges to Mass Adoption

First, trust. China’s big players are still hesitant about blockchain’s security; they need to know what risks they might face when dealing with digital assets. For example, is they lose access to their digital funds, will they be able to recover those? They used to hold funds in private bank accounts, and blockchain suggests opting out of banks and other third parties.

Second, security and stability. As traditional asset trading platforms, blockchain-enabled ones are hugely volatile. How can one be sure that tomorrow the platform used for trading won’t use, say, $200 m of its value? Businesses and individual entrepreneurs need a guarantee that those platforms operate with proper mechanisms saving them from abrupt profit losses. Otherwise, why shifting to them since they can’t offer anything new?

The third is, of course, regulations, mainly reflecting banks’ attitude to the blockchain. Generally, we can divide Chinese banks into two groups: those that are positive about blockchain and open to innovations and the ones that are suspicious and resistant. The appropriate blockchain education might become a solution to this issue, but here’s where the following challenge stems from.

Since blockchain is a nascent technology with yet short history, scientists beat themselves out, thinking about how to categorize its concepts, like digital assets, smart contracts, and others.

Proceeding from the above, Chinese companies now don’t have a dire need to move to blockchain. Yet this dynamic changes, and the report by Deloitte confirms that.

Conclusion

In the long run, changes are going to come to the Land of the Rising Sun. Chinese enterprises, especially the big ones, will need to adopt blockchain to stay on the roll.

Across industries and use cases, countries around the world experience hurdles and stumbling blocks that traditional solutions can no longer mitigate (if they ever could), and China is not an exception. And some initiatives, as we can see, are now beginning to emerge.