Blockchain rules expose China’s Achilles’ heel 

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China has already produced some of the world’s most successful blockchain-oriented startups. But many blockchain enthusiasts are concerned that new proposed regulations could stifle the development of the potentially-transformational field.

“Premature supervision will certainly hamper innovation,” explained one blockchain entrepreneur from northeastern China who didn’t want to be named. “But blockchain now is very mixed, some activities that were previously gray areas have become outright illegal.”

New draft regulations will tighten control over blockchain technology and platforms. If enacted, they would require that blockchain users go through real-name registration, and that service providers take responsibility for censoring content as well as saving user data for potential government inspection. The laws would apply to all “blockchain service providers,” whether organizations or individuals that operate in China.

The legislation, proposed by the Cyberspace Administration of China, is already being compared to the country’s cybersecurity law, enacted last year, and which operates under similar principles.

New proposed rules could rock China’s blockchain industry. Here’s what they mean

Such regulations seem to be contradictory to the technology’s very nature. Since blockchain has established a near-religious following due to its anonymous, transparent, and decentralized nature, the proposed rules would eliminate or hinder many of the attributes which make it so appealing in the first place.

The blockchain entrepreneur referenced a number of gambling dapps which have become popular among many cryptocurrency-holders in China, allowing users to bet on online games of chance, and skirt local laws.

However, the threats to social stability in China posed by an unregulated blockchain go much further. Fraudsters have capitalized on the blockchain craze to take advantage of unsuspecting investors, and cryptocurrencies have become a popular means by which corrupt business people and government officials can launder ill-gotten gains into assets overseas.

Blockchain networks have also been fertile ground for social activists, as Ethereum transactions have been used to publish documents and data which have been censored by Chinese authorities. In a domestic cyber landscape over which Beijing is determined to have total control, this poses a threat.

As blockchain technology has moved closer to the mainstream in recent years, Chinese entrepreneurs seemed to take an early lead. Chinese firms saw impressive levels of investment, and the Chinese business community produced some of the world’s first blockchain billionaires.

However, as China’s regulators have cracked down on the space, starting with ICO and cryptocurrency bans even before this current draft legislation, many of China’s blockchain entrepreneurs have taken their ventures overseas. Silicon Valley and Singapore, with comparatively lax rules, now seem to be more appealing locations for Chinese entrepreneurs to set up shop. For Binance, the Chinese-founded international cryptocurrency exchange, Uganda is the country they now call home.

Need for control

Regulatory stifling of its burgeoning technology industries seems to be a pattern of behavior this year from Beijing. In the gaming sector, where Chinese firms have begun to establish themselves as global leaders, regulators have hit the brakes on the industry’s rapid growth.

No new games have been approved since March, and none are expected to be approved until next year. Even if approvals resume, it is safe to say that gaming companies and investors alike will now be factoring this into the risks involved in doing business in the China market.

When it comes to blockchain technology, China faces a dilemma. For the technology to function best, regulatory authorities have to give up some degree of control. Blockchain systems, by and large, are designed to operate in decentralized ways, that is where their greatest benefits lie.

For China’s highly-centralized system of authority, there is not much of a playbook for integrating such systems. After all, for a bureaucracy that prioritizes stability above all else, any form of decentralization will be seen as a potential threat, at least in the short term, to such stability.

This is not a new problem in China—and it may be the single greatest problem plaguing the Chinese system. Throughout the past decades, not to mention centuries and millennia, there have been many efforts to foster semi-independent institutions of law, business, and society. In each case, the threat that they pose to stability in the short-term, often leads to crack-downs, preventing such institutions from fully maturing, and creating broader, more resilient, and sustainable systems in the long-term.

This has long been China’s Achilles’ heel. It has held China back in the past and will likely do the same to its aspirations in technology and innovation as well.