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In this article, we looked at the evolution of the Chinese blockchain scene from 2013 to the most recent events taking place, and present the positive & negative impact on the current blockchain scene.
We also illustrated what opportunities it brought, what we are looking at and what industrial-specific projects may stand out from our point of view.
China Vs Facebook
“Back our cryptocurrency or China wins”, said Mark Zuckerberg on the testimony to congress on 23rd Oct.
It’s becoming a rival of China vs Facebook, since the announcement of Libra, a permissioned blockchain digital currency backed by American social media giant Facebook, it has faced concerns over perspectives of privacy issues, national security, monetary policy and its ever-expanding power from regulators & politicians.
Libra is envisioned as a reliable digital currency to facilitate “the internet of money” through its association network covering mainly sectors of payments (e.g. PayU), marketplaces (e.g. Uber, Spotify), telecommunications (e.g. Vodafone). The goal is to enable money transactions around the world as easy and cheap not only within Facebook’s apps, Messenger and WhatsApp but also potentially the rival ones.
Blockchain’s unique properties have enabled trustworthiness, greater transparency, improved traceability, and enhanced security among the network to increase efficiency and reduce unnecessary costs. Benefiting from its decentralized nature, opportunities to various industries arose and Facebook, with 2.4bn users globally, is determined to become one of the world’s biggest financial entities by inventing the more accessible and connected global currency.
Much can go wrong. With the fear of the threat to the US government’s economic sovereignty, there has been both skepticism and pushbacks from related authorities. Facebook CEO Mark Zuckerberg has claimed that they won’t launch cryptocurrency until U.S. regulators approve under the growing pressure, however, in the meantime, he has warned that “China is moving quickly to launch similar ideas in the coming months”.
Chinese President Xi urges accelerated blockchain technology at the 18th Collective Study of the Chinese Politburo on 24th Oct, followed by the announcement that People’s Bank of China’s plan with DCEP (Digital Currency Electronic Payment) at 28th Oct.
Xi stressed the use of blockchain as an important breakthrough for independent innovation of core technologies, the necessity to strengthen the talent pool, build a variety of talent training platforms and increase capital investment. Furthermore, he pointed out that China should seize the opportunity of blockchain technology integration in the areas of data sharing, optimizing business processes, reducing operating costs and credit system building to bring better government service experience to the people. Also, he emphasized that relevant authorities should actively explore the laws to ensure a safe and orderly development of the blockchain environment and on the other hand, keep track of development trends to further promote economic and social development.
Evolution of the Chinese Blockchain Scene
Tracing back the history of Chinese regulations towards cryptocurrency,
·In 2013, China banned that banks shall have either direct or indirect relationships with bitcoin transactions for government-related authorities’ matters. (For the individual, however, can still exchange bitcoin as a commodity.) 18th Dec. 2013, 1 BTC dropped at 455 USD at MtGox, while in China its 2011 RMB (about 330 USD).
· In 2015, China has established the Chinese central bank’s digital currency research institute.
· In 2016, the Ministry of Industry and Information Technology of the Chinese government released the first white paper of industry blockchain.
· In Sept. 2017, China labeled token sales “illegal and disruptive to economic and financial stability” and banned ICO activity in China. The reason behind this has been mostly thought to protect investors at this early stage. According to the Beijing Internet Finance Association, in early 2017, there were 65 ICOs raised approximately $400 million.
· 24th Oct. 2019, Chinese President Xi gave out the speech right after Zuckerberg’s testimony at the congress, blockchain technology has become a prominent industry strategy after AI, Big data, Machine Learning and IOT; and China should “actively promote the development of blockchain and social-economic integration”. The price of Bitcoin surged overnight nearly 40% from a recent low.
· 28th Oct. 2019, Qifan Huang, vice president of the China International Economic Exchange Centre has announced the plans of DCEP and mentioned that “it’s highly likely that China’s central bank will be the first to issue a national digital currency”.
We believe that there will be three main impacts.
