China’s Big Blockchain Bet Aims for an Early Advantage Over the U.S.

December 16, 2019, 1:00 PM UTC

Any talk of the on-going “tech Cold War” between the U.S. and China includes the countries’ positions in the fields of artificial intelligence, 5G networks, quantum computing, and semiconductors.

Meanwhile, the development of blockchain, the distributed ledger technology that underpins Bitcoin and has potential uses in cross-border payments, supply chain management, and manufacturing, has not received the same kind of geopolitical scrutiny.

Proponents say blockchain will revolutionize industries across the board, while skeptics point to difficulties with scalability and question whether the technology can live up to its potential. China, for its part, seems to have its mind made up on blockchain’s benefits. The government there is spearheading a national effort to develop blockchain-powered technology so it can gain an early edge in the field.

Blockchain buzz

“There’s a lot of hype right now [in China] around the whole blockchain concept. That means money will flow into startups and probably a lot of them will fail, but there’s at least a lot of hype and excitement,” says Paul Triolo, practice head of geo-technology at Eurasia Group. “It seems like there’s a conference every day now in China on blockchain.”

Since Chinese leader Xi Jinping called for an acceleration of blockchain development in China at a Politburo study session in October, Triolo says, “suddenly everybody’s talking about blockchain.”

More than 500 blockchain-related projects have been registered with the Cyberspace Administration of China, the central government Internet regulator, since March.

In the tropical island province of Hainan, which became China’s 12th free trade zone in 2018, the government launched a “blockchain pilot zone” with a $142 million fund to finance blockchain companies, part of a larger plan to turn the region into a national technology hub.

“After [Xi’s] announcement I’m expecting to see more and more blockchain-based applications coming out of the mainland China market,” says Duncan Wong, CEO and founder of Hong Kong-based blockchain startup CryptoBLK.

Crypto crackdown

The government push for blockchain innovation does not include cryptocurrencies like Bitcoin, and an ongoing, nationwide crackdown on cryptocurrency exchanges in China came on the heels on Xi’s blockchain endorsement.

“Investors must not treat virtual currencies the same as blockchain technology. The issuance and trading of virtual currency contain multiple risks, including fictitious assets, operation failure and speculation,” the Shanghai headquarters of China’s central bank said on Nov. 22.

Leo Cheng, co-founder and CEO of Machi X, a Taipei-based startup that uses blockchain to register music copyright ownership and automate royalty distribution, says the current crackdown on private exchanges is “a great step forward for the industry.”

“It creates further regulatory clarity, and it allows projects that are solid and solving real problems with blockchain in a compliant manner like ours to continue to proceed forward,” Cheng says.

Some of China’s biggest technology companies, like e-commerce giants Alibaba and JD.com, have already developed blockchain platforms. JD uses blockchain to track free-range chickens so consumers can access food supply and food safety data. Alibaba has also used blockchain to track food supply. Both companies have made their platform services available for other businesses to use.

“[Xi] has given the sort of go-ahead or blessing to blockchain, but it’s still not clear what real applications are going to be developed that are broader than things like food supply and food security,” Triolo says.

Triolo adds that it may still be “pretty early days” for blockchain in China, but the nascent technology appeals to the government because it represents a chance for China to become self-sufficient in a technology that may be globally significant in the near future.

Uncharted territory

Winners and losers have already emerged, to some degree, in established technologies. China, for instance, has long struggled to develop a homegrown semiconductor industry; it spends more money importing chips than it does on importing oil. With A.I., China is experiencing a brain drain as the U.S. snaps up top-tier talent. Blockchain, meanwhile, represents uncharted territory; no country has a clear advantage and China is not reliant on another country for access to software or hardware.

In the Politburo study session on blockchain, Xi said that “more efforts should be made to strengthen basic research and boost innovation capacity to help China gain an edge in […] the emerging field,” according to a recap of the speech by state-run news agency Xinhua.

“Blockchain isn’t a technology or capability that is uniquely associated with the U.S., or that the U.S. is perceived to have a lead in, so I see it more as an interesting new technology where China has the chance to not be dependent on outside sources of technology like they’re going to remain for things like software and semiconductors,” Triolo says.

The U.S. government has no federal policy on blockchain technology, nor has President Donald Trump publicly espoused its importance, as Xi did. A six-hour congressional hearing back in October on Facebook’s blockchain-powered digital currency Libra—the most prominent showcase yet of U.S. officials’ attitude towards blockchain—did not go well. The House Financial Services Committee bombarded Facebook’s Mark Zuckerberg with questions that revealed their skepticism of the embattled tech company and its founder, and voiced concerns that Libra would challenge the U.S. dollar in the global financial system. Libra has since languished in regulatory limbo.

Whereas A.I. has obvious military applications and semiconductors are essential to modern commercial tech like smartphones and laptops, blockchain is a more “diffuse” technology, harder to understand, and still lacks a clear-cut, widespread application, which might explain why blockchain hasn’t become a focal point of the U.S.-China tech rivalry, Triolo says.

“Blockchain is sort of an interesting niche, and I don’t think it’s seen as a huge part of the U.S.-China technology competition also because China has cracked down on [cryptocurrencies],” Triolo says. “I think it just has a different sort of place, if you will, in the U.S.-China tech competition.”

Cheng is bullish on blockchain, saying that it will be a “fundamentally transformative technology” akin to the effect of the Internet on the technological landscape in the beginning of the millennium, though he adds that he thinks the impact will be “a lot less visible to [front-end] users.”

The Chinese government has certainly spotted its potential. “I think we’re still in the early days of watching,” Triolo said. “[C]learly in China the leadership has said, ‘Go out and unleash blockchain.'”

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