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The Changing Regulatory Landscape: How Blockchain Can Work In China

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It has been a long-held opinion that blockchain and cryptocurrency aren’t the most welcomed topic in China, but as of today, increased signs have shown that the world’s second-largest economy has gradually embraced blockchain technology rather than opposing it.

More China-based blockchain projects have received support from both local and provincial governmental bodies lately - with some of them going further to work closely with the governments, which could set examples for others on how to better pursue blockchain-related businesses.

The Launch of Regulations on the Management of Blockchain Information Services

Few people in the Chinese blockchain sector could forget about September 4, 2017.

On that day, the People’s Bank of China (PBoC) together with several other central government agencies and financial regulators announced that it would ban initial coin offerings (ICOs).

Not long after, the East Asian country’s regulators also shuttered all the bitcoin and cryptocurrency exchanges that had presences there.

Although such intensified crackdown was targeting on the scams related to blockchain and cryptocurrency, it has had an earthquake-like effect on the crypto world in China. An example would be Zhao Changpeng, the founder and chief executive of Binance, who quickly moved his company’s headquarters and servers from Beijing to Tokyo.

Ever since then, chatter on blockchain and cryptocurrency seems to have remained one taboo in the country.

 That, however, has changed.

More specifically, the Cyberspace Administration of China (CAC) recently released the first list of registered blockchain service providers, according to an announcement dated March 30, 2019, on its website.

Alibaba, Baidu, and Tencent are some of the most noteworthy names among a total of 197 companies on the list. By being registered, these blockchain-based information service providers are granted registration numbers under the Regulations on the Management of Blockchain Information Services.

Despite its vague name, this regulation was reviewed and approved by the State Council Information Office earlier this year and was then implemented on February 15, 2019.

Since then, local and provincial regulators have been working on the nuts and bolts of the regulation, which in a way reflects the government’s support to the fast-growing technology.

For example in Hangzhou, the capital city of East Coast province Zhejiang, the cyber police office held a meeting with major tech companies there on May 10 regarding the regulations, according to one of the participants at the meeting, Xuemai Yu, chief executive officer of Hangzhou-based blockchain company DataQin.

The gathering was actually a follow-up from a meeting back in January when the cyber police brought the same companies together to address the same issue, Yu said in an interview with Forbes Crypto. Compared with the January’s meeting, he said he got the feeling that the regulators are much more familiar and comfortable with talking about blockchain technology and talking to blockchain-based companies.

Also at the meeting were officials from the Central Cyberspace Affairs Commission, who were connected through a webcam. In the video, the officials detailed explained the nuances of the regulation.

 “The most important part was that they’ve divided all the blockchain projects into two categories, one is blockchain service providers, the other is blockchain technology providers,” Yu said.

While they touched little on the emerging technology itself, the regulators informed companies like Yu’s that the two things they don’t like: 1. The public blockchain, where anyone can access and write and read anything they’d like to; 2. ICOs-related scams.

“From the central government’s perspective, they want to make sure any information that could potentially harm the national security and stabilization wouldn’t spread on the Internet through blockchain,” Yu said.

By telling exactly what “land mines” companies cannot step on in the blockchain sector, the regulators in China have officially opened a door for the technology to grow further, with much clearer path to follow.

Yet the downfall is still there as told by the regulators: companies should prefer using private or enterprise blockchain rather than public blockchain.

Blockchain in China? Go for the government first

With more flexibility on the local level, some blockchain-focused projects have already been working closely with governments after seeing a huge market there.

An example would be Trias, a project that aims to build a decentralized and general-purpose computation infrastructure.

 On a list revealed to Forbes Crypto, the company has showcased more than 20 ongoing blockchain-powered projects it is working on with its partners, including at least five directly with local governments.

“When talking about blockchain, everyone’s talking about the decentralized concept... So especially in China, many executives of public companies and local governments are very afraid of this decentralization idea,” Anbang Ruan, the founder and chief executive officer of Trias said in an interview with Forbes Crypto. “What we are trying to explain to them is that the decentralization in blockchain is not a decentralization of the management; it could be understood as a decentralization of the technology.”

After helping governments resolve their fear toward decentralization, one of the key characteristics of blockchain, Ruan and his company have found a tremendous market in China for blockchain technology.

For instance, in a city called Fuzhou located in the southern province of Jiangxi, Trias will be helping a county to optimize its backbone industry, electrical substations, with the application of blockchain.

In China, the trend is that almost every government wants to use highly advanced technology including big data, artificial intelligence, and cloud computing to optimize their production line and structure, Ruan said.

But since the governments will have to highly rely on a third-party to implement the relative technology, the concern on trust rises, especially on data security.

In Fuzhou where electrical substation industry generates more than RMB 16 billion of revenue annually, the local government went to Ruan and Trias to find out how blockchain could solve their concerns on data safety.

“In a word, with our platform, we are helping the local governments and their partners in China to build an integrity system,” Ruan added.

Another interesting point Ruan made was that instead of going to potential third-party partners such as financial institutes, he has found more success and efficiency going to governments directly.

In a country ruled by one party, Chinese government stays as the central role in business decisions in China by large. And this "government" includes those from Beijing to the provinces, to city governments, counties and townships.

Once you establish a solid relationship with the government, the business opportunities come - along with perks such as tax breaks, Ruan said.

Where is the blockchain capital in China?

As mentioned by Ruan, one key factor that contributes to Trias’ success is working with the governments directly - that may lead to a second question: where in China should I go for my blockchain businesses? 

Home to some of China's biggest technology companies, Hangzhou is considered by many as one potential candidate as the blockchain hub in China. 

The eastern mainland city's internet court previously ruled that evidence authorized via blockchain technology can be presented in legal disputes.

At the same time, data have shown that Hangzhou has some competitors out there.

On the list of 197 companies that have been approved by CAC to adopt blockchain technology, 63 of them are based in Beijing.

Following Beijing, Guangdong province in Southern China came to No.2, surpassing Zhejiang province, where Hangzhou is located, by 2 with 47 registered companies.

Outlooks

Responses from some China-based companies who are considering applying blockchain to their day-to-day operations also have sent out positive signs, after Forbes Crypto sent them a list of questions addressing blockchain development in China.

“The technology itself [blockchain] shouldn’t be defined as good or bad,” said Zhihao Zhang, assistant general manager of IT department at Soochow Securities Co., a Shanghai Stock Exchange-listed broker company.“...I am very confident in the future development of blockchain in China.”

 Zhang said that his company is currently working with Trias on how to store trading log history and electronic contracts on blockchain as legitimized evidence.

“With the improvement of people's acceptance and the maturity of the technology, the decentralized consensus will inevitably bring revolution in all areas of people's lives, where things can be handled more openly and conveniently,” he continued.

“[Our company’s] mission is to maximize the value of data, and the core issue that has hindered this mission is the current centralized model and the lack of technology to maintain trust,” said Liwei Xue, co-founder and chief operations officer at big-data management startup Ptmind, pointing out the key problems that blockchain could help solve in China.

“The 'informationization' of Chinese enterprises has reached a certain stage, with a large amount of data being generated - but most of these data are ‘sleeping,’” he explained further.

With the assistance of blockchain technology, these data could be “awakened” to maximize their values. The result: both governments and companies in China could create a higher level of trust in the system, where work efficiency would be largely improved.

“The Chinese government and its people have been experiencing so-called cliff-like growth for nearly 30 years,” he said. “They’ve always been embracing the emerging technologies and business models... So instead of trying to tell the power of new technology, why don’t we just provide valuable services [powered by blockchain] directly to the people?”

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