Blockchain in China: Innovation vs Control?

A casual look into China’s cryptocurrency policies will reveal two paradoxical developments. On the one hand, China has a vibrant blockchain communities. As reported by Emily Parker for the MIT Technology Review, China cryptocurrency world feels like the Silicon Valley of the East. J.P. Morgan’s recent report, Decrypting Cryptocurrencies: Technology, Applications and Challenges, also details some amazing statistics: from January to July 2017, ICOs in China raised the equivalent of RMB 2.6 billion. At its peak, China accounted for approximately ¾ of global Bitcoin mining pools, and some 80% of global Bitcoin transactions.

On the other hand, the Chinese government has gradually tightened regulations on cryptocurrencies. ICOs were comprehensively banned since September 2017. In early 2017, cryptocurrency exchanges in China were subject to repeated scrutiny and inspections. Then in 2018, all online trading of cryptocurrencies were banned. Overseas websites related to trading and ICOs are also banned by the Great Firewall of China.

Paradoxically, the Chinese government is promoting the technology behind cryptocurrencies, namely blockchain. Blockchain is included as part of China’s State Council Five-Year Plan on Informatization from 2016 to 2020. The Ministry of Industry and Information Technology also launched the Trusted Blockchain Open Lab in June 2017. The lab promotes the exploration of blockchain technology.

In effect, China is following a pro-blockchain, anti-cryptocurrencies policy. In its decentralized version, cryptocurrencies can pose challenges to a government who is keen to control the network. A good example is the potential of Bitcoin to evade Chinese capital controls in 2016, when China’s foreign exchange reserves fall to below US$ 3 trillion. On the other hand, blockchain technology in a permissioned sense would permit the government to select who can participate in the network, hence enabling better control.

Joseph Lubin, co-founder of Ethereum, thinks that China’s ICO ban is an “appropriate approach”. Telling CNBC in an interview, he said that many of the copycat companies issuing tokens were based out of China. “With China’s political approach to things, and with the fraud that was rampant there, it made a lot of sense for them to pause things a little bit and get a better, deeper understanding of the ecosystem, and scare potential fraud perpetrators,” he said.

In the final analysis, this is a tug of war between control and openness. As a paradigm shifting technology, blockchain’s transformation power would be at its maximum if it is permissionless and open. Like the early Internet, it enables the largest number of innovators at the fringe of the network to innovate and build on top of the platform. The downside is that this will introduce a lot of bad actors without proper management.

Achieving a balance is not an easy task. However, many countries, such as the US, Japan, Singapore and Switzerland, are exploring the appropriate approach that can encourage innovation with sufficient oversight. After the severe crackdown in 2017, perhaps it is also time for China to pivot to this approach.

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