European Union Institute for Security Studies
Published Date: 06/09/2022
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Summary: China was initially cautious in the development and application of blockchain technology. Among the technology’s best-known attributes are the relative.
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Matching search results: As part of this dual policy, which is analyzed in the first part of the Brief, the Chinese government has launched its own digital currency – the digital yuan. At the same time, it dislikes bitcoin, which relies on a truly decentralized type of …
Initially, China was cautious in the development and application of blockchain technology. Among the best-known attributes of the technology are the relative anonymity and immutability of information, as every blockchain transaction has a digital record and signature that can be identified, validated, stored, and shared. Therefore, this technology could become a double-edged sword for the Communist Party of China (CCP), as it runs counter to the government’s efforts to censor content it deems sensitive and, more generally, the efforts for asserting their cyber-sovereignty.
However, after initially watching the rise of blockchain technology with concern, China’s central government has increasingly seen it as an opportunity, as has been the case with most emerging technologies. Since the release of the 13th Five-Year Plan in 2016 and the publication of the first White Paper on Blockchain Technology and Application Development by the Ministry of Industry and Information Technology in the same year, the CCP has increasingly considered that blockchain could become an economic factor, political and geopolitical asset for the country if it is ‘directed’ well.
China has continued to shape its positioning and conceptualization of blockchain technology on a regular basis for the past 5 years: China Blockchain Industry White Paper (1) was published in 2018, and another White Paper was published white titled Application of Blockchain Technology in Judicial Evidence Storage in 2019 (2) and the Fourteenth Five-Year Plan (2021-2025), published in March 2021, also refers to blockchain and cryptocurrencies (see line diagram on page 7) (3).
China’s unique approach to blockchain is conditioned by precisely this paradox, stemming from the decentralized nature of the technology and the highly centralized nature of the Chinese political system. While blockchain technology is essentially decentralized, regulations in China aim to ensure state control over its development and application.
As part of this dual policy, which is discussed in the first part of the Report, the Chinese government has launched its own digital currency: the digital yuan. At the same time, he doesn’t like bitcoin, which is based on a truly decentralized type of blockchain. Although blockchain is best known for being the technology behind cryptocurrencies, the Chinese government’s approach to blockchain is very comprehensive and goes far beyond cryptocurrencies.
It promotes the application of technology in a variety of fields, ranging from energy conservation to urban management and law enforcement, and has high ambitions to become the world leader in the field. In October 2019, Chinese President Xi Jinping, speaking at a study session for Politburo members, stated that he wanted the country to be a “rule maker” in blockchain, suggesting that this technology will become increasingly once again on a key stage in the country. race against the United States for technological supremacy (4). Blockchain has become a fast-growing sector in China in the last two years.
But is China likely to succeed in promoting an alternative form of blockchain globally? This Report answers this question by analyzing the development of different applications at the national level, before and during the Covid-19 pandemic, but also the emergence of international cooperation in blockchain and cryptocurrencies.
China’s dual politician
Xi Jinping stated in October 2019 that “advancements in key technologies must be accelerated to provide secure and controllable technological support for blockchain development and application” (5).
In concrete terms, this has materialized, for example, in the 2019 issuance by the China Cyberspace Administration of Administrative Provisions for the Management of Blockchain Information Services, which forced blockchain platforms to collect data from users and allowed authorities access to them (6).
The rules came months after a Peking University student used the Ethereum blockchain platform to bypass censorship and voice criticism over a 1998 sexual harassment and suicide case. The case demonstrated the challenges the technology could pose to companies. government policies if not controlled more. implemented (7).
While blockchain technology initially drew attention for its potential for decentralization and circumvention of state surveillance, the rise of a tightly controlled, state-led blockchain setup in China now stands in stark contrast to the technology’s original libertarian image. For example, EOS, a highly favored government blockchain, is based on a model where users vote for representatives, and only these representatives can verify transactions and make decisions regarding system updates. All transactions and governance decisions on EOS are approved by just 21 main nodes (“supernodes”), and 12 of these nodes are located in China, making it easy for the government to control them (8).
In 2019, China launched its own blockchain-based service network (BSN), which was subsequently established in April 2020, with the aim of reducing the cost of blockchain “development, implementation, operation and maintenance, interoperability and regulation” ( 9).
The BSN explicitly formulates the differences between two blockchain frameworks: permissionless, decentralized and transparent, and permissioned, in which all attributes are formulated by the owner. The former is difficult to operate in China due to the country’s regulations, according to the 2020 White Paper published by the network (10).
In concrete terms, the Chinese government is promoting a specific type of blockchain and cryptocurrency that is neither open nor fully decentralized. Intervention (including government intervention) can be exercised in an emergency.
