Blockchain opportunities and challenges in China

Written by Kapronasia || March 31 2023

A commentary in collaboration with Banking Circle.

While many countries are enthusiastic about blockchain, or distributed ledger technology (DLT), China is in a class by itself. It has a commanding share of blockchain patents, many companies operating in the space and related investment that is growing exponentially. China’s blockchain investment surged from US$14.4 million in 2017 to USD US$930 million in 2021, according to the research firms IDC and the China Commercial and Industrial Research Institute.

At the same time, DLT in China enjoys unusually strong support from the central government. “We must take the blockchain as an important breakthrough for independent innovation of core technologies,” Chinese President Xi Jinping said in October 2019, urging the use of DLT for healthcare, anti-counterfeiting, food safety and charities, among other things.

Given blockchain’s immutable qualities, Xi sees it as enabler of greater security in industries that have historically suffered from a lack thereof as well as a means of advancing the country’s broader technological prowess. Blockchain certainly shows potential to fulfill some of these objectives for China.

However, whether China can build a thriving blockchain industry while keeping it distanced from cryptocurrency remains an open question, as is how the relatively minor role – at least thus far – of the private sector could affect the competitiveness of China’s DLT projects.

A numbers game

By several measures, China has the lion’s share of blockchain patents. As of September 2022, China accounted for 84% of blockchain patents globally, according to the country’s Ministry of Industry and Information Technology. From 2015 to mid-2021, China had more than a 60% share of blockchain patent applications, according to a study by think tank 01Caijing and patent consultancy PatSnap.

China does not just have a lot of patents: It has many blockchain enterprises too. There are more than 1,400 such firms currently operating in China, according to a white paper published by the China Academy for Information and Communications Technology. China and the U.S. account for 52% of blockchain companies globally.

However, the amount of Chinese investment in blockchain is relatively small compared to the country’s share of related companies and patents. Expected to reach US$1.4 billion in 2022 (up from US$930 million the year before), China’s blockchain investment accounts for about 20% of the global total, according to the communications consultancy APCO Worldwide.

One likely reason for this discrepancy is that China has to date focused on a permissioned blockchain divorced from cryptocurrency in line with its ban on decentralized virtual currencies. This policy places constraints on blockchain projects in China that do not exist elsewhere.

Another is that high-level government support for blockchain in China has resulted in hype about DLT that does not always correspond with reality. In 2019, state television reported on the huge number of bogus blockchain firms operating in China, at the time estimated at close to 30,000, or about 90% of the country’s total number of DLT companies. Some of them were involved in pyramid schemes similar to those that have afflicted the cryptocurrency sector.

Unconventional wisdom

China has a history of adapting new technologies to its national conditions in ways that surprise outside observers, including the internet, messaging apps and mobile payments, to name a few. While the idea of government using blockchain devoid of cryptocurrency in a top-down manner might seem unusual, it makes perfect sense from a Chinese perspective.

Blockchain is sometimes criticized for being a solution in search of a problem, but in China’s case, its leaders are eager to explore how it can help solve specific challenges they face, whether it is ensuring the integrity of a food supply chain, preventing and/or foiling counterfeiters, or mastering so-called “core technologies” viewed as vital to the nation’s future.

To that end, in February, China’s Ministry of Science and Technology approved the establishment of the National Blockchain Technology Innovation Center, which will be based in Beijing. It will focus on major use cases related to the national economy and personal livelihoods, and aim to make blockchain a “foundation for China’s digital infrastructure,” according to Beijing Youth Daily.

This government-led effort follows the establishment of the Blockchain-based Service Network (BSN) several years earlier, which is also state-backed and aims to serve as a one-stop shop for the deployment of blockchain technology in the cloud for businesses or government agencies – a process that might otherwise be expensive and slow.

Harnessing private sector potential

One factor that could limit the global adoption of China’s blockchain initiatives is the dominant role that Beijing has in mind for the government. While government support boosts the prospects of success domestically, the international market has different dynamics. On the one hand, data security outside of China is handled differently. On the other, entrusting state-owned companies not recognized as innovators to take leading roles in such a competitive industry could be counterproductive. If the private sector is relegated to a supporting role, it will be hard for projects like the BSN to be competitive internationally outside of some specific emerging markets.

A model worthy of Beijing’s consideration is the public-private partnership used in Singapore’s Project Ubin, in which the Monetary Authority of Singapore (MAS) teamed up with the Singaporean sovereign wealth fund Temasek and J.P. Morgan to develop next-generation cross-border payments infrastructure with blockchain.

Project Ubin has already enjoyed some success: The blockchain-based payment platform Partior, which is backed by J.P. Morgan, DBS, Standard Chartered and Temasek, has its genesis in the project. Partior is working with 60 banks in 15 jurisdictions, CEO Jason Thompson told Ledger Insights last November.

Meanwhile, in September, the BSN Spartan Network was launched with the support of HSBC. It is the international version of the BSN, and professes to be open source, free, and anonymous for anyone to install. Within its data center, the nodes of several non-cryptocurrency public chains can be installed: Spartan I Chain (powered by NC Ethereum), Spartan II Chain (powered by NC Cosmos) and Spartan III Chain (powered by NC PolygonEdge).

At present, BSN Spartan Network’s international footprint is growing steadily in Africa and the Middle East thanks to a partnership with the Dubai-based fintech firm Singularity Innovations. The two companies will focus on offering international interoperable enterprise blockchain solutions to the region in industry segments such as supply chain, carbon credits and personal data management.

If BSN Spartan Network’s partnership with Singularity Innovations bears fruit, China could gain a foothold for its first big global blockchain endeavor in two regions where it already has strong economic ties with many countries. However, it remains to be seen if the absence of crypto will limit the appeal of the network in some countries, especially as nations such as the United Arab Emirates, Qatar and Nigeria move to integrate cryptocurrency into their existing financial systems.

Unless China changes course on its crypto ban, its approach to digital assets will increasingly differ with many of its key economic partners.

This commentary was written in collaboration with Banking Circle and originally appeared on Banking Circle.