The blockchain ecosystem in China

China is already using blockchain and other Distributed Ledger Technologies (DLT) to empower various industries and to pioneer the development of a national digital currency. Ran Zhao looks at the blockchain ecosystem in China today and the role policy makers can play to further enable its development.

Ran Zhao is the Founder of Blockchain Business Bridge and Innovation Officer at the Innovation Centre Denmark in Shanghai

In 1991, cryptographers Stuart Haber and W. Scott Stornetta explored a concept of implementing a system based on a cryptographic hash algorithm where document timestamps could not be tampered with – this was the prototype of what we know as blockchain today.

However, it was only a decade ago that Satoshi Nakamoto introduced Bitcoin to the world. In 2013, bitcoin prices soared dramatically and this is when blockchain started to draw the public’s attention, as the underlying technology of so-called “cryptocurrencies”.

When we think of blockchain, we tend to relate it to cryptocurrencies, although this is far from its only use. The Chinese government has drawn a clear line between cryptocurrencies and the underlying blockchain or other DLT, regulating them separately. While cryptocurrencies are strictly regulated, blockchain technology and its industrial applications are fully encouraged to develop in a relatively open environment.

The regulated crypto market and centralised digital currency

China has regulations in place that tightly control the proliferation of cryptocurrencies within its borders, given the ability of these currencies to circumvent capital flight controls. In addition, all types of capital-raising activities through cryptocurrencies, such as ICOs (Initial Coin Offerings) and STOs (Security To­ken Offerings), are banned to prevent the illegal fundraising, financial fraud and pyramid schemes which proliferated from 2013 to 2018.

This does not mean however that China rejects all digital currency. In fact, the Chinese Central Bank, PBOC (People’s Bank of China) has explored the launch of its own, centralised, digital currency called DCEP (Digital Currency Electronic Payment) since 2014. DCEP is a central bank digital currency built on DLT and cryptographic technology. According to Changchun Mu, the director of the PBOC Digital Currency Research Institute, the main reason behind the issuing of DCEP is to increase the efficiency with the circulation and payment of RMB. Recently, a picture of a DCEP wallet from an internal test by the Agricultural Bank of China was inadvertently published. It indicated that DCEP will be piloted in four cities in the first phase, including Suzhou which will be the first city to implement DCEP for the transportation subsidies payment of local civil servants.

Blockchain empowered industries in China

China has set out to establish national standards and policy frameworks for blockchain technology. Its 13th Five-Year National Plan published end-2016 lists blockchain as one of the key cutting-edge technologies. In October 2019, at a meeting of the Central Politburo, Chinese President Xi Jinping stressed that blockchain technology will play an important role in the next round of technological innovation and industrial transformation. Xi also urged more efforts to develop the blockchain industry as well as to strengthen research and innovation capacity for China to gain an edge in this emerging field.

So far, major tech giants in China including Alibaba, Baidu, Tencent, HUAWEI, JD and Ping An Group have independently developed blockchain projects. There is also a very active start-up scene. The scale of businesses embracing blockchain technology is still expanding and the number of enterprises exploring this technology is growing at a very fast pace.

The financial sector is the earliest and most common field for blockchain technology application. In China, almost all large mainstream financial institutions have carried out blockchain applications, mostly in cross-border payments, clearing and settlements, supply chain finance and asset management. In January 2019, Ant Blockchain[1] released its blockchain-based supply chain finance platform which enables SMEs to transfer their credit information transparently among banks, guarantors, and companies involved in the supply chain at all levels. Ant Blockchain now provides speedy financing services to 78 million SMEs across the country.

In agriculture, blockchain technology greatly speeds up the process of product traceability, improving the transparency of the food system and reducing product quality risks. In June 2019, Walmart China teamed up with VeChain and PwC, and launched the new “Walmart China Blockchain Traceability Platform”, which already has 23 product lines tested and listed. According to Walmart China’s own press release, they expect fresh meat products to be tracked on the platform, accounting for 50% of its total sales in that category. Blockchain-tracked products will also account for 40% of vegetable sales and 12.5% of seafood sales by the end of 2020.

With the fast growing e-commerce market, logistics has become a huge industry in China. Traditional logistics is prone to a series of risks and problems due to the large number of participants and long processes. Tencent has developed a blockchain-based waybill system that can broadcast the order information to all the parties including the contractor, the carriers and the regulatory authority, and allows coordinating management throughout the whole chain.

Blockchain’s decentralisation feature also aligns with the needs of distributed energy provision, which can greatly reduce the transaction cost of distributed power and improve transaction efficiency. This application can drive a shift in the distributed power industry. China State Grid has created a series of blockchain-based fintech solutions for electronic contracts, power settlements and supply chain finance, etc.

Since the outbreak of the COVID-19 pandemic, blockchain has also been playing an important role in charitable donations as well as epidemic prevention and control in China.

The other side of the coin

Yet blockchain is still in its early stages. We all know that blockchains based on “proof of work” consensus mechanisms have an endogenous security issue, which is the 51% attack problem. There can also be unknown vulnerabilities in the security of an emerging technology if it lacks a systematic security protection. When there is a security problem in the traditional system, you can use cancellation, withdrawal or emergency intervention. But blockchains are largely irrevocable by nature. Further, the scalability of blockchains is still limited. As the number of participating nodes increases, the cost of data synchronisation and verification increases, the performance of the system will be further reduced. In addition, blockchain technology’s rapid technological development has not been accompanied by standardisation. The absence of mature standards could lead to risks such as customer lock-in, lack of interoperability and privacy issues.

Finally, as an emerging technology, blockchain can be expected to be applicable to a variety of business scenarios. However, blockchain technology is not a panacea for all problems. Not all real-world scenarios are suitable for blockchain. In China, most enterprise-level blockchain projects are still in an experimentation phase. Blindly exaggerating the functions of blockchain could generate unnecessary business costs and could even waste social resources.

To cultivate a sound blockchain industry, industry practitioners should intensify their efforts in R&D of core technologies and industrial solutions. Policy makers should create a tech-friendly regulation environment and educate the public to correctly understand blockchain in an objective and comprehensive way.

(To learn more about blockchain cases in China, you can read the China Blockchain Ecosystem Report)

[1] Ant Blockchain is a subsidiary of Ant Financial, part of the Alibaba Group.

OECD Webinar on Blockchain in China

OECD Blockchain Policy Centre

OECD Global Blockchain Policy Forum

China Blockchain Ecosystem Report

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