If necessary, data can be reversed and transactions can be reversed. In extreme situations, the system can shut down. The Chinese government is reshaping the blockchain to such an extent that some may wonder if this technology can still be called a blockchain. Beijing insists on using this term, which is already causing confusion and misunderstanding.
China’s approach to blockchain is very comprehensive. First, in the banking sector, China has begun to test its potential locally in recent years, with the ultimate goal of facilitating cross-border transactions and making digital payments more secure (11).
In October 2018, Hainan Province became China’s first “blockchain pilot zone”, and a blockchain security technology testing center was established in Changsha (12).
In March 2019, the government also developed a pilot blockchain cross-border financing platform, initially covering 19 provinces, which aims to improve transaction security and reduce costs (13).
The use of blockchain technology is also being tested by the 38 banks that participate in the blockchain platform supervised by the People’s Bank of China (PBoC), which is 2020 obtained USD 4.7 million in funds from the central government to support and develop this blockchain trading and financial platform in the next 3 years (14).
Second, the central government sees blockchain as a key pillar of the smart city infrastructures currently being built in China that can support a wide range of activities, including road network management, health public, power generation, communications, food safety, and the environment. pollution reduction. In 2019, blockchain became an integral part of Shanghai’s smart city program, where it helps manage and store vast amounts of sensor-generated data.
The government has also designed a blockchain-based identification system for smart cities to solve data and application interoperability issues between them. Xi Jinping has called for blockchain technology to be integrated with other technologies used in urban environments, including artificial intelligence, big data, and the Internet of Things (15).
The government believes that the deployment of 5G could also benefit from the integration and security provided by blockchain technology. There are several ways these technologies support each other. For example, a blockchain can be used to store large amounts of data that have been rapidly aggregated thanks to the increased speeds offered by 5G technology.
Blockchain-based cloud servers have already been used to store encrypted personal information during the COVID-19 crisis (16).
This combination of blockchain with other technologies within the smart city ecosystem is likely to expand as China’s ambitious aspirations to take the lead in blockchain fuel its equally ambitious aspirations to lead the smart city market.
Third, the Chinese government has taken advantage of the traceability and immutability that blockchain technology offers in the field of surveillance. Blockchain has already been used to verify and preserve electronic evidence (17), as well as store evidence collected during police investigations (18).
Fourth, the Chinese government has explored the use of blockchain for the dissemination of information and, in some cases, propaganda. For example, blockchain-based platforms were used for the dissemination of official daily updates during the COVID-19 pandemic to ensure that the information provided was tamper-proof (19).
The pandemic crisis provided a fertile testing ground for the expansion of blockchain applications: in just 2 weeks, more than 20 blockchain-based applications were launched, including technology for online consultations and secure health record management, a mini program on WeChat that can generate QR Codes to allow residents to enter gated communities or the Alipay information platform to manage, allocate and donate relief supplies (20).
Fifth, the government is also exploring the use of blockchain to facilitate government data and human resource management. For example, the People’s Liberation Army is testing blockchain technology to manage personnel data, “improve performance” and, in particular, provide soldiers with the tokens they have earned, which can be used to collect rewards. In intelligence and law enforcement units, blockchain technology is already in use to prevent distortions or leaks (21).
Finally, the government is already using blockchain to collect evidence online against dissidents. For example, blockchain-based platforms have been used to collect evidence on those who defame Chinese revolutionary martyrs through online platforms (22).
Blockchain could also be used to ensure that data in the social credit system is always accessible and cannot be changed by unauthorized actors. This is not so far-fetched since, in December 2019, a seminar was organized in Beijing with the title “Blockchain technology helps China’s new social credit system” (23).
All these developments underline two trends. First, the Chinese government is currently testing all possible applications of blockchain technology on its territory. This comprehensive trial provides Beijing with a comparative advantage over countries that anticipate potential applications but are not yet testing them on the ground. The Chinese government’s dual policy remains experimental in many respects, but the “work in progress” approach nonetheless provides the ability to adjust applications at a rapid pace.
Second, some of the government-tested blockchain applications are designed to support the one-party system and its surveillance and control functions. Beijing is developing a specific type of blockchain that is not only suited to the authoritarian political system but also has the ability to strengthen it in some areas, such as surveillance and cracking down on dissent.
Blockchain and Cryptocurrency: Not Two Sides of the Same Coin As with blockchain technology in general, China sees digital currency as a double-edged sword, potentially threatening its financial sovereignty but offering opportunities to fuel economic growth. China’s digital network improves transaction efficiency, combats illicit activities, and facilitates online payments (24).
Therefore, despite having a skeptical and ambiguous stance towards some cryptocurrencies, such as bitcoin or Facebook’s emerging cryptocurrency Diem (previously known as Libra), China intends to take the world leader in the field of digital currencies, while guaranteeing the control and supervision of the state.
