Digital Financial Revolution: Blockchain in the PRC

blockchain is sort of a decentralized platform and so yes I think sort of in general this is why cryptocurrencies uh sort of became you know the focus of Chinese regulatory authorities and then there's more recently there's this idea of decentralized Finance which is which you know so instead of for example with cryptocurrencies having a central exchange hold your crypto you know there are these decentralized exchanges which are much less subject to control and this really scares governments um authoritarian governments like China hello and welcome to our viewers my name is Helen yayala and I am a Schwartzman fellow at the National Committee on U.S China relations today I am joined by Paul triolo Paul is currently senior vice president for China and Technology lead at Albright stonebride group a senior associate with the trustee chair in Chinese business and economics at the center for strategic and international studies and has served in senior positions within the US government for more than 25 years Paul thank you so much for being here my pleasure So today we're going to be talking about blockchain technology in China and its impact on U.S China relations so just to begin Paul can you tell us when did China first start using blockchain technology well that's a good question I think it's important to note that China very early on was became aware of the use of blockchain for things like cryptocurrencies um and in fact was one of the sort of early uh pioneers of regulation in the crypto space so I can still remember in 2013 when the pboc The People's Bank of China issued a statement that's basically saying Bitcoin for example which is which is the was sort of the first blockchain uh company or not company but blockchain project um declared that Bitcoin was not a currency and so I think Bitcoin and cryptocurrencies and blockchain were on the radar of Chinese authorities um you know pretty far back and as far back as 2013 and then of course over the next six seven eight years China um in the cryptocurrency space enacted a number of policies that basically shut down um the cryptocurrency part of and use of blockchain in China um you know Banning initial coin offerings and banning uh mining eventually and then really in 2021 the pboc basically banned all cryptocurrency transactions but what the cryptocurrency craze had done was sort of highlight um the the technology underlying cryptocurrencies which was blockchain and so the Chinese government and and Industry since then have really been attempting to leverage the uh the underlying technology and the advantages that blockchain provides while trying to to scrupulously avoid um the cryptocurrency part of that and cryptocurrencies are really just the native currencies if you will of of a particular blockchain type of blockchain and there are many different kinds of blockchains which we can talk about but there is there's a recognition in the Chinese government that blockchain is useful for many different applications which we can talk about so the the challenge that that um that Chinese Financial authorities for example have faced and had really driven this is that they don't like the the decentralized financing part of blockchain they don't like um the sort of the whole cryptocurrency piece of that strikes them as as bad and undermining centralized control um for example of the financial system and so they've worked scrupulously to restrict um the cryptocurrency aspect but at the same time interestingly Chinese Regulators um are eager to approve um various blockchain projects and um and Enterprise blockchains in China for example we could talk about um our our very popular and there's a lot of use cases in China but they're all divorced from the the currency part of it from the sort of um any kind of payment system being used as a payment system so it's really the sort of uh distributed Ledger uh technology aspect of blockchains and being able to track things and um and put things on the blockchain uh sort of immutably uh that has attracted um the interest from the from both the government and the technology sector um to to blockchain but it's a it's a it's a complicated relationship because of the of the cryptocurrency aspect that's very helpful thank you so much um on the topic of uh cryptocurrency so hany ping he's an economist who was a former advisor to China central bank he and others have suggested that the government the Chinese government should reconsider its cryptocurrency embargo and he believes that the ban on crypto related activities may result in missed opportunities to innovate in cutting-edge Technologies do you think that banning crypto can hamper China's Innovation capacity well it's it's a big question and I think what he's getting at is that the use of crypto cryptocurrency is or sort of you know again native sort of payments capability is is really an incentive um for example for developers and in in a particular project they're really the most successful um Western projects for example um like ethereum and I guess Western may not be the right term for it but a global project like ethereum for example which was founded by um vitalik butaran who's a who's a who's actually Russian but has a broad developer base uh globally you know they're they're the again the developer base and the sort of project is all helped and fueled by the fact that there's a cryptocurrency ethereum in this case The Ether that's associated with that blockchain and so I think the the comments from from this official may make it trying to be trying to get it that that it's a sort of ecosystem that where where the cryptocurrency the native cryptocurrency is sort of an important part of that ecosystem and if you take that away then you take away some incentives for people to get paid for developing projects or for just easing transactions on the blockchain for example because if you don't allow the cryptocurrency a native currency to be used then you you introduce um you know other complexities into into the to the use of those blockchains except for example for payments um which is one of the big the big use cases of course for cross-border payments and sort of frictionless payments um and so um you know that's what I think he's getting at but um you know I I it's hard to say where that has um you know where where the exact impact on Innovation comes from Chinese companies have been pretty