لنستخرج كنوزا من المعرفة و الإبداع و العلم و الأفكار
Executive Summary
Emerging technologies such as blockchain, a subset of distributed ledger technology, are not limited to a single region or use case. Global powers are recognizing blockchain’s power to surpass the use of cryptocurrency and its potential to shape critical processes in many fields, including financial, healthcare, government, and supply chain. In pursuit of global competitiveness, China is a significant player in testing blockchain technology as well as implementing legal frameworks, regulations, and government initiatives around it.
This working paper examines the country case of China and assesses how it has progressed in its attempts to test, adopt, and implement blockchain technology. It offers insight into how China’s vision in blockchain technology has led to many innovation initiatives.
Introduction
While Bitcoin introduced the world to blockchain over a decade ago, the buzz continues around the underlying technology, distributed ledger technology (DLT). Over the past decade, both the public and private sectors have continued to develop industry solutions and fund blockchain research and development. Reports project global blockchain funding will reach $11.7 billion by 2022.1
As global spending on DLT increases, it is worthwhile to ask how and why global actors like China are using blockchain technology. How is DLT impacting their financial sectors and improving global market competitiveness? Are there potential opportunities for collaboration?
China has dedicated significant resources to blockchain and made strides in assessing its potential within their own industries. For China, DLT is part of a broader technology vision that aims to position the country at the forefront of the global community. In this paper, we explain the technology and its significance, and assess how DLT is being developed in China. The paper offers insight into China’s vision for adopting blockchain technology and how it is building up an industry with a focus on domestic regulation, public/private sector use cases and an international vision of innovation initiatives.
What is Distributed Ledger Technology?
Despite a common misconception that “the blockchain” is cryptocurrency itself, the blockchain is the underlying technology, a subset of distributed ledger technology (DLT).2 At its core, DLT is a shared ledger that stores time-stamped data across multiple locations and combines technologies like cryptography, peer-to-peer protocols, and hashing.3 4
DLT can be classified as either permissionless, in which anyone can access the ledger, and permissioned, in which only specific participants can access the ledger. In order to input data, participants in the network must agree that the data are valid, and this is done through “a consensus mechanism that is specified in the algorithmic design of the distributed ledger.”5 Specific to blockchain, data are stored in “blocks,” which are linked to one another by a cryptographic signature, and are append-only,6 meaning that data are not deleted, but rather that a change is notated at the end of the chain. Each block is “hashed” with a unique cryptographic signature, which verifies that the data have not been altered.7 Each transaction and group of transactions (or blocks) stores the hash of its predecessor, and any attempts to alter a transaction are therefore rejected as incompatible with the rest of the chain and result in alerts to participants.8
The significance of DLT lies in its ability to provide an immutable record of data and enable proof of provenance for various data, such as licenses, legal documents, and photographs. Firms and governments are interested in using DLT due to its resistance to cyberattacks. In order to manipulate or change data within the distributed ledger, a cyberattack would need to simultaneously attack every copy of the distributed ledger, which is stored across multiple nodes, or locations. DLT differs from centralized databases or cloud-based data platforms, which can be accessed anywhere but are still stored in one central location. Cyberattacks on one centralized database need to attack only one location to maliciously manipulate or access the data. Thus, changes to the single ledger may go undetected since they are not comparable to trusted copies of the ledger as in a DLT system.
These are a few of the reasons why China is exploring the applications of DLT across various industries. The following sections explore how DLT is regulated, where DLT initiatives are concentrated, and the areas in which DLT is being utilized in China.
China’s International Vision in IT & DLT
On October 1, 2019, President Xi Jinping spoke at Tiananmen Square declaring that “China yesterday is already engraved in the history of mankind… and China tomorrow will be even more prosperous.”9 China has determined that it will become a global leader particularly in the technology and manufacturing sectors through its Made in China 2025 plan (2015), which aimed to position China as the world leader in manufacturing by 2049.10 Chinese plans for becoming a global leader extend into the technology sector; months before President Xi’s speech, the State Council released a plan for Chinese innovation and a pledge that China would become an “innovation country” by 2020 and a global “innovation leader” by 2030.11China’s objectives in progressing its efforts in technology serve two overarching objectives: reducing foreign dependency, and advancing China as a high-tech manufacturer.12 Heeding such a national vision for innovation, the Chinese government has entered the blockchain space to promote research and development, establish government committees, and identify regulatory standards. Indeed, in October 2019, Xi Jinping himself called on China to adopt DLT to promote innovation.13
Aiming to establish China as an innovation leader, the Chinese State Council emphasized the importance of investing in a digital infrastructure.14 According to China’s Ministry of Industry and Information Technology (MIIT), the Chinese government has been using big data in tracking COVID-19 cases by assigning individuals a color code that indicates their health status.15 Blockchain technology can complement this process, as it has been used to ensure the security of personal data against misuse.16
Evidence of China’s commitment to DLT development includes the launch of the National Blockchain and Distributed Accounting Technology Standardization Technical Committee in April 2020 to further standardize the industry. Committee members include major companies such as JD.com, Huawei, Baidu, Ant Financial, and Tencent; the committee will also bring together researchers from universities, MIIT, and local governments.17 China’s vision for improving national and international standards for technology is embodied in the multi-year project China Standards 2035,18 released in 2020, and the establishment of the aforementioned blockchain committee.
