Some of my favorite speaking engagements in recent months have been on blockchain development. Blockchain technologies are inherently international, and China has had its share of news lately. I have talked about China and web3 from both business and national security perspectives. These new technologies offer challenges and opportunities both inside and outside of China. This post focuses on the for-profit blockchain development and opportunities in China.
1. How do most authorities view the development of Blockchain (Web3)?
In most countries, including the United States and China, disruptive technology of this caliber is often inextricably intertwined with key sovereign state issues, including trust in government, social stability, monetary and fiscal policy, national security, high-tech infrastructure, and poverty alleviation.
All governments want their citizens to engage in entrepreneurial activities that will increase the size of the country’s economic pie. Governments also want to ensure that transactions that should be taxed are reported and taxed. Governments without a healthy tax base offer fewer of the key services mentioned in the previous paragraph.
And governments want to ensure that national and international criminals cannot access legitimate financial systems to launder their ill-gotten gains, regardless of the currency or cryptocurrency those funds reside in or move through. Governments also want to ensure that their citizens are not cheated or defrauded. China’s government shares all these sentiments.
2. How do China’s regulators view the development of Blockchain (Web3)?
China’s regulators have a love-hate relationship with blockchain technology because, like much technology deployed in China, it represents both an economic growth opportunity and a potential tool for government oversight. None of these reasons are inherently suspicious or alien to the way other governments view blockchain technologies, including Western governments.
But in China, social stability via state supervision and intervention comes first. Virtually all laws in China have a conviction, reserving the government’s right to intervene in anything or deal with anyone deemed to “endanger national security or public safety” (安全国家安全，公共安全).
3. Yes, China’s regulators need blockchain innovations
On the one hand, China’s economic slowdown in recent years, partly due to the Trump administration’s trade war. It was followed by the Covid-19 pandemic and especially China’s internal zero-tolerance policy. China must move on the right side of its declining economic growth curve. China has been focused on modernizing its economy and country for decades, but this process was significantly accelerated by the announcement in 2015 of the Made in China 2025 plan.
Blockchain technologies do not explicitly fit into the 10 key industries championed in the 2025 plan, but they fit perfectly within China’s stated goals of continuous innovation and becoming the dominant global superpower by 2049 in all high-tech areas.
The number of registered trademarks and patents are some of the key indicators by which Chinese government bureaucrats are evaluated and rewarded. A blockchain-related IP registration in agricultural technology that improves track and trace systems or fertilizer application history is valuable and fits into the framework of the Made in China 2025 plan.
So does a permissioned blockchain that enables AI development in any number of the core technologies: electric cars and new energy vehicles, next-generation IT and telecoms, aerospace engineering, high-tech maritime engineering, advanced rail infrastructure, emerging biomedicine, advanced electrical equipment or new synthetic materials. Blockchain technology can and is used in all of these focus industries.
4. But China’s regulators loathe cryptocurrencies and probably always will
Cryptocurrencies are one of the exceptions to web3 development in China, where the government has predictably taken an openly hostile position.
In September 2021, a who’s who of Chinese authoritative bodies issued the Notice on Further Prevention and Management of the Risk of Speculation in Virtual Currency Transactions (see here). It was signed by all agencies that matter in China: the Supreme People’s Court, the Central Cyberspace Administration, the People’s Bank of China, the Supreme People’s Procuratorate, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission , the Securities Regulatory Commission and the Foreign Exchange Bureau.
This hard line is largely due to the decentralized nature of defi (decentralized finance) and the technology’s potential to move funds out of China or engage in criminal activities, such as money laundering and garden variety fraud (with a blockchain flavor). Don’t expect the Chinese government to change its tune on cryptocurrencies, but that doesn’t mean there aren’t plenty of other viable opportunities to engage with China on blockchain technologies.
5. What are Chinese entrepreneurs doing in Blockchain (Web3)?
As my new favorite China blockchain reporter wrote recently, Chinese degenerates (web3 participants) have taken one of three positions in the ever-emerging blockchain ecosystem: (1) remain anonymous, (2) continue to build under the leadership of academic connections in the name of blockchain research, or (3) move founders outside of China but keep some development teams in China.
Predictably, many Chinese blockchain projects operating in daylight focus on safer areas such as NFTs and gaming and avoid anything that smacks of cryptocurrencies, tokens or coins. Even NFTs in China are sometimes referred to as digital collectibles, focusing on their affinity for .jpgs rather than fully-fledged digital assets to avoid regulatory scrutiny.
6. Opportunities for blockchain businesses in China and with Chinese in the world
I am first and foremost a business lawyer, so I spend my time helping entrepreneurs find the best way to move forward with their vision. For those companies that are already in China or want to sell in China or to the Chinese diaspora, you should not abandon time-tested market development strategies.
In short, this means first understanding the Chinese consumer market you are targeting and then building and leveraging loyalty to your superior products or services through traditional channels. Only then should you add web3 technologies to your business plan. Look at Starbucks’ recent announcement about the enhancements to its customer loyalty program, powered by NFTs.
Starbucks’ CMO said: “The company wanted to invest in this area, but not as a ‘stunt’ side project, as many companies do. Rather, they wanted to find a way to use the technology to improve the business and expand the existing loyalty program.”
This is exactly the kind of opportunity that smart foreign brands will deploy in China and to Chinese consumers in their key markets. China’s market is and will continue to be highly receptive to blockchain technologies that are linked to existing successful brands.