Innovative a lot of Chinese companies have developed their own blockchain projects and there's this thing called the blockchain Services Network which which we should talk about which is a a bigger effort um and again all of these native blockchains in China are not um don't have that cryptocurrency sort of piece to them um and that's an important part of the equation yeah that's a great point so talking about that um crypto is not allowed but other forms of blockchain are um can you tell us a bit about what forms of blockchain are in use in China and what Industries or if the government uses blockchain sure so um there are a lot of um there are a lot of um efforts to use blockchain and different in different applications and so um in China um their their the the cyberspace administration of China for example approves licenses for different blockchain projects and so um they've done and they've done this this gives you a sense of the scope and scale of how blockchain is being used in China so the CAC um you know requires registration of an approval of a license for blockchain projects um and they've done something like seven or eight uh tranches of approvals um and as of last time I looked it was you know mid earlier mid 2022 they were something like there were almost 2 000 licenses approved um for um for different blockchains in China so they're sort of and these are these are is these These are presumably sort of you know company specific kinds of blockchains that are being used for internal purposes so there's different kinds of applications here there are there are sort of company specific blockchain platforms that they're using internally and then there are also projects which we can talk about which are sort of Enterprise level blockchains um that are that have also gained uh currency in the west like Ripple and Corda and um and there you know there's a number of of bigger Enterprise blockchains which are not you know for sort of personal use or they're they're for there for uh for for use within a corpus structure they're usually permissioned blockchains so that's another big difference I think in China they're the the tendency has been to use more permission blockchains rather than permissionless blockchains which is what the cryptocurrency um uh projects are like ethereum and and Bitcoin um and so I think that that this Evolution has occurred over particularly over the last four or five years and so for example the CAC has approved blockchain projects for a whole host of companies I was actually in China at one point um before the pandemic and I had a full tour of jd.com's um sort of uh business model and some of the some of the activities they were doing they're a big e-commerce company and they were using blockchain for example to track the Commodities they were selling particularly food items sort of from you know catching a fish putting it on a truck trucking it to processing plant and then finally ending up in um in a store so that's one of the one a good example of a use case that seems to be pretty popular so I could actually scan the QR code on my phone on the fish and it would tell me it would sort of give me the whole history so this is a food safety issue in China so this is one of the big applications that for blockchain that that has sort of become popular um uh tracking food from you know and that of course stems from a lot of the food crises and and Scandals that have happened in China so that's one one particular use case there are other examples um there's a National Health Data chain for example which is which is designed to sort of put Healthcare data on the blockchain that's uh that's under the National Health commission in China that's another sort of broader data sort of data management use case uh for blockchain um there's also things like the beta chain which is managed jointly by the central bank and and MIT the ministry of information uh technology in industry and information technology that's used to handle transactions um that are that involve China's Beto satellite system so you know that so the government views again blockchain as this is this uh this this technology where the barriers to entry are low in China and that China Chinese companies should use this and so you also see in many many statements like National five-year plans or or long-term plans for technology development the the the the blockchain is always included in there along with 5G and Ai and uh and other Technologies as sort of areas where China and Chinese companies should lead so there's also so for things like Logistics and that's where sort of the government is focusing the Cyprus and where these licenses coming from cic are focused on things like Logistics Health Care data um Huawei Huawei Cloud there's a blockchain that Huawei has that's um that's that's um that's been approved and then there's also things like for nfts uh non-fungible tokens that also uses blockchain technology that that's been sort of a rage in China uh for a bit over the past um couple of years this is things like digital art or other other other things that can be digitized or tokenized and put on a blockchain and so CAC has approved some some blockchains that are that are involved in nft projects although that's a little bit controversial because you know the regulations around that normally those nfts are paid for using cryptocurrencies um and so that there's been a little bit of issue around that and then so so so basically these categories of Enterprise level blockchains for specific purposes like Logistics more National efforts um like this Healthcare data to put Healthcare data on the blockchain and and for broader Logistics purposes on things like Beto and then there's also um um this National project which we can talk about um called the blockchain Services Network which which is a large permission blockchain that it that that um that was set up under the state information uh committee um sic under under dndrc the national development Reform Commission and that's that was intended to be sort of a national blockchain platform that would allow um things like um um applications to be developed on top of that that could include payments and that has also has an international uh element to that um that's being pushed uh by a company called red date which is which is working with the attorney's government and that that may eventually get to this bigger issue of blockchain being used as part of