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Non-Crypto Blockchain in China: How MNCs Can Support It

January 13, 2023

The Chinese blockchain market has grown rapidly in recent years, expanding from USD $14.4 million in 2017 to USD $930 million in 2021, and is expected to reach USD $1.4 billion in 2022. However, it accounted only for around 19.9% of the global blockchain market in 2021 as new investment in China is being outpaced by investment abroad.

This discrepancy is largely due to the Chinese government promoting a particular type of blockchain technology–non-crypto blockchain, which is applied beyond cryptocurrencies. Analyzing the government’s priorities in this area can help multinational corporations (MNCs) better understand the opportunities that they have to support it.

The Emergence of Non-Crypto Blockchain in China

The Chinese government views the blockchain industry as highly important and has provided substantial policy support to it in recent years. In 2019, President Xi Jinping identified blockchain as a critical breakthrough in core technologies and called for accelerating its development and innovation. As a result, blockchain became a national priority, with 26 provinces issuing 117 policies and documents containing provisions for blockchain development between 2016 and 2021.

However, given the decentralized nature of blockchain, the Chinese government sees it as a potential security risk if it is used for tokens and cryptocurrencies. In 2013 and 2017, China issued regulations targeting cryptocurrencies and initial coin offerings (ICOs), banning banks from handling bitcoin trades and then prohibiting ICOs. Finally, in September 2021, China effectively banned all cryptocurrency-related activities. Consequently, enterprises in China have avoided attaching cryptocurrencies to their blockchain services from the very beginning and instead began focusing on developing other applications of blockchain technology.

The Application of Non-Crypto Blockchain

China now focuses on research and development (R&D) for blockchain functions beyond the original ledgering of cryptocurrency transactions, including large-scale consensus algorithms, smart contract technology, hardware and software privacy protection, cross-chain protocols, blockchain storage, etc. These functions are commercially applied in mainly two sectors–finance and digital governance–across three scenarios:

  • On-chain deposition: Where blockchain acts as a trusted ledger for depositing evidence, subsequently improving traceability and auditing. It is mainly used in sectors with high requirements for network-wide data consistency, such as digital governance. China’s judiciary system has already started storing evidence on blockchain.
  • On-chain coordination: Where blockchain provides a trust machine for multi-party collaboration, enabling data sharing and system interconnection. Six major banks in China utilize cross-chain protocols for inter-bank information sharing and are now working on achieving cross-chain transfers of credit card points and other on-chain assets.
  • On-chain value-transfers: Where blockchain is used for asset mapping, bookkeeping and circulation. Major on-chain value-transfer scenarios include cross-border trading, such as Sino-Europe Trade Link of the Industrial and Commercial Bank of China and e-CNY payments.

In addition, the Chinese government has developed Blockchain-as-a-Service (BaaS) to further promote non-crypto blockchain technology. BaaS refers to the third-party creation and management of cloud-based networks for companies in building blockchain applications. In April 2020, the Chinese government launched the Blockchain Service Network (BSN), which is a global infrastructure network for deploying and running all types of blockchain applications across cloud services, portals and underlying frameworks. The BSN is led by the State Information Center—a think tank under the National Development and Reform Commission (NDRC)—with other operators including China Mobile and China UnionPay supporting it.

Different from the decentralized blockchain, BSN adopted a consortium blockchain model, which is also known as a permissioned blockchain. All business attributes are formulated by the application owner, and users are required to gain approval from the application owner before they can use it. Under this model, developers will be able to create decentralized applications (DApps) using BSN facilities. The state-backed BaaS will facilitate the deployment of blockchain technology as an infrastructure and accelerate the digital transformation of businesses. Furthermore, the BSN has developed another set of blockchains to sell its services overseas, with BSN facilities now available in eight cities outside China, including Paris, Sydney and Tokyo.

The Outlook for Non-Crypto Blockchain in China

As China actively promotes nationwide digital transformation and the digital economy, the government will continue prioritizing the development of blockchain. In the “14th Five-Year Plan,” blockchain was listed for the first time as one of the seven major industries of the digital economy. It is expected that the revenue of blockchain applications will expand rapidly in China in the coming years as BSN will be a key driver for its mass adoption in China. At the same time, non-crypto blockchain will likely become a critical information infrastructure (CII) once the technology is applied in different sectors, receiving increased regulator attention.

On the other hand, China will work on expanding its ambitious BSN overseas. However, the incompatibility between the permissioned blockchain and the decentralized nature of global blockchain will make it challenging. Although the international BSN platform is open source, its link to the Chinese government will influence how people perceive it.

Opportunities for MNCs

MNCs can look for business and engagement opportunities related to blockchain technology in in China in the following areas:

  • R&D for blockchain technologies that are still underdeveloped in China, including large-scale consensus algorithms and blockchain storage.
  • Digital transformation of industries other than digital governance using non-crypto blockchain, in particularly agriculture, which the central government is keen to revitalize. As well as advanced manufacturing and the consumer goods industry, which the government will rely on to drive economic recovery.
  • The BSN’s international expansion efforts, which will require infrastructure support such as cloud computing and data centers, as well as Chinese enterprises’ aspirations to participate in global blockchain standard-setting.

In the upcoming years, the Chinese government and industries will pay increasing attention to non-crypto blockchain as a crucial technology that will support China’s pursuit of digitalization. This gives MNCs ample opportunities to pro-actively offer their experience and look for investment opportunities to establish a strong foothold in this emerging sector in China.

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