China has historically been very active in both bitcoin mining and bitcoin trading, but the government has become increasingly suspicious of bitcoin trading since 2013, and since 2017 it has introduced a series of regulatory measures to crack down on bitcoin-related activities. cryptocurrencies to isolate the financial. system of the risks associated with them (25).
Although Bitcoin trading has declined considerably in recent years, China still has the largest mining pools in the world (over 60% of the world’s mining capacities), much larger than those of the United States and Russia (less than 10% each) (26).
This is partly due to the affordable price of electricity in China: mining cryptocurrencies requires a lot of electricity, with powerful computers running non-stop.
But this state of affairs can evolve rapidly. In May 2021, China’s State Council called for a further crackdown on both bitcoin mining and trading, shortly after three state-backed Chinese industry associations promised tighter restrictions on virtual currency trading (27).
Chinese authorities are likely to intensify surveillance of bitcoin and the cryptocurrency market as a whole in the coming years.
China’s skeptical attitude towards cryptocurrencies comes at a time when it is developing its own state-backed digital currency. The digital yuan, officially known as digital currency electronic payment (DCEP), is envisioned as a central bank digital currency (CBDC) and has the same legal status as the regular yuan, with its value linked to it (28).
A CBDC echoes some of the characteristics of bitcoin in that it allows consumers to use computerized code like money.
However, this computer code is created and controlled by the central bank, not anonymous bitcoin miners. Other countries, including European ones, Sweden for example (29), are in the process of exploring or developing their own CBDC, but are behind China, which has already become the first country to test its digital currency.
The Covid-19 crisis gave a new impetus to China’s CBDC. In May 2020, Chinese state media reported that “the design, standard setting, R&D of DCEP functions, and joint testing have been basically completed” (30), and a test of a week during Lunar New Year 2021.
A national launch of the virtual currency is expected in time for the Winter Olympics in Beijing in February 2022, but this timeframe has yet to be confirmed.
The PBoC, which began studying the digital currency in 2014, will remain the main overseer of the process, but DCEP is also likely to integrate with Ant Group’s Alipay and Tencent’s WeChat Pay, which currently control 90% of digital payments. in China (31). ).
Although many details about its implementation remain unclear, DCEP is expected to replace only a portion of cash in circulation. Current money supply channels will not be altered in the short term.
Still, the digital currency has the potential to substantially increase central bank oversight of transactions. According to the 2019 regulation of the Cyberspace Administration of China, banks and electronic payment companies that will distribute the new digital currency already require users to authenticate their real names as well as national ID card numbers, and the central bank will be able to see transaction data (32).
Thus, China’s digital currency will substantially increase control over the population, whose financial transactions will be easily traceable by central authorities. They will no longer need to obtain customer information from payment companies to monitor citizen transactions.
China’s international ambitions
Several developments outlined above may have international repercussions, as Beijing has included blockchain in its diplomatic agenda since 2018 and promoted cooperation in the field through existing forums.
For example, blockchain was discussed at the 2019 China-Central and Eastern European Countries (CEEC) Cooperation Forum, and the possibility of establishing a China-CEEC blockchain center of excellence was mentioned in the Cooperation Guidelines. from Dubrovnik (33).
The first China-CEEC Blockchain Summit (34) was held in Slovakia in December 2019. Blockchain has also been addressed as part of other summits and initiatives, including the ‘Belt and Road Initiative (BRI) (35), the 2018 Boao Forum for Asia (36), and the second International Blockchain Import Expo. China in 2019 (37), as well as in bilateral meetings (38).
Against a backdrop of intensifying trade tensions and technological rivalry between Washington and Beijing, blacklisting is likely to extend to the blockchain, further fragmenting the blockchain industry, which has emerged in a rather disparate fashion. Many blockchain applications (urban governance, logistics, supply chain management, customs, and cross-border trade) could be hampered due to interoperability issues (39).
In any case, China’s ambition to lead the world in blockchain development poses two key geopolitical challenges: one related to blockchain development in China as a whole and another related to the development of the digital yuan more specifically.
Blockchain: Geopolitical, Industry, and Regulatory Implications
Beijing has strengthened research capabilities in the field of blockchain over the past 5 years, in part with the goal of shaping blockchain standards. China leads the international research group on the Internet of Things and blockchain standardization, created in 2018 (40).
Furthermore, in the first half of 2019, China announced a total of 3,547 patents on blockchain technologies, more than in all of 2018 and accounting for more than half of the global total (41). In October 2019, Xi Jinping emphasized “the importance of stepping up research on blockchain standardization to increase China’s influence and regulatory power in the global arena.” (42)
The aforementioned BSN is China’s most ambitious and comprehensive project to shape blockchain globally. While the BSN is largely driven by economic and business concerns, it certainly has geopolitical ramifications.
