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China looks to become blockchain world leader with Xi Jinping backing

Chinese President Xi Jinping

Aris Messinis | Pool | Reuters

China is poised to take the lead in blockchain after it was given strong backing by the country’s leader President Xi Jinping, experts told CNBC. The move could allow the world’s second-largest economy to control the development of the nascent technology in the absence of competition from other regions like Europe and the U.S.

Blockchain refers to a technology which began with the cryptocurrency bitcoin. In that case, its role was an immutable and tamper-proof public ledger of activity. It was also “decentralized,” which means it was not owned by any one party.

The definition of the technology has since evolved as it started being applied to areas like finance. Other terms such as “distributed ledger technology” or DLT are now often used in these cases and they bear differences to the original bitcoin blockchain. But the promise of a system in which transactions can happen across a single record aimed at authentication is still attractive.

In October, Xi gave a speech saying China needs to “seize the opportunities” presented by blockchain, in what appeared to be one of the first instances of a major world leader backing the tech. Xi said blockchain is an “important breakthrough in independent innovation of core technologies.”

“This is an extremely significant development, not just for China but for the broader world,” Garrick Hileman, head of research at cryptocurrency exchange and trading platform Blockchain.

“Countries are racing to identify strategic technologies and develop sustainable competitive advantages in areas like artificial intelligence and robotics. With Xi’s speech blockchain technology can now be added to this list,” Hileman told CNBC.

China’s relationship with crypto

Cryptocurrency trading, like that of bitcoin, is technically banned in China.

In 2017, the government banned so-called “initial coin offerings” or ICOs. This was a way for start-ups to raise funds by selling off newly-created digital currencies.

But not all cryptocurrency activity is totally outlawed. Hileman estimates that over half of all bitcoin and other cryptocurrency mining takes place inside China while millions of citizens own and invest in cryptocurrencies. “Mining” is a term which relates to the creation of new bitcoin, and requires specially made computers that use a lot of energy.

The Chinese government has never had an issue with the underlying technology — blockchain.

While bitcoin’s price soared after Xi’s comments, perhaps in hopes that China could loosen its rules on the trading of the digital coin, experts said that’s not likely. Instead, Chinese firms will focus on the development of blockchain technology.

“For the foreseeable future, we think (the) Chinese government will insist on pushing the development of blockchain technology, instead of the application of cryptocurrency,” Lawrence Wintermeyer, co-chair of Global Digital Finance, an industry body that promotes the adoption of digital finance technologies, told CNBC.

What’s happening in China?

China has a history of throwing its weight behind key technologies with big announcements about how they should be developed.

In 2017, the government laid out a blueprint for how it wants to become the world leader in artificial intelligence (AI) by 2030. More recently, China officially launched research and development work for 6G mobile networks, having only just rolled out 5G a week before.

This often gives companies the impetus to develop the technology.

“With President Xi’s backing blockchain, China has unequivocally said that the future foundation of technology is blockchain, and China will be the first nation to the moon,” Jehan Chu, co-founder of Kenetic Capital, a trading and investment firm focused on digital assets, told CNBC.

“Within China, there will be waves of innovation at state and local levels, with massive inflows of capital powering innovation like AI (artificial intelligence) and Big Data previously.”

Development of the technology is certainly underway. Since March, over 500 blockchain projects have been registered with the Cyber Administration of China. Some of China’s largest internet companies from Tencent to Huawei have registered projects.

The technology is still very much in its early stages but is being looked at very closely in a number of areas. Sebastian Markowsky, partner at Blockchain Valley Ventures, said China is looking to apply the technology to areas such as fraud prevention, food safety and its supply chain, as well as using blockchain to track charity donations, among other things.

Hainan test

While Xi has backed blockchain, the government is still taking a fairly measured approach.

Hainan, a province in south China, has set up a so-called blockchain pilot zone, with the aim of fostering the development of the technology. Huobi, a cryptocurrency exchange, has set up shop in Hainan as has Chinese search giant Baidu.

Markowsky compared this to how the Chinese government has operated in the past, designating specific cities or areas of the country as special economic zones. But it also helps mitigate the risk should the technology live up to the hype.

“China has the ability to therefore experiment around blockchain with all the upside, and very limited downside,” Markowsky said.

“The government has put its name behind the technology, and will continue to do so indirectly (through state-owned enterprises and private enterprises). If blockchain turns out to be the revolution that is promised, they will be able to quickly roll it out in the entirety of the country,” he said. “Otherwise, the small Hainan experiment will be shut down, leaving the rest of the country unscathed.”

Blockchain hype

There is certainly a lot of hype around the technology.

“Blockchain technologies have not yet lived up to the hype and most enterprise blockchain projects are stuck in experimentation mode,” Avivah Litan, research vice president at Gartner, said in a recent report. “Blockchain is not yet enabling a digital business revolution across business ecosystems and may not until at least 2028, when Gartner expects blockchain to become fully scalable technically and operationally.”

The industry, which includes blockchain companies based on cryptocurrencies, has seen hundreds of projects die. And with Xi’s support, it could cause a rush of companies and projects to come to the market without a real business.

“There is a danger that companies start using blockchain because it’s one of the promoted technologies, even if they don’t have a valid use case,” Markowsky said.

China vs the rest of the world

China appears to be the biggest nation to have come out with a blockchain policy. Other places in the world, like Switzerland and Gibraltar, have introduced friendly policies to encourage blockchain firms to set up there.

But countries like the U.S. are notably lacking in their blockchain policy. Instead, in the U.S., individual firms have tried to push forward blockchain projects, the most high profile of which is Facebook‘s Libra. The cryptocurrency project from the U.S. tech giant already faces pressure from regulators before it’s gotten off the ground.

Blockchain’s Hileman however said that Xi’s speech could prompt other countries to come out with their own policies.

“I expect Xi’s speech to trigger a domino effect, where over time, we see similar announcements from other governments and leaders around the world,” Hileman told CNBC.

Markowsky said that China’s blockchain push could put other countries behind, to the point where the world’s second-largest economy could dominate the technology and the way it’s developed. In essence, blockchain could be developed in a way that benefits the way China’s society is moving.

“I would say that for the rest of the world, this is an emergency call since with all the good things that blockchain theoretically promotes, like transparency, staking (rewarding right behavior in societies), interaction in a trustless system, etc., if applied towards a society in shape of the social scoring that is underway in China, it can be a fairly dangerous technology if it is used to cater the needs of a specific country,” Markowsky said.

“If this country is big enough and sets the norm, we in the western world may miss the chance to make sure the system is not immutable and fair for all.”

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