1. The positive signal from the government has brought confidence to the relevant authorities. Blockchain technology has the potential to become a powerful disruptive force in increasing efficiency and reducing unnecessary costs and China sees that and is willing to undergo continuous exploration with industry leaders. There will be even more and bigger corporate joining the “league” in the near future and we will see startups to launch initiatives that are appealing to regulators. However, it’s also worth noticing that China has drawn a clear line between crypto and blockchain.
2. More competition will be regarding adoption. More infrastructure layer projects will be starting to pay attention to real-world needs, rather than simply pursuing higher TPS.
3. A desire for a more open economy and actions to protect RMB international position. It shows China’s always got digital currency in mind, what about other countries? The legal and regulatory frameworks globally are categorized as strong, mild and weak. In the U.S., we have seen a diversified attitude from various states as each set up the framework according to its own digital economy development. For instance, Delaware has taken embracive steps toward the innovative technology by recognizing the trading of stocks on the blockchain; North Carolina has actively created a task force on blockchain deployments.
The Securities and Exchange Commission (SEC) has taken the position that ICO is securities offerings and should subject to its own rules, which require companies’ registration and disclosure documents. While in Japan, all exchanges are regulated and can only conduct trading by receiving licenses from the Financial Services Agency (FSA). The regulatory policy has become tightening especially since the event of MtGox. With a comparatively weak regulatory policy like Malta, which has deployed blockchain with the hope to reshape its own financial system, it has a more friendly policy welcoming ICOs. Therefore, to China, with the volatility of offshore RMB exchange rate and the indistinct stage of the U.S.-China trade war, it is crucial to launch a liquidate digital currency with a programming feature to protect its capital borders against potential advanced technology that might facilitate illegal cash flows.
Positive impact: Chinese local projects go to the next stage working with corporates & government.
After Xi’s remark, blockchain initiatives, deeper collaborations, funding are expected. To list a few government-led & corporate-led projects,
· Industrial and Commercial Bank of China (ICBC), the world’s largest bank by asset, has registered two blockchain projects to facilitate transactions for clients.
· Chinese internet giant (Baidu, Alibaba, and Tencent) has each registered information about its blockchain cloud services and addressed the necessity of infrastructure providers for third-parties.
· Guangzhou government has taken the initial step to launch a $140 million subsidy to encourage the development of blockchain technology.
· Conflux, a portfolio of us, is a State-of-the-Art public blockchain system that achieves high TPS without sacrificing decentralization or safety. Last month, they have announced a plan to set up the research institute together with Vice Mayor and representatives from Science & Technology Committee, Development & Reform Committee, Financial Directory from Shanghai, which marked the first public blockchain project that Chinese government supports. Conflux has taken the 1+1+n approach with the Shanghai government through the research institute. The first “1” represents the research institute’s direction, which would serve the five pillars of Shanghai: Finance, Economy, Transportation, Trading plus Science & Technology. The second “1” stands for the fact that the research institute will incubate startups and projects that build on top of the Conflux infrastructure to advance the industry with new applications. The “n” stands for n-amounts of pilot projects, together with Shanghai Government, from city governance to customized optimization.
Negative impact: more non-mainstream cryptocurrencies, which has been viewed often with suspicion, tend to be over-promoted again
Many projects have started to launch more aggressive blockchain-Esque initiatives since Xi’s speech. Since early 2017, investors started to make big profits and this has introduced more speculations to the crypto scene. In the meantime, lots of pioneers in China have created active and live communities like EthFans, RealSatoshi, etc. to discuss projects and host related events; on the other hand, unfortunately, there is not enough understanding toward altcoin in third-tier or under third-tier market, who are the target audience for scam crypto projects.
While keeping the education of blockchain technology on CCTV and official state-backed newspapers to the people, China is reminding its people of the potential fraud and market risk. The attitudes towards projects are straightforward: the government will filter scam projects out and provide sufficient support to projects with promising tech or present benefits to real output economy. In the long run, China has made this huge move and it left the other countries to show their positions on the development of blockchain technology as well. We would suggest projects not miss the opportunities in the Chinese market.
Opportunity in China Blockchain
We believe at the current stage; most opportunities still lie in the infrastructure and middleware layer.
