Blockchain Gets a Boost in China as National Cryptocurrency Announced
After the hype, blockchain will bring more practical solutions to industries in an increasingly digital world.
On October 24th, speaking as part of the 18th collective study of the Political Bureau of the Central Committee, Chinese president Xi Jinping said that blockchain is a breakthrough technology, adding that the country needs to seize the opportunity it represents.
“We must take the blockchain as an important breakthrough for independent innovation of core technologies, clarify the main direction, increase investment, focus on several key core technologies and accelerate the development of blockchain technology and industrial innovation,” Xi said in his speech.
What is blockchain?
Blockchain technology originated in a whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System, which was published by an unknown author under the pseudonym Satoshi Nakamoto in 2008. The whitepaper outlines a digital currency based on an encrypted peer-to-peer network that allows individuals to send and receive payments without involving intermediary financial institutions. In order to achieve the necessary qualities of a currency and resist problems like ‘double spending,’ Bitcoin uses a blockchain, a form of encrypted network that distributes information across every node in a given system, making it extremely difficult to hack or distort the data once it is entered into the chain. The continuing spread of Bitcoin and its stimulation of entire secondary industries, such as Bitcoin ‘mining’ centers, testifies to the durability of the underlying blockchain technology.
Why is the blockchain concept so appealing at present? One reason is that centralized topologies have particular problems. One may think of dysfunctional political or institutional policies that cause a cascade of unwanted effects in a social system, for example. In digital systems, centering all or most data or hardware in one place leaves the system vulnerable to attacks, mismanagement or abuse. The decentralization that is the core characteristic of a blockchain means that active nodes in the chain share the core duties of the network; if one fails, the blockchain will be unaffected. This resists the ‘single-point-of-failure’ that affects centralized systems.
What's the Chinese government attitude toward blockchain?
As regards blockchain industries, the Chinese government has historically had a love-hate attitude. While China has officially endorsed the underlying blockchain technology, authorities have a skeptical and restrictive attitude toward cryptocurrencies, the digital ‘coins’ that have rapidly evolved into an entire online transfer economy in the wake of Bitcoin’s rise.
In December 2013, the PBOC (People’s Bank of China), the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Insurance Regulatory Commission and the China Securities Regulatory Commission issued a joint Notice on Preventing Bitcoin Risk. It states that Bitcoin shall not be treated as currency and that financial institutions are no longer allowed to provide Bitcoin-related services. However, it permitted the public to buy and sell it at their peril.
With the cryptocurrency market booming, a group of seven agencies led by the central bank later published an official notice, titled Notice on Preventing Financial Risk of Issued Tokens, in September 2017. It declared initial coin offerings illegal and called for an immediate halt to all fundraising involving virtual coins.
The difference between cryptocurrencies and blockchain technology is defined clearly. In October 2016, the China government published its official blockchain whitepaper, detailing the potential applications. Then, China’s 13th five-year plan described blockchain technology as a critical “strategic frontier technology” in December 2016.
In February 2019, the CAC (Cybersecurity Administration of China) implemented the Blockchain Information Service Management Regulations, which is the first official set of rules to regulate the blockchain industry and blockchain service providers. On March 31st, 2019, the Cyberspace Administration of China released a list containing 197 approved blockchain service providers; 164 private companies were involved.
In June 2017, the PBOC began testing a prototype state-backed digital currency called DCEP (Digital Currency Electronic Payments). Over the subsequent years, the development of DCEP was in a sort of limbo. Recently, the Chinese government ramped up the research and development of DCEP. The Chairman of the China International Economic Exchange Center, Huang Qifan, said that DCEP is currently being rolled out, with the POBC issuing the currency.
What is DCEP?
DCEP is the forthcoming national digital currency of China, which is supported by the central bank. The blockchain uses a decentralized structure while also being connected to the national currency.
Fan Yifei, deputy governor of the central bank, proposed in the ‘Several Considerations on the Digital Currency of the Central Bank’ that the “necessity of digitization of legal tenders is increasing day by day. Banknotes have the following problems: too many circulation system levels, inconvenient to carry and easy to forge. In order to comply with the trends of the digital economy and defend the national monetary sovereignty, the POBC is issuing DCEP to improve efficiency, reduce costs and prevent risks.”
