China to Lead in Blockchain, Digital Currency
Blockchain is an exciting technology that is garnering much attention, most notably of late in China. Governments and central banks recognize that blockchain is here to stay, and that it has many applications across both the public and private sectors. Many countries are investing resources into blockchain initiatives and this is likely to grow significantly in coming years. This update summarizes a number of important recent developments in China and discusses their implications for blockchain generally.
On October 24, 2019, Chinese President Xi Jinping publicly described blockchain as a breakthrough technology, signaling to the world that China is ready to be a leader in its development and deployment. President Xi noted the vast number of applications for blockchain, but stressed the importance of proper implementation and regulation.
Since the announcement, the Cyberspace Administration of China (the central internet regulator, censor, oversight and control agency) released a second batch of 309 approved blockchain projects,1 comprising companies in the financial services, healthcare, auto manufacturing, e-commerce, and logistics sectors, bringing the total to more than 500 approved projects nationally.2
Previously, in September 2017, the People’s Bank of China (“PBOC”) and six other regulators banned cryptocurrency trading and initial coin offerings prior to ordering financial institutions to stop providing funding to any activity related to digital currencies. However, as a sign of further support for blockchain and cryptocurrency in China, on November 6, 2019, the National Development and Reform Commission (a key central government agency in charge of formulating macroeconomic policy) promulgated the “Industrial Structure Adjustment Guidance Catalog” – a list of those industries the agency advises the country to encourage, restrict or eliminate. Cryptocurrency mining was absent from the final list of industries to be eliminated, although it had appeared in the draft released in April 2019.
A day after President Xi’s call to seize opportunities in blockchain technology3 and two years since its initial draft, the Standing Committee of the 13th National People’s Congress enacted the Encryption Law on October 26, 2019.4 According to the law’s most recent draft proposal from July of this year, “[c]lear guidelines and regulations are needed to evaluate commercial cryptography technologies used in major fields related to the national interest as the current ‘loose’ system is no longer suitable for the industry.”5 The Encryption Law was adopted following two earlier documents released by the State Council and the State Cryptography Administration,6 further indicating the Chinese state’s intention to develop a unified encryption regime and controlled blockchain ecosystem. The Encryption Law becomes effective on January 1, 2020.
The stated purpose of the law is to: (a) regulate encryption application and management; (b) facilitate the development of the encryption industry; (c) protect network and information security; (d) safeguard national security and public interest; and (e) protect the legal rights of citizens, legal persons, and other organizations.7 While the Encryption Law does not explicitly mention cryptocurrency, it signifies a considerable move to bring the industry under legal and policy frameworks. Part of the context for these developments include Chinese efforts to spur economic growth in the face of an ongoing trade war and general economic slowdown by liberalizing certain sectors. However, this development must also be seen in the context of efforts by the Chinese state to promote its own national digital currency (as discussed below) and maintain centralized control over the financial system. As such, and given a number of outstanding unanswered questions, the Encryption Law will be significantly supplemented by future implementing regulations and companion measures originating from key public and private entities likely in step with an ongoing drive for indigenous Chinese innovation.
While the recent positive news on blockchain technology in China has received widespread coverage in the international press, it is worth noting that the PBOC reportedly completed trial run algorithms needed for a national digital currency supply as far back in October 2017.8 The currency is believed to be a digital form of Chinese fiat currency with the same legal status as the RMB. The PBOC announced that it is close to completion and will introduce the currency initially to a select set of domestic financial institutions.9 However, a recent announcement by the PBOC clarifies that it remains in the process of researching and testing a digital currency and unofficial announcements otherwise may involve fraud.10 If the digital RMB launches successfully, it could have broad domestic and international implications as it could allow for parties to transact globally in RMB outside of normal banking channels. Such a digital currency would allow for the PBOC to have additional oversight of its currency and help advance the RMB onto the global stage, putting pressure on the U.S. dollar as the incumbent global reserve currency.
