On January 10, 2019, the Cyberspace Administration of China (CAC) published new anti-anonymity regulations for blockchain organizations scheduled to be enforced on February 15. These new regulations have been characterized through 24 articles, composed with the intention of promoting a more transparent and disciplined blockchain industry.

Although China has banned the sale of cryptocurrencies and the usage of the country’s exchanges, President Xi Jinping, in a speech given on May 28, 2018 at the 19th Academician Conference of the Chinese Academy of Sciences and the 14th Academician Conference of the Chinese Academy of Engineering, pointed out to the value of blockchain technology as well as the need for further innovation in the country’s blockchain industry.

Although these new regulations do not directly stifle innovation in general or blockchain development in particular, they could eventually be problematic for a country hoping to become a global leader in the blockchain sector.

Regulations Intended to Advocate for a “Healthier” Industry?

The new regulations describe what constitutes a “blockchain information service provider” (from this point referred to as ‘provider’) as well as outlines various requirements concerning Know Your Customer (KYC) practices and provider information.

When the regulations begin to be enforced on February 15, providers will have 20 days to register both their names as well as server addresses with the CAC. The regulations also require providers to improve KYC practices by requiring new and existing users to provide valid identification or a mobile phone number. Providers must also keep records of their user’s service history for no less than six months, and willfully provide such information to the CAC or law enforcement officials when requested.

Providers who refuse to follow regulations will be charged a fine ranging between 5,000 ($740) and 30,000 ($4,445) yuan, and will be suspended from operating until the issue has been properly addressed. If the offence is great enough, providers may also face a criminal investigation.

The Effects of Bans and Regulations

  • In September 2017, the Chinese government began its attack on cryptocurrencies by first prohibiting companies from procuring funding through Initial Coin Offerings (ICOs).
  • Then, about two weeks later, it shut down domestic bitcoin and cryptocurrency exchanges, signifying the government’s first steps to rid the nation of the nascent digital asset.
  • The government’s next move would come in August of 2018, with the banning of cryptocurrency-related commercial activities.

These bans would eventually lead to the departure of Binance from China. According to CoinMarketCap, Binance is the world’s largest cryptocurrency exchange, and although the exchange was founded in China, the new laws forced the exchange to move its operations to Japan.

After fleeing from China, Binance would face increasing regulations in Japan too. At that point Binance would open offices in Malta, the tiny archipelago referred to as “Blockchain Island.” CEO of Binance, Changpeng Zhao, expressed his favourable view of Malta at the DELTA Summit, a blockchain conference held in the country, saying,

“This is a country where leaders and the government understand blockchain technology.”

Binance recently announced their intention to launch their own blockchain, Binance Chain, in order to “help advancement of the industry.”

China’s ban on cryptocurrencies and exchanges has resulted in the departure of what could have been one of its greatest blockchain innovators and now Malta, a country that works with blockchain companies, is reaping the benefits.

The Benefits of Effective Regulation

China’s new regulations, although geared toward providing more transparency in the blockchain sector, are presented in an authoritative and overbearing tone. These regulations lack a depiction of the meaningful or productive relationship between provider and government. Regulation is a necessity in cryptocurrency and blockchain technology, however, China is approaching enforcement from the wrong angle.

At the same time, Malta has become a kind of haven for companies working in the blockchain sector, due to the country’s ability to work hand in hand with blockchain companies in regards to regulation. In July 2018, Malta introduced a coordinated regulatory structure focused on cryptocurrencies and blockchain. It developed the Malta Digital Innovation Authority, a regulatory entity intended “to enhance the growth of blockchain technology in the country” while ensuring blockchain companies are working transparently and honestly to provide a useful product that proves beneficial for current and future uses.

While China’s regulations describe the government as more of a monitoring agent, Malta’s laws describe the government’s desire to promote innovation. Following the announcement of Malta’s regulations, OKEx, an exchange founded in Hong Kong and currently the third largest (according to CoinMarketCap), also opened offices in Malta. Although China’s Xi Jinping has identified the importance of blockchain technology, his new regulations have shown otherwise.

The Potential Effects on China’s “Blockchain Revolution”

In the past, China’s ban on cryptocurrencies and exchanges led to the world’s largest exchange departing from the country. Now, the newest blockchain regulations may introduce the similar effect.

In 2016, LinkedIn was banned in Russia, because the platform didn’t comply with the newly introduced data retention law, which required to store the Russian users’ data on the servers in the Russian Federation. As LinkedIn refused to transfer the data to Russia-located servers, it was blocked on the territory of the country.

Toward the end of 2017, around 320 blockchain companies were operating in the Chinese market. In 2018, that number would dramatically increase to 4,000 conveying the country’s motive to become a leader in the industry. Also in 2018, the city of Nanjing launched a $1.5 billion blockchain fund hoping the technology will eventually lead to improved healthcare, logistics, urban planning, and supply chain management.

China has taken great strides to bolster the growth of blockchain, and it has resulted in the dramatic increase of blockchain businesses in the region. These regulations, however, place China two steps back and that much further from leading the sector. Although there may have been an increase of blockchain businesses in China between 2017 and 2018, 2019 may tell a different story.

Steps Forward, Or Steps Back?

With these new regulations, China’s intentions are difficult to pinpoint. The country made its view on cryptocurrencies apparent with their ban in 2017, yet their approach toward blockchain technology may appear confusing, considering the existing technical nature and privacy policies of commercial blockchain projects.

Given the president’s view of blockchain’s importance, it’s easy to expect China to model a different approach for their regulations. Without regulation, cryptocurrencies and blockchain would be operating in a similar manner to the wild west, as shown in 2017. However, there are ways of administering regulation which can result in a safer market while promoting innovation, and countries like Malta or Belarus has proved it as much.