Blockchain with Chinese Characteristics

中国特色区块链

Nobody expected China to let cryptocurrencies run wild in its onshore financial market, not least because the concept of an asset that provides transactional anonymity is anathema to the Chinese Communist Party. Yet that has not meant the death of Chinese blockchain. Instead, the Chinese government has sought to co-opt and guide the development of the onshore digital currency sector, turning it into an innovative form of recentralised finance rather than a deregulated, anonymous ledger – in short, blockchain with Chinese characteristics.

As early as 2013, the People’s Bank of China (PBoC), the Chinese central bank, started regulating cryptocurrencies on the Chinese mainland by banning local financial institutions from processing transactions in Bitcoin. While the popularity of cryptocurrencies – and digital assets as a whole – has since exploded across the world, Chinese regulatory scrutiny in this area has grown tighter. By 2018, the Chinese government announced a ban on the mining of cryptocurrencies on the mainland; a blanket ban on trading cryptocurrencies was instituted in September 2021.

Simply put, if the government is unable to access and monitor a digital asset, the asset would need to be subject to state-controlled regulators, or be ejected so that the state could replace it with a homegrown version. This did not, however, mean that the Chinese mainland had no appetite for cryptocurrencies, digital assets and wider blockchain-related products and services. Rather, the state stepped in to plug a gap in its control of the market – as the Chinese government usually does.

The foundation of digital currency in China

China’s digital asset macrostructure began with the PBoC’s development of the country’s sovereign digital currency, the “digital renminbi” or “e-CNY”. Approved by the Chinese State Council in 2017, the digital renminbi began real-world testing in 2019. As of March 2022, the pilot programme had been extended to most major cities in eastern China.

The initial success of the digital renminbi can be credited in large part to the widespread use of third-party mobile payment applications in China, such as Alipay and WeChat Pay. These platforms have rendered cash nearly obsolete, making the transition to a digital currency deployed by a central bank smoother and more natural.

The digital renminbi is still in its infancy and will likely require more years of real-world beta testing. However, the framework behind it – and the state’s desire to establish control over the emerging digital currency sector – have had major implications for the development of digital assets in China.

The rise of the Blockchain-based Service Network

In early 2022, China’s Blockchain-based Service Network (BSN), a state-backed blockchain technology firm, announced that it would develop a domestic blockchain infrastructure network and launch a non-crypto NFT project. The key difference between BSN’s NFTs and mainstream NFTs is that BSN’s NFTs are not traded on the public blockchain using cryptocurrencies and are denominated in CNY.

The PBoC and BSN have not yet publicly announced any sort of collaboration. However, it is not difficult to see the eventual integration of the digital renminbi with BSN’s blockchain infrastructure. For example, the digital renminbi could act as the stablecoin which domestically produced cryptocurrencies are pegged to; or the digital renminbi could act as the currency for state-approved NFT transactions on the Chinese mainland.

Transparency (For the Regulators)

For all their promise, the digital renminbi and BSN’s blockchain network contradict the very concept of DeFi. Instead of decentralising, these two systems, by design, recentralise finance in the hands of the Chinese government and its regulators.

What does this all mean? First, the Chinese government is not against digital assets and blockchain per se; rather, it sees great potential in developing this industry, albeit on its own terms. The government’s behaviour makes clear that it envisions many uses for the underlying technology in the Chinese economy. However, the sector must be developed from the top down, and be made accessible first to the regulators and the government. The PBoC claims the digital renminbi’s advantages include helping reduce various forms of financial crime and aiding the work of law enforcement. This means that transparency (for the regulators) and transaction monitoring will be key features of the new digital currency. Naturally, with the digital renminbi connected to BSN’s wider blockchain network, any and all transactions made there would also be readily available for the government to access if needed.

The Chinese market for blockchain and NFTs

In July 2022, BSN announced that daily NFT trading volumes on its platform have surpassed those of NFTs being traded on the Ethereum ecosystem. Where can investors and entrepreneurs find opportunities in the Chinese blockchain/NFT space? Blockchain technology’s ability to verify authenticity and ownership can find many practical day-to-day uses, such as purchasing tickets for travel, transportation and entertainment. This could naturally extend to high-end art purchases and private museum collections.

Chinese consumers, especially millennials and Gen Z, have a strong appetite for collectible items and souvenirs – as evidenced in the craze over mascot toys during the Beijing 2022 Winter Olympics. NFTs would be well suited to these consumer demands and could form a secondary asset class alongside physical collectibles.

Even though “true” – anonymous and unregulated – DeFi will not be disrupting mainland China anytime soon, there remain commercial and investment opportunities for entrepreneurs in blockchain technology and NFTs.