Cryptocurrency with Chinese Characteristics: Attempting to Regulate the Unregulated

The Chinese government has cracked down hard on cryptocurrency trading in the last year. The fundamental precept of cryptocurrency trading seems anathematic to the Chinese government, with its pseudo-anonymous transactions and anarchic origins presenting an obvious challenge to the Chinese Communist Party (‘CCP’). However, beyond the doomsday headlines, until recently there has been surprisingly little first-hand information regarding the government’s stance on the underlying blockchain technology. Only in recent months has a more nuanced picture emerged, indicating that the government sees a place for blockchain technology in the market, albeit under heavy state control.

In September 2017, the Chinese government banned initial coin offerings (‘ICOs’), a process whereby a company issues tokens to investors in exchange for legal tender or more established cryptocurrencies. The ban also attempted to curtail the private trade of cryptocurrencies  by censoring ICO service providers and  trading platforms. This caused Binance, a prominent PRC-incorporated international cryptocurrency exchange, to promptly move its headquarters to Japan and later to Taiwan, and Bitmain – the world’s most profitable cryptocurrency mining company – to turn to the production of hardware for the emergent artificial intelligence sector.

However, since then, the government has been reticent to deliver a definite statement regarding its overall view on blockchain technology and the legality of cryptocurrencies in China. As such, cryptocurrencies currently exist in a kind of limbo, not being explicitly illegal, while also lacking legal status as a currency. Much of the government’s action to date has been to legislate against certain aspects of cryptocurrency trading that are problematic, such as fraud, drug smuggling, and other criminal activity. Indeed, illegal activity was an important reason for its recent clampdown: in May 2018, IFCERT, China’s industry internet finance security think tank, announced that as at April 2018 it had uncovered a total of 421 cryptocurrency scams.

What is the reason for the government’s cautious approach? While inherently distrustful of currencies whose transactions can go untraced by the government’s sophisticated censorship and surveillance mechanisms, China’s leaders see enormous potential in the alternative applications of blockchain technology. In May 2018, President Xi Jinping publicly marvelled at the potential of blockchain technology, stating that “blockchain is accelerating breakthrough applications”, highlighting its centrality to the future development of the digital economy. As a clear indication of Xi’s vision of the future, in the same month, the Ministry of Industry and Information Technology released the 2018 PRC Blockchain Industry White Paper, finally providing a detailed description of Beijing’s view of the opportunities, as well as risks, that blockchain technology presents.

The White Paper, tantamount to an endorsement of blockchain technology, tells us that Beijing envisions the development of an advanced digital ecology with blockchain at its core. To achieve this, it is actively seeking measures to encourage technological innovation and entrepreneurship to identify and strengthen alternative blockchain applications. The White Paper draws particular attention to the technology’s potential in a number of areas that are increasingly important to China’s future technological and economic development. This includes the potential of increased market liquidity through more precise micro-transactions, as a solution to well-documented issues with copyright infringement and piracy, and as a tool to improve patient care through incorruptible time-stamped ledgers and consolidated medical records. The government has also highlighted blockchain as a tool to strengthen its e-governance structures, increasing its information feedback system, which has long been identified as a vital area of development by the government.

Efforts are being made to develop a network of industry associations and research centres to optimise the growth of the blockchain industry, while simultaneously trying to ensure that the technology is not misused. In this vein, the government continues to examine the challenges that could emerge, for example, through widespread application of smart contracts, which could be used to circumvent the necessity of lawyers and certain legal clauses. The White Paper also states that the government is examining the legal issues surrounding token issuance, and designing industry standards for Bitcoin, indicating that they could make a controlled comeback in the future. Innovations in blockchain technology have been designated as intellectual property, and are now afforded legal protection, which will likely lead to an increase in entrepreneurial spirit. Though these moves will doubtless be criticised by many as defeating the purpose of cryptocurrency, regulation would be welcome in some ways from a due diligence perspective. Currently, while the public is freely able to view transaction details on the blockchain, a given transaction cannot be traced to a specific person unless a ‘Wallet ID’ is provided, making it near impossible to verify ownership and source of wealth for a person who claims to derive their capital from Bitcoin trading.

With Beijing’s formal endorsement, blockchain technology is likely to face an exciting future that looks set to redefine our traditional conceptions of society and the wider economy. However, China does not wish to promote an anonymous, privately issued and distributed currency existing beyond its grasp. Rather, it wants to manipulate the existing technology to fall within and complement its control. In the not-so-distant future we might even begin to see the emergence of a CCP-endorsed state cryptocurrency, whose design enables the state to trace particular transactions to individuals; a ‘cryptocurrency with Chinese characteristics’ that toes the Chinese Communist Party line.