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In Short

The Situation: Authorities in China have cracked down on privately developed cryptocurrency, yet have heavily invested in and encouraged the development of other blockchain applications and services.

The Result: The rapidly rising number of blockchain projects in China is accompanied by increased regulation, including a requirement that blockchain-related projects be registered with the Cyberspace Administration of China.

Looking Ahead: As China’s central bank continues to develop a government-backed digital currency, there will likely be no lifting of the crackdown on other types of cryptocurrency in China. However, blockchain technology will continue to expand, and foreign companies doing business in China should closely monitor related legal developments.

Cracking Down on Cryptocurrency

It was said that China is controlling around 70% of the cryptocurrency mining operations around the world. Since 2014, the People’s Bank of China has been working on developing a fully backed digital fiat currency, and is expected to become the first national central bank in the world to launch an official currency in digital form. In the lead-up to its introduction, Chinese financial regulators have cracked down on other cryptocurrency-related firms and activities. As early as 2013, China’s central bank and other authorities jointly issued the Notice on Prevention of Risks imposed by Bitcoins to prohibit financial institutions from transacting bitcoins, denominating products and services in bitcoins, or providing bitcoin-related services. These restrictions were expanded in September 2017 when Chinese authorities published the Announcement Preventing the Financing Risks of Initial Coin Offerings (“Announcement”), essentially banning initial coin offerings (“ICOs”) and ICO-related financing activities (an ICO is the introduction of a new cryptocurrency in order to raise capital, similar to an initial public offering of stock).

The Announcement declared ICO financing to be an unauthorized illegal public financing, akin to the illegal issuance of securities or even financial fraud. It further required authorities to close down trading platforms that provide an exchange service between legal tender and cryptocurrency and other services related to cryptocurrency, such as pricing and intermediary services, and prohibited financial institutions and payment institutions from providing these services. The Announcement has led to a nationwide crackdown of cryptocurrency, including bitcoin.

In late 2019, Chinese President Xi Jinping declared his support and encouragement of the development of blockchain technology in China. With blockchain being the key technology behind cryptocurrency and cryptoassets, many investors and entrepreneurs mistakenly interpreted this endorsement as an endorsement of privately developed cryptocurrency as well, temporarily reigniting China’s cryptocurrency sector and crypto trading activities. Chinese authorities put a swift end to this, however, closing down all platforms that traded or provided services related to foreign cryptocurrency, including five China-based cryptocurrency exchanges that allow cryptocurrency to cryptocurrency exchange transactions.

Blockchain Technology in Public and Private Sectors

Despite this strict crackdown on privately developed cryptocurrency, blockchain technology is gaining rapid acceptance in China. In cracking down on cryptocurrency applications, the Chinese government has emphasized the distinction it sees between cryptocurrency and blockchain users. Users are warned not to conflate the two and reminded that the development of blockchain applications, as opposed to cryptocurrency, is widely encouraged. Organizations using blockchain technology in China or on a global basis should pay close attention to the distinction and seek detailed legal and regulatory advice where necessary.

There has been an explosion of blockchain-based solutions in the public and private sectors. One major project launched by the Chinese government is the blockchain-based cross-border financing platform implemented by the State Administration of Foreign Exchange (“SAFE”) in March 2019. Similar to the Greater Bay Area Trade Finance Blockchain Platform, which was launched in 2018, the platform facilitates receivables financing and information verification for cross-border businesses and is now used by commercial banks and SAFE bureaus in 19 provinces and cities across China.

Other Chinese governmental projects include a smart contract application introduced by the Hangzhou Internet Court that assists the automation of contract execution and smart adjudication of cases, an identification platform in Shenzhen that automates identity verification of users of government services, and a logistic platform introduced by the Customs of Tianjin Province that facilitates cross-border transactions and payment.

Experts predict that blockchain has the potential to be applied in China in fields such as anticorruption, public security, public transportation, and crime investigation, and of course, as the backbone of the central bank’s digital currency in the near future. Many companies are also exploring the use of blockchain technology in the private sector, some with financial investment from local technology giants. Such applications range from product certification and verification, to invoicing and e-billing system, recording of intellectual property rights, and tracing and tracking of drug identity in pharmaceutical supply chains.

As blockchain applications grow in popularity, the performance of blockchain companies performance has taken on greater significance in the broader Chinese financial markets. In Shenzhen, an exchange-traded fund (“ETF”) based on the performance of publicly listed blockchain companies was recently proposed. While this proposal is pending the China Securities Regulatory Commission’s approval, the Shenzhen Stock Exchange launched in December 2019 a blockchain index reflecting the performance of the top companies with blockchain ventures. These developments signal new opportunities in the stock exchange, as well as optimism in the continued growth of the blockchain industry.

In the Catalogue for Guiding Industry Restructuring, which was issued by China’s National Development and Reform Commission in October 2019 and took effect on the first day of 2020, blockchain information services approved by the Chinese government is labelled as encouraged industry.

Regulations

With the expansion of blockchain activities naturally comes the expansion of the corresponding rules and regulations. The Provisions on the Administration of Blockchain Information Services (“Provisions”) implemented by the Cyberspace Administration of China (“CAC”), a governmental agency that regulates, oversees, and controls the internet of China, specifically governs issues relating to blockchain and blockchain information services. For example, the Provisions grant the CAC the power to supervise and regulate all blockchain information services in China.

Companies seeking to provide blockchain information services in China, including websites or applications that utilize blockchain technology to provide information to the public, must register with CAC their blockchain information services, as well as any subsequent modifications to the services. Additionally, identity verification is required of all users, and service providers must not provide services to a user who refuses to comply with this requirement. Service providers must also retain records of contents, logs, and other information for at least six months and make them available to law enforcement upon request. The Provisions apply to both local and foreign companies that seek to provide blockchain information services in China.

Another new regulation that may be relevant to those looking to establish blockchain-related services in China is the new Encryption Law of the People’s Republic of China (“Encryption Law”), which went into effect at the turn of this year. The law requires encryption products to adhere to technical and security standards to be set by the relevant Chinese regulatory authorities. As encryption is a core component underpinning cryptocurrency and blockchain, service providers and developers should adhere to the rules under the Encryption Law. Maintaining encryption standards is critical to the long-term success of blockchain technology as advances in quantum computing threaten to make existing encryption technology less secure. Encryption products with protection functionality relating to national security or the public interest are additionally subject to import licensing and export controls.

Three Key Takeaways

  1. Chinese authorities have cracked down on firms involved in cryptocurrency and related activities.
  2. Chinese authorities are encouraging the development of other blockchain applications, and there has been heavy investment in the industry from both the public and private sector.
  3. Developers and providers of blockchain services must closely monitor Chinese legal developments relating to blockchain services.

(Excerpt) Read more Here | 2020-01-22 09:00:54

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