Will the China of tomorrow run on the technology behind bitcoin?

Jane Cai

Blockchain, a new technology most associated with cryptocurrencies like bitcoin, looks set to play a major role in China’s governance after receiving an endorsement by Chinese President Xi Jinping, observers say.

Speaking at a study session for members of the Politburo last month, Xi said blockchain would play “an important role in the next round of technological innovation and industrial transformation”, suggesting it will be central to the country’s race against the United States for technological supremacy.

According to a report by Xinhua, Xi called for China to become a world leader and “rule maker” in the field, saying blockchain had applications in the financial, manufacturing and public sectors.

While he did not mention state governance as a possible application, the Communist Party and governments at all levels are likely to see Xi’s comments as a call to action.

People’s Daily, the party’s mouthpiece, ran an editorial on its website days after Xi’s speech, saying “officials and party cadres must understand that the top leadership attaches high importance to blockchain technology due to the prospects of its application in the real economy, people’s livelihood and the state governance”.

Since then, state media has been bombarding the public with articles about blockchain and the need to embrace the technology.

On November 24, authorities in Deqing, a small city in the eastern province of Zhejiang became the first in the country to host an international blockchain summit. Zhang Feng, chief engineer at the Ministry of Industry and Information Technology, said in his keynote speech at the event that China would seek to establish a national committee for blockchain standards and prioritise research into developing applications for it.

I worry that people have oversold blockchain to Xi as a magic cure-all

James Andrew Lewis, Centre for Strategic and International Studies

Mu Rongping, director of the innovation and development research centre at the Chinese Academy of Sciences said blockchain was likely to become a key feature in China’s future governance.

“China has been conducting governance modernisation for two decades – from the digitalisation of information to the utilisation of big data and artificial intelligence,” he said.

“The potential is huge for the use of new technologies, such as in areas of public security, public transport, crime investigation and anti-corruption campaigns.

“Blockchain could open a new chapter on the integration of governance and technology, if proved a reliable technology.”

China comes down hard on cryptocurrencies

China’s 13th five-year plan for 2016-20 stresses the role of artificial intelligence and blockchain in the development of the country’s strategic technological advantage.

Although Beijing has cracked down on the mining and trading of cryptocurrencies, it has never outlawed blockchain as a technology. Rather, local governments have set up industrial estates to attract blockchain start-ups, in response to the call to support innovation.

Xi Jinping says blockchain has applications in the financial, manufacturing and public sectors. Photo: Xinhua

Chen Jing, a researcher with the Beijing-based Fengyun Institute of Science, Technology and Strategy said that blockchain was a complicated concept to understand but that specialists were trying to help officials understand its benefits.

“Details of the technology may be complicated, but business insiders and experts have been making efforts to educate government officials at various levels for years. Its advantages as a decentralised, transparent and immutable system are not difficult to understand,” he said.

“While officials are eager to embrace innovation and companies are keen to develop solutions to satisfy the needs of governments, we’ll probably see wider applications in governance in the coming years if the technology turns out to be reliable.”

China dampens blockchain fever with cryptocurrency trading crackdown

More than 500 blockchain projects have been registered with the Cyberspace Administration of China, which in January required every entity working with the technology to register their projects for supervision.

Of the registered projects, most relate to financial applications like trade finance, asset management and cross-border payments.

The three tech giants Baidu, Alibaba – which owns the South China Morning Post – and Tencent are behind many of the projects, though there are also dozens of government-led initiatives and schemes, in areas ranging from communications to land development.

China has also introduced blockchain in building the Xiongan New Area, Xi’s dream city transformed from dusty plains in the northern province of Hebei. According to Xiongan Group’s website, blockchain is “an important infrastructure” of the area.

Since the end of 2017, blockchain has been used in forestation, a public service centre, floodway construction and several other projects, it said.

Xiongan officials were not available to comment on the latest blockchain applications.

More than 500 blockchain projects have been registered with the Cyberspace Administration of China. Photo: Xinhua

China’s prosecutors used blockchain technology in the development of their e-proof cloud platforms in 2017. It is used to verify the process of obtaining e-proofs and storage, Cai Xin, from Hubei People’s Procuratorate, said in a recent article in Procuratorial Daily.