The main characteristics of DECP are the following: First, the currency is pegged 1:1 to the RMB, supporting the connection to the central bank; Second, the DCEP adopts a "two-tiered" system, whereby the upper layer will connect the POBC with commercial banks in the country while the lower layer will work to connect the commercial banks to retailers, businesses and individuals; Third, the DCEP permits peer-to-peer transactions in offline scenarios based on a special design; Finally, the DCEP is legal currency that will focus on the replacement of M0 "cash in circulation".
The DCEP is central bank-liable, anonymous and does not need to pay interest to the holder like banknotes. However, they also have some differences. For example, DCEP allows restraints on anonymity, while banknotes are completely anonymous; the DCEP allows holders to apply anywhere at any time, rather than go to banks or ATMs.
Now, electronic payments such as those based on bank cards and internet payments will be tied to a bank account. This aspect means it is hard to reconcile the DCEP with the advantage of anonymous payment, which is one of the aspects of cryptocurrencies that has encouraged their adoption. DCEP is based on the loose coupling of accounts, so that the dependence of the transaction link on the account is greatly reduced.
Yao Qian, former director of the Digital Bank Institute of China, said that the payment of Alipay and WePay is equivalent to trading with central bank liabilities after the 100% reserve deposit of the central bank, which is essentially the central bank's digital currency. Besides commercial banks, the DCEP will be distributed through Alipay, WePay and other institutions. Then, the DCEP will transmit to their users.
According to the course in Dedao APP, Mu Changchun, director of the Research Institute of Digital Money of the People's Bank of China mentioned that the DECP will have restrictions on use, involving time, amount and transaction fee limit. If you only use mobile phone number to register the wallet, the DCEP obtained will only meet the daily micropayment requirements. This means that the target usage scenario of DCEP is small retail businesses.
In summary, the DCEP ought to meet the need for a cryptocurrency to have transferability along with stable value (the latter being perhaps the largest obstacle faced thus far by Bitcoin) while improving payment efficiency without causing inflation. With the development of DCEP, consumers will bid farewell to banknotes and find daily life that bit easier. At the same time, the “cashless society” will take a step closer to reality.
How big is the market?
According to EO Intelligence, the number of blockchain companies in China as of September 2018 is 615. It is the most significant number of blockchain companies in any one country. The number of financing events rapidly increased between 2013 and 2018, fueled in a large part by speculation connected to the rise of Bitcoin. This has since gone to a steep decline. In 2019, financing events this year have so far reached 324. The total volume of financing declined from CNY 208.00 billion in 2018 to CNY 62.71 billion in 2019.
According to the Chinese Institute of Electronics’ analysis, the total market size worldwide hit USD 7.8 billion in 2018, with a 5-year CAGR of 67.11%. In China, the market has surged since 2016. The market generated an estimated volume of USD 2.9 billion in 2018, representing a compound annual growth rate (CAGR) of 76.33% between 2013 and 2018.
Although there are still some pressing issues for the blockchain industry players to resolve, a growing number of companies are treading the path to commercialization as time goes by.
How can blockchain benefit industries?
Financial service providers are emerging as the current and near-future leaders of blockchain. According to PWC’s Global Blockchain Survey 2018, 46% of reported blockchain use cases were in financial services. Among them, supply chain finance and cross-border payment are the two main application areas.
Supply chain finance is a large and growing industry. However, it faces many challenges, for example, the difficulties and high cost in the financing of SMEs, the incompleteness of enterprises' credit systems, information islands, and so on. Supply chain finance solutions based on blockchain technology can reduce the supply chain’s overall financial costs, improve capital allocation, share data sources and lower risk control of pre-loan. Such a business can be divided into five parts: contract signing, assignment of creditor's rights, corporate financing, fund collection and ABS financing.