cross-border payments so there's a whole you can see there's a whole range of of areas where where the Chinese government is is seized blockchain as as being advantageous and then Chinese companies um across the board have sort of put forward projects related to blockchain in part because of I think the government saying hey you know this again this is a technology that China should should be leading on um but again because they they sort of divorced it from the cryptocurrency uh uh aspect they've been very careful to to to keep continuing uh to to emphasize that you know blockchain itself is fine the technology is good they're good use cases but don't don't uh try not to to use it for um for things like um uh payments and so for example for nfts you can use alipay and WeChat pay to pay for those which are sort of normal digital payment platforms but but there's no inherent cryptocurrency there so that that's it's been sort of I would say it's been a little bit of almost a craze for blockchain um and some of these use cases seem to be you know pretty good like the the commodity tracking um but it's still very much um uh a process to develop and then finally one final point is I think the Chinese government and companies also see the use of blockchain for example in metaverse related applications and so metaverse is another one of these sort of buzzwords and and um and and and you know getting a lot of attention in China and so whenever you hear metaverse being mentioned there's usually a blockchain piece to that right because that would form the payments layer uh for example in in some blockchain and game and gaming it could also be used um but again not the cryptocurrency using you know RMB to actually um pay for those uh blockchain applications in the metaverse yeah that's very helpful thank you and I can definitely see how that might be a little bit conflicting at times with nfts for example being a new form in some cases of digital art and art has also historically been a way of accumulating wealth right right sometimes that could get a little bit tricky to enforce um I would imagine now I wonder sorry yes and I'm just gonna yeah anything that involves that involves sort of um you know using alternative instruments that don't don't run through Chinese centralized Financial authorities sort of oversight or or you know ability to sort of track it ends up running a foul of the system and so yeah nfts and uh and um and particularly cryptocurrencies are just viewed as dangerous instruments that allow things like Capital flight um and and sort of you know evasion of Foreign Exchange controls in China and so the the central government is very sensitive to these and and will continue to in into to intervene from a regulatory point of view to try to control this at the same time as issuing documents supporting blockchain right so it's a very interesting Dynamic and shine but you really don't have in other countries where the debate is more about how do you regulate cryptocurrencies yeah well on the topic so some Scholars have said that or theorized I guess that cryptocurrency might be incompatible with authoritarian regimes precisely because of the decentralization aspect what do you think about that yeah and again you have to be careful what you're talking about here so so inherently you know blockchain is sort of a decentralized um a decentralized um platform and so yes I think sort of in general the the the this is why cryptocurrencies uh sort of became you know the focus of Chinese regulatory authorities and then there's more recently there's this idea of decentralized Finance um which is which you know so instead of for example with cryptocurrencies having a central exchange hold your crypto um you know there are these decentralized exchanges which are much less subject to control um and then there's things like stable coins which provide on-ramps to those decentralized Finance uh Financial exchanges and this really scares governments um authoritarian governments like China because even if you try to control those centralized exchanges for example which China did China initially didn't control those exchanges and you had and some of the best exchanges in fact were Chinese exchanges like binance and okay coin um and coupon um these were at one point were the largest centralized uh cryptocurrency exchanges globally and binance remain Remains the global leader even though they had to sort of move offshore as China clamp down on centralized exchanges but the real the real promise of blockchain and cryptocurrencies if you will is uh is this idea of sort of decentralized payments that don't have to go through a central system um and you know you saw a lot of Fury for example around Facebook which was going to offer its Libra later called diem uh cryptocurrency based on blockchain uh within the Facebook context for for micro payments and small payments globally and that just ran a foul not only of Chinese Regulators but of all sort of financial um centralized Financial um uh economies and and their Regulators in those economies like the EU and the US of course because they didn't like the idea of people being able to use a payment system that was completely outside of their control that used through which dollars and other other Fiat currencies would be flowing but which over which they wouldn't have sort of monetary and fiscal Authority and so in general blockchain and and um and Bitcoin of course that's why Bitcoin was in some sense was founded right the the the founder of Bitcoin was trying to he didn't believe that central banks controlling the monetary policy and and inflating the currency um was a good thing and so that's why he he he developed blockchain and Bitcoin uh as the first sort of platform for use of blockchain because he it was a philosophical thing he believed that that you know Central Authority is controlling the the monetary system was bad particularly because of inflation the the the of the tendency of governments to inflate the currency and so inherently blockchain is sort of a subversive technology and then in China finally you also saw other things like people dissidents putting documents on the blockchain for example that were then sort of immutable uh on the ethereum blockchain dissident documents or documents um you know about certain scandals or you know sort of almost public being able to publicize um things that the Chinese government didn't like and so that