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China, blockchain and the crypto "double-edged sword": Is the tide turning for cryptocurrency?"

When it comes to technology, China rarely mimics the rest of the world, and the fields of blockchain and cryptocurrency are no different.

As with the internet, China has approached blockchain technologies with both enthusiasm and suspicion, quick to block uses that it sees as contrary to its own goals while heartily backing approaches that it believes are beneficial to the country’s wider aims.

As a result, the country’s approaches to blockchain and cryptocurrencies have traditionally been very contrasting.

“The government is very favourable towards blockchain technology in terms of being to keep an eye and track certain business processes and transactions. What they do not like is any type of free-floating cryptocurrency that they cannot directly control,” Oliver Oram, founder and CEO of Chainvine, tells Verdict. “This is not so dissimilar to any government that likes its central bank or sees a future for central banks.”

However, a number of decisions by the government in July suggest that China’s stance on cryptocurrency is shifting – if only hesitantly.

On 18 July, the Hangzhou Internet Court ruled that Bitcoin could be formally described as virtual property. This move was described at the time by investor Dovey Wan as a “major milestone”, as it suggested that an effective ban on cryptocurrencies put into place in 2017 was coming to an end.

Meanwhile, on 22 July the China Electronics Technology Standardization Insitute (CESI) issued a certification under its Standard Blockchain System Function Test for decentralised cloud computing network aelf.

While not compulsory, the accreditation confers significant advantages to companies, with only 30 having passed the state’s high barrier of entry. And for aelf this was particularly notable, as it was the first company to pass that uses a cryptocurrency as part of its project – although its ELF tokens were not part of the certification.

But is this the start of a loosening of control over cryptocurrency in China, or does state-directed blockchain remain the country’s focus?

How China is harnessing blockchain

When it comes to blockchain, China is arguably a very forward-thinking nation. According to Oram, who went on a trade mission to China in March to showcase his company’s bespoke platforms built on digital ledger technology, blockchain is present in many Chinese companies’ policies, as part of a wider focus on technology.

“Almost every Chinese company I met from Ping-An to The Bank of China has a policy called ABCD,” he says.

This stands for artificial intelligence, blockchain, cloud and big data, and highlights how these technologies are considered vital to future development in the country.

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As a result, China has embraced crypto-less blockchain, with diverse applications being explored in the country.

One such company addressing this is Aurora Chain, a Chinese company that has developed a blockchain for use in fields such as gaming, big data and the internet of things. And according to founder Zhao Meijun, the government has taken the lead when encouraging developments in the blockchain space.

“With regard to blockchain technology, the Chinese government has been taken an active and leading role in advancing its development, working with the companies like Tencent and Alibaba in this field and pursuing cooperation with China’s top blockchain projects including us at Aurora Chain in the fields like digital certificates and food tracking systems,” he tells Verdict.

Is China really relaxing on cryptocurrency?

As embraced as blockchain is in the country, cryptocurrency, with its lack of regulation or monitoring, has been treated with far more wariness.

“The Chinese government has historically supported and encouraged blockchain technology development, while taking a cautious attitude towards cryptocurrency and has formulated the policies/regulations necessary to avoid any potential risk,” says Meijun.

However, with some movement on regulations surrounding cryptocurrency, China’s position appears to be shifting.

“Crypto is double-edged sword for China in the sense that it is first seen as a danger to the state, but increasingly seen as a weapon against Western financial hegemony,” says Dr Tim Kane, JP Conte Fellow in Immigration Studies at the Hoover Institution at Stanford University.

“We shouldn’t lose sight of the fact that Beijing’s hostility toward Hong Kong protestors that the legal status of Bitcoin is not a firm legal principle being realised, rather it’s a strategic decision that will last so long as it is useful.”

Exactly why China has shifted its position at all isn’t entirely clear, although Kane argues that it is a “curious mix” of the emergence of Facebook’s Libra cryptocurrency, the political tensions surrounding Hong Kong, the US-China trade war and “rising authoritarianism”.

However, he does anticipate further movement on cryptocurrency, albeit in select areas where the state can maintain control.

“I expect China to embrace Libra and other stablecoins. Bitcoin is a tentative test step, one I do not anticipate will endure when non-crypto digital currencies that the state can better control are developed,” he says.

This view is also echoed in China.

“Since Facebook issued its Libra cryptocurrency this year, we have noticed that China’s central bank has commented on supporting digital currency and started looking into the possibility of benchmarking digital currency and fiat currency,” says Meijun.

Could China become a blockchain powerhouse?

While any shift in China’s cryptocurrency is met with excitement by the crypto community, it is important to note that the country in no way needs to embrace a crypto free-for-all in order to be successful in this space – quite the opposite.

“I believe it is important to differentiate between free-floating cryptocurrency and a controlled distributed digital currency. On the latter China is leap years ahead of the US, this is clear even by simply looking at the multitude of payment solutions that are baked into chat apps and the oversight the government has over the data they collect,” says Oram.

“Will the Chinese adopt or ease laws in the near future to allow its citizens to hold a borderless currency? I don’t think so not for a long time or indeed at all. But I certainly see the use of controlled distributed digital currency rising in the country in the coming years.”

Instead, China looks set to harness both blockchain and cryptocurrency to enable it to maintain and build on its position as a key player on the global technology stage.

“I believe we will see the country utilise the technology to improve efficiencies in business and government processes, ultimately reducing red tape and cutting costs in in the public and private sectors, creating a more versatile market and garnering them a competitive vantage system,” says Oram.

“It is worth noting that the Chinese are no strangers to the process of decentralisation and have used it to great effect, making economic gains in the process. Decentralisation was used to turn China around in the space of twenty years, going from a command economy to decentralising fiscal and administrative processes in the government sector, doing what the US took two hundred years to do – allowing it to become the second or even top economy in the world.

“By adding blockchain to this scenario, one could see them accelerating past the US and making huge economic gains when combination with the ABCD policy. We should bear in mind that the government has yet to fully implement the technology to manage its decentralised system, but once it does it will race ahead.”

In time, then, China could ultimately become a leader in this space – even if cryptocurrency remains highly restricted in the country.

“We believe the Chinese government has realised that the digital economy is a major and inevitable trend and digital currency has the potential to be a revolutionary innovation,” says Meijun.

“As a result, China is preparing itself for the upgrading of the entire global financial system.”