China has taken a mixed approach to the blockchain industry. While it has taken a strong stand against the use of cryptocurrencies, it has shown great interest in developing the underlying technology. This is apparent in its 13th Five-Year Plan where blockchain development is a key goal. The Chinese government has invested billions in blockchain research and has filed more blockchain patents than any other country. It remains to be seen whether the government’s authoritarian and censorship tendencies can be reconciled with the decentralised nature of the technology.
Cyberspace Administration of China (CAC) — Blockchain Regulation
In February 2019, the Cyberspace Administration of China (CAC) introduced new regulations on blockchain technology, enforcing new requirements for blockchain service providers, which aim to prevent them from bypassing internet censorship rules. The Blockchain Information Service Management Regulations requires such businesses to not only register users with their actual names and national identity but also to delete any data stored that the Chinese authorities consider infringing on existing national laws. Failure to comply with the new rules could lead to fines and prosecution. CAC has claimed that the regulations form part of its objective to strengthen the blockchain industry by promoting industry self-discipline and improving industry standards.
People’s Bank of China (PBoC) — Blockchain-based trade finance platform
In September 2018, the People’s Bank of China (PBoC) provided its support to a blockchain-based trade finance platform. The Guangdong, Hong Kong and Macao Dawan District Trade Finance Blockchain Platform aims to provide a blockchain-powered ecosystem for cross-border trading across Guangdong, Hong Kong, and Macau Bay Area. The platform is reportedly being jointly promoted and organised by the PBoC’s Central Bank Digital Currency Research Lab and the Central Bank Shenzhen Central Branch. The platform leverages the transparent and immutable properties of blockchain to facilitate a regulatory system for trade finance that achieves dynamic and real-time monitoring of various financial activities. The PBoC hopes it will boost the efficiency of interbank transactions and help SMEs access a wider range of financing tools, such as asset-backed securities, as data can be easily shared across participants via a distributed network.
Food and Drug Administration of the Chinese Chongqing Yuzhong District
Most of the blockchain implementation in China has occurred at the local government level, such as in supply-chain management and tax collection as well as food and drug safety. The Food and Drug Administration of the Chinese Chongqing Yuzhong District has been testing blockchain technology for strengthening the supervision of food and drug quality assurance with better traceability of the product life cycle and anti-counterfeiting measures. The company developing the technology, PrimeNumber Chain Technology, believes that the system will improve the regulatory measures of the government and the supervisory efficiency.
Hangzhou’s Internet Court Ruling
In a move that seems to indicate the Government is softening its stance on Bitcoin, Hangzhou’s Internet Court, on the 17th of July 2019, ruled that Bitcoin, and crypto in general, ought to be considered legal “virtual Internet property” and deserves to be treated like other assets. The judge determined that Bitcoin has value, scarcity and disposability, bringing it under the scope of Chinese property laws.
The two-year-old court is designed to handle online disputes, and initially stemmed from arguments over online shopping, lending, infringement of digital copyright, and domain-name disputes. It remains unclear how this ruling will affect the country’s policy towards the blockchain space.
As a highly sophisticated global financial hub, it is perhaps unsurprising that, as opposed to the rest of China, Hong Kong has taken a friendlier approach to cryptocurrencies. In November 2018, its Securities and Futures Commission (SFC) issued a statement, clarifying where existing regulations apply to crypto-assets and stating that it is exploring formally regulating the “platform operators” i.e. exchanges.
As far as the existing regulatory regime is concerned, virtual assets products and related activities may fall within the SFC’s ambit if they come under the definition of “securities” or “futures contracts”. Further, all funds that invest more than 10% of their portfolios in virtual assets must licensed by the SFC.
The statement goes on to explain that the SFC is also setting out a conceptual framework for the potential regulation of virtual asset trading platforms in this statement, with a view to exploring (and forming a view after the exploratory stage) whether virtual asset trading platforms are suitable for regulation. If the SFC is minded to license any virtual asset trading platforms, it is proposed that the standards of conduct regulation for virtual asset trading platform operators should be comparable to those applicable to existing licensed providers of automated trading services.