also led to some of the some of the clampdowns around how blockchains were used and that and that's the the the being afraid of allowing these permissionless blockchains like ethereum to be widely used in China because they could be used for other things to solve its payments that they could be used for things for example for putting documents on the blockchain so the blockchain technology in itself I think scares um authoritarian governments that's very helpful thank you um as we get closer towards the end of our interview today uh I'm curious about what do you think all of this implies for for the the future of Chinese Society but also specifically how might it impact U.S China relations based on how the United States is regulating blockchain versus how China's regulating blockchain that's a really good question so so I think there's two two aspects to that one one is the um you know this sort of just just the cryptocurrency piece right so the US is trying to get its hand and other governments are trying to get their hand Western governments around how do you regulate cryptocurrencies and in some sense China is seen as a leader in that right because China decided at some point we're not we're just not going to tolerate this we're not even going to tolerate mining right which which they did for for a long time they tolerated the mining of Bitcoin which was which at one point trying to dominate the Chinese companies dominated so on the one hand um at this regulatory level the U.S and

other Western democracies may be moving towards a more china-like approach to cryptocurrencies but on the blockchain side it's a very different a very different issue um and then you get into things like um Central Bank digital currencies where China conversely is leading in terms of deploying a digital uh the digital RMB for example and one concern in the west then is over over this issue particularly in in the U.S that China's leading in the deployment of central buying digital currencies and then on top of that you have this this uh this this project that I mentioned the the um the the blockchain Services Network which is seen in in the US government for example as an attempt as part of a broader Chinese government attempt through the digital RMB and through this this this blockchain Services Network which now has an international component to it and is being trialled by the way in other countries um and actually uh there are projects in for example in Hong Kong and the bank of Thailand that are sort of sanctioned by the bank of international settlements in Switzerland uh as sort of a platform for eventually interoperability of Central Bank digital currencies using blockchain right and so the US government very much views that whole effort which is going to be a long-term effort this is a very complicated issue um uh when it comes to using a sort of a blockchain platform broadly to to enable exchanges uh interoperability of Central Bank digital currencies that's coming but that's that's a that's a five to ten year project but China is leading and leading in that area so the US government sees this very much as an attempt to circumvent you know to provide an alternative to U.S a dollar for example for dollar settlement to circumvent U.S sanctions law right in the context of um of U.S China relations and Russia uh of course and and and these these situations where the US government has very much leveraged um its dominance of the dollar system globally to cut off countries and companies um from that system through sanctions uh you know instrument implemented by the treasury Department so the bigger picture is that that that blockchain is part of that equation uh because of in particularly this this blockchain Services Network and what they call the Spartan Network which it which is you'll see periodic stories in the media about this but this is a long-term effort um to to establish this this sort of global um uh new new Financial system if you will that where where the the issue of of sort of sovereign digital currencies and Central micro currencies is going to be really Salient here and China again is leading in that area um and the the cbdc that that's being the digital r b for example is being widely deployed now you can you can get it on your wallet on your phone um there's lots of pilot efforts to do this it's it's not necessarily itself based on blockchain it's not clear that they're it's really not a blockchain based based um currency but the idea is that blockchain would be used as part of this broader system to to deploy a a digital RMB and other digital currencies globally and and have them be interoperable and blockchain would provide a good platform for doing that because of some of the security features and um and sort of the the the the the the technical advantages that you get from deploying blockchain but that's still very much a work in progress um I'm actually drafting a paper on on the blockchain Services Network and sort of how that will um how that will unfold globally and then and how um you know the US government is like to react to those kinds of developments but it's definitely a very interesting part of the equation of U.S China

relations going forward because there's a lot of concern in the U.S about you know any effort that to undermine the dominance of the dollar um and the reason that's important is specifically because of things like sanctions as we've seen in the case of for example Russia Ukraine um and there's now there's a lot of discussion in Washington for example about how um the U.S might sanction China in the event of any activity related to Taiwan um and so part of that um uh you know the discussion there would be how would China for example um circumvent Global uh International global global payment systems that were dominated by the dollar like Swift and other other um uh interbank uh uh payment system infrastructure so it's it's a big it's a sort of a sailing issue and going forward um it will be come probably even more important as China develops blockchain and as um as as countries around the world figure out that you know us whether they need a sovereign digital currency or not there's a lot still a lot of debate about that but China has in the meantime decided that that was something that they would be leaders on uh and the pboc for example has been very active in um in developing and deploying um the digital RMB so it's it's definitely blockchain is