The Basis and Status of China’s Regulatory Framework for DLT
China filed more patents in blockchain technology—58,990—than any other country in 2019,19 making it clear that DLT initiatives are becoming an increasingly significant part of China’s technological landscape. Next we discuss the location, status, and regulatory framework of these initiatives.
Generally, DLT initiatives have been concentrated in the eastern coastal region of China and Sichuan. China has four major blockchain hubs, located around its major cities20: in Sichuan and Chongqing, Guangdong centered on Shenzhen, Yangtze Delta centered on Hangzhou and Shanghai, Xiong’an New Area and Beijing. Sichuan and Chongqing boast favorable policies and low electricity costs, while Guangdong is a hotbed of innovation and industry. The Yangtze Delta is an advanced economic center and center of globalization, and Beijing is home to top universities and produces some of the top tech talents. Regions such as the Guangdong–Hong Kong–Macao Greater Bay Area have seen the start of DLT projects such as the People’s Bank of China’s (PBOC) pilot trade financing platform.21 The Greater Bay Area was at the forefront of a cooperative blockchain group with the establishment of the Guangdong–Hong Kong Macao Greater Bay Blockchain Alliance in November 2018.22 Over 150 DLT initiatives have developed in the Greater Bay Area, while Hong Kong’s Innovation and Technology Fund23 has funded $67.2 million across 18 DLT projects.24
The Chinese government aims to facilitate further development of DLT with the creation of a national Blockchain-Based Service Network, a hosting platform for small and large companies engaging in DLT. Such developments demonstrate how China is engaging in opportunities for DLT initiatives to emerge and coexist with existing infrastructure. The main government regulatory authority for DLT is the Cyberspace Administration of China, which requires that all DLT initiatives register with the agency.25 Other bodies regulating the DLT space include the PBOC, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, and the China Banking Regulatory Commission.
DLT is being explored further in sandbox pilots, which are in use in major cities across China. These pilots began in December 2019, and include Shenzhen, Shanghai, Guangzhou, Suzhou, Chongqing, Hangzhou, Beijing, Chengdu, and Xiong’an New Area.26 The sandbox assists cities in building up DLT, particularly in fintech. Projects under trial will allow buyers, sellers, and other intermediaries to carry out contactless digital transactions.
Blockchain in China
CHINA, BLOCKCHAIN, AND THE FINANCIAL SECTOR
From Bitcoin to Libra, one of the broadest applications of blockchain in China is in the financial technology or “fintech” area, in which blockchain-backed projects have involved virtual currencies, supply chain financing, and transaction processing. Fintech includes companies that are utilizing emerging technologies to enhance current infrastructure as well as disrupt traditional financial services.27 A 2019 EY report interviewing over 27,000 consumers in 27 markets found the adoption rate of fintech in China to be 87 percent.28
Although China banned initial coin offerings,29 the Deputy Director of the PBOC has reconfirmed China’s commitment to developing its own sovereign digital currency.30 This currency, which is close to launch and already tested in major cities, will be rolled out by the central bank to commercial banks, which can provide customers with digital wallets or other applications for receiving and using the currency. The currency will be streamlined in its issuance with physical currency and is intended to disrupt the economy as little as possible.
China’s financial sector, including both fintech and traditional financial institutions, is increasingly adopting DLT. Baidu Finance, Tencent, and JD Finance are major fintech/e-commerce firms that have developed large DLT platforms for diverse financial purposes.31 Baidu Financial Credit Collection Platform has partnered with Shanghai Pudong Development Bank to use DLT for collection tasks, increasing information sharing and transparency of the process. Smart contracts can be accessed to properly determine collection tasks and settle funds while maintaining information security.32 Tencent Cloud uses DLT for warehouse pledge financing to record the authenticity of goods listed on warehouse receipts. The process can help prevent the double financing of goods. JD Finance and UnionPay established a partnership to share credit information to guard against fraud.