Zeng Liaoyuan, an associate professor of information and communication engineering at the University of Electronic Science and Technology of China, said the application of blockchain for governance was still in its early stages.

“Government spending and investment in governance applications are limited,” he said. “However, the speech from the top leader will boost interest in the area as well as the huge potential of a market that could be worth trillions of yuan,” he said.

The use of blockchain could be used to battle corruption, make it easier to preserve proofs and trace the origin of transactions, all of which would be of use in China’s scandal-ridden legal, financial and business sectors, he said.

The party and the state seem determined to frame the terms of engagement before the application of this technology becomes more commonplace

Sourabh Gupta, policy specialist at the Institute for China-America Studies

Sourabh Gupta, a policy specialist at the Institute for China-America Studies, an independent think tank in Washington, said the fundamental driver of the party’s embrace of blockchain was to “stay ahead of – not fall behind – the regulatory curve”.

“The party and the state seem determined to frame the terms of engagement before the application of this technology becomes more commonplace in the public and private marketplace, he said.

“Being China, the role of the government will however not just be limited to extending out the regulatory perimeter. The state will be an active purveyor of blockchain technology in its governance systems.”

Blockchain endorsement from Xi Jinping could lead to fraud and speculation

Daniel Castro, vice-president at the Information Technology and Innovation Foundation in Washington, said modernising governance would give Xi more control over China.

“Xi’s anti-corruption campaign has certainly ensnared many people. Part of this campaign appears to have had the impact, whether intentional or not, of centralising state power. Normally, blockchain has the opposite effect – the technology usually is used to reduce the power of a central actor and empower users,” he said.

“However, in this case, the development of a national blockchain infrastructure may take power away from individual government agencies and administrators.”

For example, using blockchain could reduce corruption within local tax authorities or agencies providing various government payments, as their records would be subject to greater oversight and scrutiny, Castro said.

That oversight, in turn, shifted power away from the officials, who previously may have been able to exercise more discretion in their decisions, which was often a prerequisite for corruption, he said.

In the past, official policies might be subverted, but with blockchain and the subsequent transparency and immutability of records, practice must match policy, Castro said.

“So it would make sense to emphasise the use of blockchain as part of the country’s anti-corruption efforts, as this will indirectly give Xi greater control over the administrative state.”

According to a report published in January by China Science Daily, the country’s law enforcement agencies and even intelligence units are already using blockchain technology to prevent leaks.

“From data clues in e-governance systems, we make judgments on whether a party member’s faith is fading, or if his enthusiasm at work is running low,” Fang Jinyun, a researcher at the computer institute under the Chinese Academy of Sciences, was quoted as saying.

He has been involved in research involving the use of information technology in the area of party discipline and supervision since 2009, the report said.

But James Andrew Lewis, a senior vice-president at the Centre for Strategic and International Studies in Washington, said implementation of blockchain technology could be a problem.

“The theory of blockchain is that you have distributed ledgers that make fraud much more difficult,” he said.

“The theory is sound, but it depends on the implementation, and it will be difficult to rapidly transition an economy as big as China’s – maybe you could focus on big state-owned enterprises and big public projects to start.

“I worry that people have oversold blockchain to Xi as a magic cure-all,” he said.

Is China set to launch a digital currency this autumn?

Steve Tsang, director of the SOAS China Institute at the University of London, said although Xi was keen to apply blockchain he might face some resistance among lower ranked officials.

“I can see Xi wanting to use blockchain technology to tighten party and government control across the board, including potentially in the anti-corruption and party rectification drive,” he said.

“But I suspect the rest of the party may be less willing to go along with this, and other senior leaders may try to slow the process down or avoid doing so for as long as possible.

“If the anti-corruption campaign were to be run by AI and blockchain then it would not be possible to be selective in taking down particular corrupt ones rather than taking them down in a summary fashion. This being the case, I find it hard to see this being pushed to the logical conclusion in the application of these technologies.

“Without full transparency and without democratic accountability, the risk of abuse in adopting such technologies are high,” he said.

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