First, the BSN is conceived as an international project and as a network used to operate different types of blockchain applications. So far, the vast majority of nodes are located within China (more than 100); there are eight overseas city nodes, spread across six continents (43).
Second, although the BSN allows organizations to set up their own nodes, at the top of the pyramid it will be managed by a consortium made up of Chinese companies and a state government agency. Third, the BSN could support the further deployment of China’s BRI,
and in particular the ‘Digital Silk Road’ and Beijing’s e-commerce ambitions. Fourth, through its BSN project, China plans to pilot integration with the world’s central bank’s digital currencies. In particular, it intends to build a multi-country CBDC-based Universal Digital Payment Network (UDPN) as part of its 2021 roadmap.
With the UDPN, the BSN aims to enable a digital currency transfer method and a standardized payment procedure and increase cross-currency settlement. The beta version of the UDPN is expected to be released in the second half of 2021, with full development planned to be completed within 5 years (44).
The list of cooperating countries has yet to be revealed, but in February 2021 China co-founded a project called ‘Multi-Central Bank Digital Currency Bridge’ together with the Bank of Thailand, the Central Bank of the United Arab Emirates, and Hong Kong. Monetary Authority with the aim of exploring the use of CBDC in various cross-border payment scenarios (45).
Internationally, several protocols compete for adoption, but none have gained prevalence thus far. Through the BSN, China offers the infrastructure to other countries and, in turn, could gain some first-mover advantages (46). If the BSN gains international appeal, it could bring China to the forefront of blockchain rulemaking.
However, the BSN is unlikely to have universal appeal. Technological tensions between the US and China are likely to have an impact. For example, companies such as China Mobile, whose operations are prohibited in the United States for security reasons, are involved in the BSN. Still, China is way ahead of the curve in terms of conceptualizing and promoting blockchain, and countries that are not opposed to Chinese technologies (in parts of Southeast Asia, Africa, and Latin America, but also in the vicinity of the EU) may remain open to China’s blockchain proposals for years to come.
Digital Yuan: Geoeconomic Implications
Theoretically, the launch of the digital yuan could support China’s efforts to internationalize its currency and, in the long run, challenge the supremacy of the US dollar and the SWIFT system. But any assessment of the digital yuan’s potential to achieve this must be cautious given the current centrality of the US financial system. To date, the yuan and its forthcoming digital version have not challenged the US dollar. China’s currency accounts for about 2% of global foreign exchange reserves, compared to nearly 60% of the US dollar (47).
Technical developments alone will not be enough to accelerate the internationalization of the yuan; Political decisions will also be necessary, as China maintains a strict regime of capital controls.
Still, the development of the digital yuan raises concerns in the US and has intensified debate there about launching a digital dollar, particularly since Janet Yellen was appointed Treasury Secretary in January 2021, but it would still take time. . form.
With the launch of the DCEP, China hopes to improve the global position of the renminbi (48) and progressively convince several countries to use its digital currency for cross-border exchanges. The distribution of the digital yuan could be advanced through trade and infrastructure agreements alongside China’s BRI, for example by requiring countries to repay their loans in this currency.
Other forums could be receptive to the use of the digital yuan for international agreements; for example, the Shanghai Cooperation Organization or the BRICS countries (Brazil, Russia, India, China, and South Africa) could be candidates for this experiment. In 2019, the BRICS countries began to cooperate on this at the proposal of Russia, with the aim of reducing dependence on the US dollar and facilitating trade (49).
Also, it might be easier for China to promote the adoption of the digital yuan in countries where Alipay and WeChat Pay are more advanced. Finally, as has happened with other technologies, Beijing could take advantage of its consolidated experience to promote its digital currency in other countries, through training and technical assistance. Other governments, keen to evade US oversight, may be eager to take advantage of this.
In concrete terms, some sanctioned countries could avoid having to use the US dollar for transactions, undermining the ability of the United States to control critical revenue flows to those countries and enforce economic sanctions (50). In addition to undermining Washington’s ability to use sanctions as a deterrent, the United States would lose overall oversight of the financing of clandestine activities (such as terrorism or missile development) if such payments are not made under its system.
On the other hand, China’s increased ability to monitor financial activity could raise serious privacy concerns. The digital yuan could potentially be leveraged to monitor political dissidents beyond its borders. Washington is likely to seek to maintain its oversight and China to improve its monitoring capacity. This could materialize in efforts to ban others’ systems or discourage their use (eg Huawei 5G-like scenario of lobbying for adoption/rejection) and in the issue of interoperability/convertibility of digital currencies.