However, even with growing excitement surrounding blockchain, governments and central banks are still signaling caution when it comes to broad implementation. Blockchain has the potential to upend many economic and financial norms and practices, as well as challenge the operation of current anti-money laundering and counterterrorism financing measures. Many governments, therefore, are worried that if blockchain is broadly adopted before its effects are fully understood, financial stability could be threatened as a result. This is perhaps most clearly exemplified by recent negative reactions to Facebook’s Libra project.
The Libra digital currency proposed by Facebook was announced with the support and partnership of a number of important global firms and institutions. The project was initially met with much excitement and proclaimed lofty aspirations of being a new way that people may transact with one another. However, government officials around the world have become increasingly alarmed by the potential risks of a full-scale Libra launch. Governments and central banks have signaled caution when it comes to Libra and many important partners in the project have since departed. Despite these setbacks, Libra continues to move forward although its ultimate timetable is unknown.
While we expect that various virtual currencies may come and go as they compete for market fit and acceptance (including virtual currencies issues by central banks), blockchain technology appears to be here for good. While many governments around the world are still determining the best way to move forward, the Chinese government have made it clear in recent weeks that they intend to be global leaders in this field.
1) Announcement of the Cyberspace Administration of China on the publication of the second batch of domestic blockchain information service filing numbers, Oct. 18, 2019, http://www.cac.gov.cn/2019-10/18/c_1572931934637684.htm.
2) Announcement of the Cyberspace Administration of China on the publication of the first batch of domestic blockchain information service filing numbers, Mar. 30, 2019, http://www.cac.gov.cn/2019-03/30/c_1124305122.htm.
3) In the 18th collective study of the Political Bureau of the Central Committee, Xi Jinping emphasized the use of blockchain as an important breakthrough for independent innovation of core technologies and accelerated the development of blockchain technology and industrial innovation. XINHUA (Oct. 25, 2019), http://www.xinhuanet.com/2019-10/25/c_1125153665.htm.
4) ENCRYPTION LAW OF THE PEOPLE’S REPUBLIC OF CHINA (promulgated at the 14th Meeting of the Standing Committee of the 13th National People’s Congress, Oct. 26, 2019, effective Jan. 1, 2020) 2019 STANDING COMM. NAT’L PEOPLE’S CONG. NETWORK (China).
5) ENCRYPTION LAW OF THE PEOPLE’S REPUBLIC OF CHINA (DRAFT) (Standing Committee of the National People’s Congress, Jul. 5, 2019), copy available at http://www.dffyw.com/fazhixinwen/lifa/201907/46250.html.
6) DECISION ON REMOVING A BATCH OF ADMINISTRATIVE APPROVAL REQUIREMENTS (promulgated by the State Council, Sep. 29, 2017), http://www.gov.cn/zhengce/content/2017-09/29/content_5228556.htm; and STATE CRYPTOGRAPHY NOTICE INSTRUCTING LOCAL BUREAUS OF CRYPTOGRAPHY ADMINISTRATION ON IMPLEMENTING STATE COUNCIL DECISION (issued by the State Cryptography Administration, Oct. 12, 2017), http://www.sca.gov.cn/sca/xwdt/2017-10/12/content_1015813.shtml?from=timeline&isappinstalled=0.
7) Supra, note 4, at Art. 1.
8) Wang Yanfei, PBOC Inches Closer to Digital Currency, CHINA DAILY, Oct. 14, 2017, http://www.chinadaily. com.cn/business/2017-10/14/content_33235955.htm, archived at https://perma.cc/T4R8-R4PU.
9) Michael del Castillo, Alibaba, Tencent, Five Others to Receive First Chinese Government Cryptocurrency. FORBES, Aug. 27, 2019, https://www.forbes.com/sites/michaeldelcastillo/2019/08/27/alibaba-tencent-five-others-to-recieve-first-chinese-government-cryptocurrency/#43e46ab61a51 (reporting that China’s central bank will launch a state-backed cryptocurrency and issue it to seven institutions in the coming months).
10) Announcement on the fraudulent use of the People's Bank to issue or promote legal digital currency. PEOPLE’S BANK OF CHINA, Nov. 13, 2019, http://www.pbc.gov.cn/rmyh/105208/3919880/index.html.