In general, it is still early looking at use cases within blockchain-native area. In traditional sectors, there have been many corporate exploring different scenarios with blockchain technology. Besides the ones mentioned above, Foxconn has launched HCM, a fund focused on the upgrade and transformation in supply chain financial management; Amazon has launched Kaleido, a Saas platform based on blockchain.
For real-world use cases, we believe that increased efficiency to resolve practical problems is at least as important as restructuring production relationships and it would be a pseudo-demand if productiveness is not improved while the problems can be solved with traditional internet solution or database system. Therefore, we are forward-looking and also excited to see blockchain can solve more “not-appearing-yet-demands” or even create our demands.
In the past 10 years, China has inspired the world what internet can do: from Alipay to Wechat red envelope, from TouTiao to Tiktok, it shows Chinese distinctive perspectives of product design. For instance, DiDi China has more than 10 product lines to meet the needs of customers in various consumption capacities. At the moment, it’s rare to see exciting use cases nor products delivering friendly user experience in the whole blockchain landscape. However, combining the macro positive environment in China and inspiring products from internet solutions, we are looking forward to seeing a wave of exciting use cases.
What has IOSG been looking at?
We have been looking at IoT, open finance and layer 1 solutions.
IoT is an important piece of technology that is set to improve greatly over time. With more devices owned by individuals and the need for all devices to communicate with each other, IoT may lighten the workload with automation, ultimately increase efficiency and is expected to bring a better lifestyle. We have invested in IoTeX from Silicon Valley and MXC from Berlin.
Open finance aims at reconstructing the banking system worldwide in an open, permission-less manner. There are fewer restrictions to participate and fewer costs & time involved relative to similar offerings provided by traditional financial entities.
For the past 20 years, the liquidity within the financial system has been poor as the majority of its business has been in the hand of Wall street or other centralized financial giants. Without liquidity, the financial system will be a lack of incentives to create profits. For instance, Compound, Dharma, BlockFi, Maker, Nuo and other Defi products cover a wide range of use cases in debt. While looking at the current user activities, we believe the market still has tremendous room for innovation and profit. We have invested in MakerDao.
Lastly, the blockchain system has been facing its own impossible triangle: decentralization, security and high performance. Bitcoin and Ethereum 1.0 have upgraded security and decentralization, while Ethereum 2.0 aims at tackling with scalability. We have been asked about large-scale commercial blockchain applications; however, the underlying technology of its public chain is not mature enough to support and we have therefore 2017 seen many projects simply working on scalability as if it were the ultimate barrier to achieve massive adoption. Though true, that scalability is a key obstacle that slows down Dapp usage and its development.
We believe however that, a promising blockchain would be highly customized and have a trade-off according to the highest weight among the triangle. Take our portfolio, Polkadot, as an example. Our reasoning behind is illustrated: firstly, they have created a blockchain-building framework Substrate, where developers can build any blockchains as the way they like in minutes. It will be connected to Polkadot from day one and benefits of interoperability and security will be shared, which allows developers to put effort on other specific areas to create more purpose-like chains; secondly, Polkadot’s multiple parachain architecture is designed to provide a horizontal scaling solution where a high number of transactions can be processed in parallel. Dapp Developers could, therefore, leverage an existing framework to focus more on user experience or UI/UX design, etc. We have invested as well as Near and Blockstack from this category.
How to drive mass-adoption among industry?
Projects to be deployed successfully in the current industries needs three aspects: Firstly, reduce the cost of trust. Blockchain technology simplified the management of trusted information, which in turn makes it easier for relevant parties to access and use critical data while maintaining security. Secondly, improve efficiency among parties to serve real output economy in terms of tokenization, decentralization and aligned consensus.
Lastly, reconstruct value distribution via token and make a creative and reasonable design of the token economy. The token is viewed as bridges, channels in distributed ledger technology. An individual receives a series of rights or a promise from the platform every time they produce and consume. Only in this way, contributions from users toward the platform can be quantified and achieve an alignment between the two parties to facilitate a fair, healthy ecology.
Note: The title has been updated slightly from the original article.