a piece of that not the whole thing with lots of other issues around that r b convertibility for example that are complicated but um blockchain is is definitely in the mix yeah wow that is fascinating um the topic of sanctions and how this might impact Taiwan um I have just one final question for you right before we wrap up so we very briefly touched upon um nfts the metaverse so these might be good topics for a future interview uh and I'm just curious if you could uh give us maybe like one final like summary I suppose of like how blockchain might tie into that um and how the metaverse might actually like play a role in the future of U.S China relations or just big big question that's definitely at least an hour another conversation yeah yeah so a couple things there's sort of the the um there's sort of the sort of practical application and use cases for um that fall under this idea of the metaverse and really at the metaverse is the idea of bringing together different Technologies and arvr um and you know gaming and sort of three-dimensional um you know presence applications like meta has developed you know so you can do instead of doing a two-dimensional thing like we're doing now we could be sitting next to each other you know in three dimensions at a table um so there's there's a coming together of Technologies for people to be able to interact and transact in in a virtual environment that's basically what the metaverse is and do it in more exciting and efficient ways and so um but part of that is clearly the most one of the big important parts that is economics is the economics of that and and so that's where the payment system comes in so part of that metaverse development will include a payments layer which will almost certainly be based on a blockchain platform right people talk it could be ethereum which is which is widely used and um is is is fairly easy to use and and you know so it could be a platform like that that's used in the metaverse so blockchain will definitely be a part of the sort of metaverse um uh development uh along with all these other technologies that are coming together um uh and and you know we're all living in the metaverse in some way or another right I mean depending on how much time we spend on our phone and everything so but coming together in a more easy way and sort of three-dimensional is a vision and then there's the geopolitics of the metaverse right because again China is not going to allow a metaverse that has you know cryptocurrencies of the payment system so um next week actually um I'll be publishing an article um on sort of the geopolitics of the metaverse and when I was at Eurasia group we published two years ago uh if you haven't seen it we published a white paper on the geopolitics of the metaverse and so it's a really important question because there will be multiple metaverses it will really be sort of a Multiverse of metaverses um because particularly China um whatever develops in China into into what we can call the metaverse will be different because they'll want to have more control over the content they'll of course from regulatory point of view and they'll and they'll want to have there'll be more control over the um over the payment system so so whatever develops in China will have much more government and Regulatory uh sort of oversight over that whereas in the west we'll probably see you know different types of metaverses develop we'll have a they'll be sort of a maybe a more public metaverse there's already a lot of corporate metaverses that are out there that are that are that have very strong use cases for example Accenture during the pandemic um onboarded thousands of new of new employees and they were all trained in a metaverse environment uh with you know headsets and and and and all the rest so they have this they think that they they deployed basically the biggest sort of corporate metaverse ever and it was used to train and onboard employees right so a very very clear use case and they despondent that that was that was more conducive to what they were wanted to do because it was you know again in the sort of more um expansive uh virtual world where interaction was was a little bit easier and so you know and then and and those are the kinds of applications also I think that in China will become important uh for for metaverse they'll be sort of an enterprise Enterprise version things used for training and other things and then they'll be this other sort of weird public metaverse um that will include elements of the gaming industry and um and certainly um AR and VR and XR sorts of applications um but that's going to be different than what what develops um in in the west and the question of whether they'll be interoperable at some point um is a really interesting sort of geopolitical issue um and we touch on that in this article that I that I'm gonna we'll put out next week but that's a it's a really important uh Point going forward because already the Web 2.0 right is there's a

sort of a bifurcation in Web 2.0 obviously and so this is sort of a web 3.0 world metaverse world we're in and obviously these geopolitical tensions and bifurcations that we're already seeing in not only the you know the web but also in other parts of the technology stack are going to carry over into um into the metaverse so so stay tuned the metaverse is going to be a Battleground for you know geopolitical Battleground and great power competition um across all elements of that metaverse but it's going to be um it's going to be a fascinating world to watch develop um as we go forward absolutely that is super interesting I would love to talk about that more and hopefully we can schedule a future interview to go more in depth about that and for now we are left with your article which sounds very interesting as well and will hopefully give us a little bit of background before we jump into our interview so for our viewers um thank you so much for joining us today we hope that you continue to engage with the national committees programming and interviews and if you like this topic please let us know if you want to hear more about blockchain web 3 nfts or just Tech in general write to us and let us know check out uh Paul's article and take care and thanks for watching and thank you so much Paul thank you my pleasure what a great great questions and great great conversation

2023-03-09 05:52

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