Banks have adopted DLT platforms to improve traditional processes.33 Minsheng Bank has worked with China CITIC Bank to create the first letter of credit blockchain application. In August 2016, WeBank and Shanghai Huarui Bank set up an inter-account reconciliation platform that maintains business capital and transaction information on the blockchain. Data is passed between the two banks securely, allowing for quasi–real time reconciliation.34 China Merchants Bank Credit Card Center is using an asset-backed securities project management blockchain platform that was set up by FunChain Technology.35This improves transparency and records data such as the status of bond financial process, allowing bond investors to view the process and ensure the credibility of the assets.
DLT has been useful in tracking cross-border payments. The Bank of China is cooperating with UnionPay to create a blockchain-based payment system for cross-border payments. The Industrial and Commercial Bank of China has set up a China-Europe e-Single Pass that brings together port companies, banks, regulatory agencies, customs, and other bodies to set up a cross-border trade financial service ecosystem for smooth document and information flow and funds traceability. The system improves business processing efficiency in trade settlement.
Alliances have also been established to conduct and share research and development of blockchain technology. The Financial Blockchain Cooperation Alliance, or Gold Chain Alliance, includes more than 100 members in banking, funds, securities, insurance, local equity exchange, and technology. Chongqing has also set up an alliance that incorporates over 100 firms in an effort to develop DLT applications for the city and generate billions of RMB in value.36
Some alliances have been created to improve banking processes. The State Administration of Foreign Exchange plans to form an alliance with commercial banks to establish a national “cross-border business blockchain service platform.” The State Administration of Foreign Exchange is working with commercial banks to share customs clearance verification information and allow banks to submit applications for customs clearance financing.37 The China Trade Finance Cross-Bank Transaction Blockchain Platform, established by the China Banking Association with a number of banks,38 uses DLT to coordinate interbank transactions, such as the transfer of information.
A new type of alliance promises to greatly reduce the costs of creating DLT applications by providing an existing blockchain framework. The national Blockchain-Based Service Network (BSN) is composed of government departments, banks, and technology companies and allows participants across China to easily construct their own DLT applications.39 The network greatly reduces costs for firms to build and operate their own blockchain applications, from about US$14,000 to less than $300.40 The BSN Alliance, comprising the State Information Center and major organizations like China Telecom, is testing BSN in over 50 cities, including Hong Kong and Singapore, and intends to expand internationally.41 Ant Financial has created the Ant Blockchain Open Alliance to reduce barriers to entry for small to medium enterprises (SMEs).42 The alliance introduces DLT as a service built on the Alibaba Cloud.
GOVERNMENT-SPONSORED PILOT BLOCKCHAIN PROJECTS
In line with its ultimate policy aim of expanding innovative technology, China’s government has promoted the use of DLT in several major areas. The central bank has created a DLT system that digitizes checks. The Supreme People’s Court has stated that it supports the use of blockchain in the storage of digital evidence. Local governments, at both the provincial and city levels, have also incorporated the technology. Over 30 provincial and city governments have introduced over 40 policies to support emerging technologies, including DLT.43
The cities of Guangzhou, Beijing, Shanghai, Suzhou, Xiong’an, and others have prioritized the development and integration of DLT. Guangzhou has incorporated DLT into its development zone. Beijing set up the Zhongguancun Blockchain Alliance to promote the development of the technology. Shanghai has created an incubation base in its Baoshan District. Suzhou set up a training base to train hundreds of DLT technicians. Xiong’an New District has set up the Xiong’an Land Requisition and Demolition Fund Management Blockchain Platform to track relocation and resettlement and related fund payments.44 The requisition and demolition fund management platform was established by the Industrial and Commercial Bank of China (ICBC). The platform tracks requisition contracts, fund approvals, fund payment instructions, and fund transmission.
CHINA, BLOCKCHAIN, AND PRIVATE BUSINESS
Regarding DLT uses outside of fintech, President Xi Jinping stated during the 18th collective study of the Political Bureau of the Central Committee that DLT had the potential for many uses in China.45 As of 2018, China holds the most blockchain patents in the world,46 and DLT applications expand across the private sector to include the medical industry and supply chain sector.