The SWIFT (Society for Worldwide Interbank Financial Telecommunications) system which is concerned mainly with cross-border payments, faces high cost and inefficiency problems. In the payment initiation phase, blockchain technology can solve the difficulties of verifying authenticity through establishment of the ‘digital identity’ of the payer, recording the rights and obligations between sender and receiver via smart contracts. Cross-border payments based on blockchain can be divided into three types: the first type uses digital currency as a lubricant for currency exchange – for instance, Ripple functions as a bridge between different legal currency. The second type uses blockchain as interface technology between payment enterprise and bank: for example, the cross-border financial services platform established by the Bank of China and China UnionPay. The third type is the Ant Financial model. In June 2018, Alipay and GCash jointly launched an e-wallet that uses blockchain for the full process of cross-border remittance. With distributed ledger technology, remittance is transformed into node-by-node confirmation and transmission, working like a relay race with real-time, synchronous and parallel verification by service nodes, improving efficiency and fundamentally altering the nature of such payments, Jack Ma has said.
Apart from financial services, we can also see potential in industrial products and manufacturing, energy and utilities, healthcare, government and retail.
How many types of players are there?
There are four types of players in the blockchain market: internet giants, other internet enterprises, traditional enterprises and startup enterprises.
Internet giants like Baidu, Alibaba, Tencent, JD started to research and invest in blockchain technology as early as 2016, speeding up applied research in 2017 and launching their own BaaS (Blockchain as a Service) platform based on technical strength and comprehensive resources. In 2018, Tencent, JD and Baidu successively released blockchain whitepapers; only Alibaba had not yet done so. They provided an understanding of their blockchain technology in whitepapers. Tencent aims to build an enterprise-level blockchain platform, providing the function of blockchain essential services for upper-level application scenarios through SQL and API interfaces. JD wants to cooperate with its allies to explore the application of blockchain technology in a bid to let the government, the logistics industry, financial institutions and other enterprises launch blockchain applications. Baidu wants to create an open network, Xuper Chain (超级链), offering developers the opportunity to establish the necessary infrastructure and relevant apps for the system.
Other internet enterprises like Xunlei (迅雷) and NetEase, put blockchain into the original technology system, providing new products, applications, and services. In October 2017, Xunlei launched ThunderChain (迅雷链), providing services including smart contract development, blockchain implementation, commercial ecosystem building for blockchain, outreaching entity industries, AI, Internet of Things, life science and others. NetEase released a blockchain sharing platform dubbed ‘Planet,’ where users can store and trade their data.
Traditional enterprises, like Sunyard (信雅达) and Insigma Group (浙大网新), implement blockchain technology application pilots through self-research, invest startup enterprises and strategic partnership. In August 2016, Sunyard invested CNY 5 million in Hyperchain (趣链科技), taking a 10 percent stake. Insigma Group and Qtum reached a blockchain technology cooperation agreement.
Startup enterprises are rooted in blockchain to bring “subversive innovation.” Yunphant Blockchain (云象区块链) is a blockchain infrastructure service provider founded in 2014. Its solutions are widely applied to downstream practices such as notary certification, trade finance, equity transaction, verification and supervision, supply chain finance, asset securitization, and so on.
There can be no doubt that blockchain technology will address the pain points in many areas of business and will have a significant impact on the community.
However, if blockchain technology wants to have large-scale applications in industry, many problems need to be solved.
According to PWC's 2018 Market Survey Report for (Non-financial) Application of Blockchain in China, management decisions have the most significant impact on blockchain implementation, while input cost has the smallest effect. 31.5% of respondents indicate that "management not yet decided" is the dominated reason why their own enterprises have not yet adopted blockchain technology. Notably, only 10.1% of respondents chose "no budget." According to the following chart, 61.5% of respondents indicate that "policy normalization" is the most important challenge for the development of blockchain technology. It suggests that once policy normalization is established at all levels, there will be a large number of enterprises and industries taking their chances on blockchain technology.
The blockchain initiative being pushed forward will greatly help the adoption of projects. Whilst the cryptocurrency ban still stands, blockchain technology projects are thriving in China.