Blockchain: Rising Tide or Binding Fetters for the Next China?

SHARON LI analyzes the Chinese government’s extensive use and potential abuse of blockchain technology in the context of Beijing’s opposition towards cryptocurrency.

As the mayhem around bitcoin has begun to die down in the United States, the record-keeping technology behind it—blockchain—still surges forward. In China, this is no exception.

The most basic definition of blockchain calls it a “distributed, decentralized, public ledger”; in other words, it is a public database of verified digital transactions that stores its records not only in its own ‘block’, but in all subsequent blocks of digital records, which makes the stored data incredibly difficult to be manipulated given the linking nature of the chain.

So why is China concerned? The state’s recent launch of “Made in China 2025”, an industrial plan to make the country a global leader in developing and manufacturing advanced technology, points towards a larger aim of turning away from China’s current dependence on foreign technology. And while blockchain isn’t necessarily significant in tech manufacturing, any movement by the state to adopt such technology—and codify it into law— would still have sweeping political and social implications in the country’s greater push for power in the world of tech.

Late last year, China’s Supreme People’s Court declared that blockchain would be an approved method for “storing and authenticating digital evidence”. This came in response to a recent case taken by Hangzhou’s internet court, which ruled that evidence on blockchain was a legally acceptable form of evidence—at least in a copyright infringement case. This steady acceptance and adoption of blockchain in legal matters of the state also extends beyond the courts. China’s central bank, the People’s Bank of China, is currently beginning to utilize a “blockchain-based trade finance platform” for inter-bank payments. The CCP recently released a primer that discussed potential opportunities and challenges in the blockchain industry.

Much like their national counterparts, local governments have also been employing blockchain for legal matters. Convicts on parole in Zhongshan reportedly have their movements monitored through a blockchain-based system in order to “reduce the manpower burden that is traditionally required to physically follow parolees”; and according to the Zhongshan Daily Release, the new system uses a new electronic bracelet with the “highest level encryption algorithm” that stores data in real time. The city of Shenzhen is taking similar measures to fight tax evasion, as it was announced in May of last year that the Shenzhen National Taxation Bureau had partnered with Chinese tech company Tencent to work on a new digital invoice solution using blockchain—which would help combat forged and doctored receipts.

But the warm reception that blockchain has received from the Chinese state stands in stark contrast with their stance towards crypto-currency. Considering China’s historical regulation of the value of their exchange rate, allowing a volatile and non-fixed form of currency to flood the market would go against decades of economic policy. Late in 2017, the CPC banned all forms of cryptocurrency-based fundraising (i.e. initial coin offerings), which businesses typically use to raise capital, and ordered “Chinese cryptocurrency exchanges to cease trading”. Then, in another effort to prevent mainland customers from accessing crypto assets, the state blocked access to “more than 120 offshore cryptocurrency exchanges” at the end of 2018 and even allegedly began taking down news accounts that would typically report on cryptocurrency.

Unmistakably, there are some parts of blockchain the Chinese state finds more attractive than others. And as Forbes’ blockchain expert Steven Ehrlich pointed out, this “retrofitting” of a breakthrough technology for its own market is a strategy that China has used in the past. Most notably, is the strikingly similar approach the state previously took with tech platforms Google and Facebook. China’s hostility towards cryptocurrency makes their reception of blockchain all the more significant, because it is an adoption and adaption of an already existing form of technology in a manner markedly different with the global norm. One of the most commonly toted features that blockchain brings—decentralization—has no place in China’s plans for the technology industry.

While the strategy that the city of Shenzhen has taken up with blockchain is very similar those of many banks and financial institutions in the United States, the adoption of blockchain to monitor parolees is one that is largely unprecedented. And though there have not been any reports of blockchain being used on civilians in regions like Xinjiang—where ethnic minorities are currently being interned, surveilled, and oppressed—striking parallels exist between parolee monitoring with blockchain and the surveilling of Uighurs with facial recognition and artificial intelligence. Also to note are the potential use cases of blockchain in furthering China’s social credit system by creating a record system that is both immutable and immediately traceable.  According to their white paper, blockchain startup THEKEY has already used the personal identification data of 210 million people in 66 cities supplied by the Chinese government.

As mentioned, parts of China’s strategy closely mirror that of the United States’. Many financial institutions in the United States, and even multiple departments of the government, are already employing the technology in very similar means, but with the greatest focus on being able to “securely store and process data.” As the hacking of Equifax in 2017 has shown, data breaches have massive financial and social consequences for both companies and customers alike, and methods to secure such data would be crucial for the success of large-scale business. Thus, it is of no surprise that both public and private bodies across the world are beginning to adopt blockchain-based strategies. The only difference with China is the extent to which such adoption is integrated into the state’s legal framework.

Ultimately, China’s welcome of blockchain isn’t exactly with open arms, as it stands in the foreground of a blatant distrust of cryptocurrency, but blockchain’s significance to the Chinese state is undoubtedly growing. Their current use of blockchain touches on everything from legal evidence and punitive supervision to data security for the state’s financial bodies, and as its technological development continues, its potential for the Chinese government will only increase. But with technology as new as blockchain and the unexplored nature of legal integration, we are left to wonder exactly what precedent China plans to set.

Sharon Li can be contacted at sharon.li@yale.edu.

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