Analysis

Taming the Dragon: China’s First Attempt to Regulate the Crypto Industry

Last week, the Cybersecurity Administration of China published a draft of new regulations for the blockchain industry.

In its glory days, China dominated the cryptocurrency trading and mining industries. More than three-quarters of the world’s mining hashpower was in China; an eye-popping 95 percent of all BTC trading took place in the country.

All of that changed in 2017 when the Chinese government set a sweeping set of bans in motion. Suddenly, Chinese cryptocurrency exchanges, miners, and holders were sent into a wave of confusion as the Chinese government banned ICOs, followed by domestic cryptocurrency exchanges.

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Despite the Chinese government’s harsh attitude toward cryptocurrency, the Chinese blockchain industry appears to be thriving. HackerNoon reported that on June 4 of this year, Chinese Central Television broadcast an hour-long special segment on the blockchain industry in China that featured important industry figures as well as government regulators.

Over the course of the segment, blockchain was said to be “10 times more [valuable] than the internet,” and was described by President Xi Jinping as being part of a wave of technological revolution that also includes artificial intelligence, quantum computing, the internet of things, and mobile communication.

Now, the Chinese government is seeking ways to regulate the blockchain industry that it has so lovingly nurtured. Will the regulations successfully protect the industry and its users, or will they stifle industry growth?

Technological Innovation in Blockchain is Strong in China

Desmond Marshall, Managing Director of The Floor, told Finance Magnates earlier this year that indeed, despite the Chinese government’s bearishness toward crypto, the blockchain industry is stronger than it ever has been.

“China has had quite a big boom in the tech sector… where people are looking very strongly into blockchain technology,” he explained. “Of course, the popularity of Bitcoin helped in terms of people understanding what blockchain is. In terms of technology, China is actually very welcoming in terms of how these things are being applied.”


He added that the financial and regulatory environment is in fact so friendly towards blockchain that the country has become a hotbed of innovation. “From the government itself to local provinces, down to new startup companies–pretty much anything you can think of, they have already thought about or are already in the process of developing blockchain technology to be applied in those areas,” he said.

If the Chinese government is so blockchain-friendly, then why is it so crypto-hostile? Some analysts believe that China’s restrictive stance toward cryptocurrency is an attempt to protect a number of economic initiatives (i.e. the One Belt One Road policy) that are dependent on control over the international flow of money.

A Newly Drafted Regulation Could Stifle the Blockchain Industry if Passed Into Law

However, the blockchain industry is facing a new regulation that may stifle its growth. Last week, the Cyberspace Administration of China (CAC) released a draft of a policy that would require users of any blockchain service to register with their real names and national ID numbers, essentially stripping blockchain services of their ability to be used anonymously.

If the draft gets passed into law, blockchain services will also be required to register with the CAC within ten days of starting to offer their services to the public. Companies would be required to provide their names, types of services, server addresses, and industry fields. The CAC would then make this information publicly available, and conduct reviews of the information on a yearly basis.

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Blockchain companies will be required to retain backups of user data for six months, and to provide them to law enforcement officials when requested. Additionally, users who provide false identification information will have their accounts restricted or shut down completely.

The draft also prohibits blockchain companies from using their technology to “produce, duplicate, publish, and disseminate” any information or content that is prohibited by Chinese laws. This would essentially end the use of blockchain technology to circumvent Chinese censorship laws.

One recent of this included the use of the Ethereum blockchain to store information regarding a #MeToo scandal in the country’s pharmaceutical industry. Information stored in a blockchain cannot be removed or edited; it is unclear exactly how the Chinese government plans to enforce this rule.

Regulations Would Affect Masternodes on Some Blockchain Networks, Could Grant the Government Complete Control Over the Sector

If passed into law, the draft will also affect “masternodes” or “supernodes” on a number of different blockchains. This was pointed out in a post by Jiang Zhuo’er, founder of the BTC.TOP mining pool, over the last weekend: “for example, each of the 21 supernodes of the EOS network is operated by a company or an individual. As such, they must be fully compliant [with this regulation].”

It’s still unclear when (and if) the draft will be passed into law. If the draft does make it onto the books, however, it will be the country’s first set of regulations for the blockchain industry.

What’s perhaps most notable about the draft is that if passed into law, it will legally classify blockchain companies as entities offering information services to the public. According to BitRates News, this classification will essentially grant the Chinese government complete control over the sector.

While the CAC alleges that the draft has been designed to protect citizens’ rights, to promote the growth of the blockchain sector, and to standardize blockchain information services. However, many believe that the increased censorship and control that the draft has proposed will have opposite effects.

Some Believe that Regulations Arent’ Unreasonable–But they Will Place a New Financial Burden on the Industry

CEO of DropChain Billy Chan thinks that the regulations may not necessarily be a bad thing for the industry. “It’s not fair to say the government is stifling blockchain. Instead, they’re trying to hold people accountable” he said to TechNode, adding that the Chinese government has consistently invested and supported blockchain companies on both national and local levels. DropChain is a company that has developed a way of integrating blockchain into food and beverage supply chains.

Similarly, associate lecturer in computer science at Shanghai Jiao Tong University Xia Yubin said that the censorship proposed in the draft would help to keep blockchain services free of illegal materials, such as child pornography. “Currently blockchain does not support censorship, so if you put something bad on blockchain everybody can see,” Xia explained. “Definitely for our country we need to find a solution to this—especially with regard to illegal content.”

However, Tamar Menteshashvili, founder of Shanghai Jiao Tong University (SJTU) Blockchain Hub and a doctorate student at SJTU, pointed out that the draft could have a negative effect on the industry aside from censorship concerns. Indeed, the new regulations may place a financial burden on blockchain startups that will need to find ways to comply.

Indeed, it seems that the Chinese government is at odds with itself–it sees a need to regulate the industry that it has fostered. Whether or not the newly drafted regulations are too strict for the young industry remains to be seen; however, it’s certainly a possibility.

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