Some of my favorite speaking engagements the past several months were on blockchain developments. Blockchain technologies are inherently international, and China has had its share of news lately. I have spoken on China and web3 from both business and national security perspectives. These new technologies present challenges and opportunities both inside and outside China. This post focuses on the for-profit blockchain developments and opportunities in China.
1. How Do Most Governments View Blockchain (Web3) Developments?
In most countries, including the U.S. and China, disruptive technology of this caliber is often inextricably intertwined with key sovereign state issues, including government trust, social stability, monetary and fiscal policy, national security, high tech infrastructure, and poverty alleviation.
All governments want their citizens to engage in entrepreneurial efforts that will increase the size of their 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 provide fewer of those key services mentioned in the prior paragraph.
And governments want to ensure that domestic and international criminals cannot access legitimate financial systems to wash their ill-gotten funds, no matter the currency or cryptocurrency those funds reside in or move through. Governments also want to ensure that their citizens are not being duped or defrauded. China’s government shares all of these sentiments.
2. How Do China’s Regulators View Blockchain (Web3) Developments?
China’s regulators have a love-hate relationship with blockchain technology because, like much technology deployed in the PRC, it represents both an economic growth opportunity and a potential tool for government oversight. Neither of these reasons is inherently suspect or foreign to the way other governments view blockchain technologies, including Western governments.
But in China, social stability via government oversight and intervention comes first. Virtually every law in China has the catchall carveout, reserving the government’s right to intervene in anything or deal with anyone who is deemed to be “endangering national security or public security” (危害国家安全，公共安全).
3. Yes, China’s Regulators Need Blockchain Innovations
On one side, China’s economic slowdown the past several years, due in part to the Trump Administration’s trade war. That was followed by the Covid-19 pandemic and especially China’s internal zero tolerance policy. China needs to right-side its declining economic growth curve. China has been focused on modernizing its economy and country for decades, but this process was markedly accelerated by the announcement in 2015 of its Made in China 2025 plan.
Blockchain technologies do not explicitly fit into the 10 key industries championed in the 2025 plan, but they fit squarely within China’s stated goals of continuous innovation and becoming the dominant global superpower by 2049 in all high tech areas.
The number of trademarks and patents registered are some of the key indicators upon 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 in the Made in China 2025 plan framework.
So does a permissioned blockchain that facilitates AI development in any number of the core plan technologies: electric cars and new energy vehicles, next-generation IT and telecoms, aerospace engineering, high-tech maritime engineering, high-end rail infrastructure, emerging bio-medicine, advanced electrical equipment, or new synthetic materials. Blockchain technology can and is being applied 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 developments in China where the government has predictably taken an overtly hostile position.
In September 2021, the who’s who of Chinese authoritative bodies issued the Notice on Further Preventing and Dealing with the Risk of Speculation in Virtual Currency Transactions (see here). It was signed by every agency that matters 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 hardline stance 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 many 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 degens (web3 participants) have taken one of three positions in the still nascent blockchain ecosystem: (1) remain anonymous, (2) continue building under the aegis of academic connections in the name of blockchain research, or (3) move founders outside China but keep some development teams in China.
Predictably, many Chinese blockchain projects that operate in the daylight focus on safer areas like 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 with .jpgs instead of fully timbered 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 proceed with their vision. For those companies who are already in China or want to be selling in China or to Chinese diaspora, you should not abandon time-tested market development strategies.
In plain terms, 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 look to add web3 technologies to your business plan. Look at Starbucks’ recent announcement regarding its improvements to its customer loyalty program, fueled by NFTs.
Starbucks’ CMO said, “the company wanted to invest in this area, but not as a ‘stunt’ side project, as many companies are doing. Rather, it wanted to find a way to use the technology to enhance its business and expand its existing loyalty program.”
This is exactly the type 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 largely receptive to blockchain technologies that are tied to existing successful brands.