Medicine
The COVID-19 pandemic has exacerbated five major challenges facing the medical supply chain: varying product requirements, credibility of payments, credibility of suppliers, tracking throughout transportation, and customs certifications.47 Blockchain is a potential answer for addressing these problems, specifically focusing on streamlining medical processes and ensuring protection of personal data. Chinese DLT initiatives in the medical industry have been ongoing since the 2017 launch of Alibaba’s blockchain project for securing medical data.48 Other major companies pursuing DLT solutions in the medical space include Baidu and Tencent, which have also developed platforms for sharing medical data across multiple entities.49 For example, Baidu launched XuperChain, an open-source blockchain platform, for storing medical data (e.g., diagnoses and treatments) in Chongqing’s Yuzhong District. XuperChain is expected to expand to other regions in the coming years.50 Additional evidence of Chinese companies using DLT to streamline medical processes includes the joint Ant Financial and Huashan Hospital 2018 pilot, which tracks prescriptions throughout the supply chain to ensure a tamper-proof process and prevent misuses of prescriptions for unauthorized refills.51
Energy
Based in Beijing, Energy Blockchain Labs Inc. has used IBM blockchain technology to develop a DLT platform for trading carbon credits. The platform aims to promote transparency and streamline efforts to limit greenhouse gases by allowing high- and low-emitters to trade carbon credits through smart contracts, enabling compliance with government-mandated Certified Emission Reductions (CER) quotas.52 China’s Hyperchain (Hangzhou Qulian Technology) is developing a solution for China’s State Grid Corporation, which will incorporate the Internet of Things (IoT).53
Supply Chain
On the supply chain side, DLT has the potential to increase data processing times and assist in product verification. These applications are not limited by national boundaries and may involve international trade. One example is the export of US soy to China using the Easy Trading Connect platform, which has significantly decreased processing times of data involved in the shipment.54 Similarly, Walmart China and VeChainThor blockchain are developing the Walmart China Blockchain Traceability Platform to track food along the supply chain.55 A second application of DLT in the supply chain side in China is the use of DLT for product verification. JD Digit’s Blockchain Data Service in China, for example, is the first of its kind in the region. Through JD’s Blockchain Anti-Counterfeiting platform, users are able to scan bar codes via a mobile app in order to access product information and tracking records of over 60,000 SKUs.56
China is a rapid adopter and developer of blockchain, which has been applied to a variety of industries, including finance, energy, medicine, and supply chain. China’s government support for blockchain firms and applications has boosted the use of the technology across the country. The technology is modernizing the nation, improving security and transaction speed for customers.
Concluding Remarks
While DLT may have been popularized by cryptocurrencies like Bitcoin, the technology’s use goes far beyond an attempt to replace traditional currencies. China has not only tested DLT in the financial sector, but also developed regulatory frameworks and incorporated the technology in a multitude of other applications. The government established a government blockchain committee and the multi-year project, China Standards 2035.57
China’s commitment to the development of DLT gave birth to the recent government initiative to develop a national Blockchain-Based Service Network (BSN), which would allow companies of varying sizes to engage in DLT. Thus, China is opening the doors for others within its boundaries to take part in the government’s push for technological leadership.
In terms of its international vision, China’s experience with DLT has been to improve its competitiveness within the international market. The country’s international vision for DLT is prefaced by Made in China 2025, which proposes China as the world’s leader in manufacturing by 2049.58 China has not pursued a national cryptocurrency, but instead is testing a digital sovereign RMB—a digital currency, not a cryptocurrency. China has also utilized DLT in the financial sector to improve traditional processes, such as information sharing between banks. The country’s private sector has created projects on and improved processes through DLT. As testimony to its global leadership in DLT development, China was the world leader in number of patents in blockchain technology in 2018. Note: Perez, “Data: China Has the Most Blockchain Patents, despite Banning Cryptocurrency.” Some of the patents include Alibaba’s music originality analysis method and device using DLT, China Unicom’s method of tracking food quality on the blockchain, and Ant Financial’s blockchain charity application.
As technology progresses, it follows the five basic stages of adoption: (1) innovators; (2) early adopters; (3) early majority; (4) late majority; and (5) laggards.59 The advantage that countries have in the utilization of a given technology depends in large part on how lucrative the technology is and how early a country adopts the technology. It seems clear that China is among the early adopters, giving the nation a relative advantage to other countries who do not yet have full DLT programs in motion. What China and other countries will do with this technology in the future remains to be seen, but at present the possibilities seem endless, from “smart cities” to far-reaching advances in medical care. Will the major global powers collaborate on DLT development and, if so, to what extent? Will DLT systems developed by different countries be compatible? Will they compete? As DLT continues to develop in domestic markets, these questions will be critical to the future of the technology.
