Ramifications of China’s new blockchain rules hit home

China’s internet regulator is proposing curbs that go against the original spirit of blockchain, but for some, they’re the price to pay for participating in the country’s still burgeoning sector.

The country’s Cyberspace Administration of China (CAC) released the draft rules for public comment last Friday. The proposal calls for blockchain service providers in China to, among others, register with authorities, gather real-name information from their users, control content appropriately, and provide data for government inspection.

The plan poses the biggest threat to companies who provide services that are considered illegal such as exchanges. When such activities were banned last year, many companies simply registered overseas but continued operations in China. The new rules would effectively wipe out such companies, experts say. For companies currently operating within the law, the fresh regulatory measures could mean additional costs as companies move to invest in the technology and people needed to ensure compliance.

As for the broader implications of the rules, some consider the regulations restrictive, saying they will act as a brake on innovation and growth in the blockchain community. Others say the draft laws are misguided. Still others say they could help foster a “national team” of blockchain champions much in the way China’s sectioning off of the internet prompted the rise of homegrown internet giants.

Greater accountability

Billy Chan, CEO of DropChain, a company that incorporates blockchain into the food and beverage supply chain, said that while the new proposed laws may appear “sacrilegious” to blockchain purists, he took a more pragmatic view on the government action. “It’s not fair to say the government is stifling blockchain,” said Chan, a Canadian based in Shanghai, pointing to widespread investment and support shown by central and local governments. “Instead, they’re trying to hold people accountable.”

Xia Yubin, an associate lecturer in computer science at Shanghai Jiao Tong University said that while the new rules may appear to contradict the essence of blockchain, they were necessary to keep blockchain in China free of undesirable elements. “Currently blockchain does not support censorship, so if you put something bad on blockchain everybody can see,” said Xia. “Definitely for our country we need to find a solution to this—especially with regard to illegal content.”

Tamar Menteshashvili, a doctorate student also at Shanghai Jiao Tong University (SJTU), and founder of SJTU Blockchain Hub, said the new rules were “aligned” with the country’s policy toward blockchain.

“While the Chinese government has been very supportive of blockchain technology and is one of the technologically forward-thinking nations, it has been making sure that the whole industry is under the strong supervision of the authorities and as closely controlled as possible,” said Menteshashvili.

If implemented in a way the rules stand today, the new framework would affect all blockchain-based information service providers as well as their users, she said.

Specifically, this would mean implementation of proper KYC (“know your customer”) and user behavior tracing procedures to be compliant with the new legal framework while making sure that the users are comfortable with exposing their personal information and putting it under the control of the service providers, she said.

“The implementation of the new rules could put an extra financial burden on blockchain startups because they would have to introduce new procedures in order to meet legal requirements,” said Menteshashvili.

Chan said that companies that offer blockchain as a service could see cost increase, in terms of human capital and software costs. Whether companies choose to develop their abilities to comply with the law in-house or outsource them to a third party, more money will be required. “Now’s there’s an extra layer that the government is inserting into the process,” he said.

Still, he said, “I don’t think this will deter companies. They’re just going to eat the costs.”

Jelena Strelnikova, compliance officer for blockchain tech solutions provider Beijing Tai Cloud Technology Corp., said the rules were not what the country’s blockchain industry needed. She said CAC, the regulation issuing body, is quite limited in its authority, and not in a position to impose regulation for the broader blockchain industry.

Instead, she would welcome greater guidance from the government in other areas more critical for the development of the sector. “It would be helpful to have regulation on the finance side of the industry, governing such issues as trading or how to issue security tokens,” she said.

Strelnikova said proposed laws suggest a restrictive rather than permissive approach to blockchain. Other countries offer guidance about “how to do.” By contrast, China seems to be more along the lines of “how not to do.”

National blockchain champions

Shi Qingwei, COO and co-founder of CPChain, a company provides a data platform for IoT systems, said the proposed laws would help establish some industry standards, but to some degree, it may have a negative influence on public chain service providers. The development of technology innovation could be slowed down because of regulation that’s too strict, he said.

One blockchain industry participant based in Taiwan who asked not to be named, citing the sensitive nature of the issue, said new draft regulations could help China foster its own “national team” of blockchain companies. Those that fit the nation’s agenda could grow to become the BAT of blockchain in China, he said in a reference to Chinese tech giants Baidu, Alibaba and Tencent.

Xia suggests that a technical solution might be the “preferred way to tackle” the concerns swirling around some aspects of blockchain. But conceded that, in the absence of such an approach, authorities had to rely on regulation.

“I think it’s a responsibility for the blockchain community because we have to consider illegal stuff,” said Xia. “Sooner or later this is a problem we need to solve.”

Additional reporting by Christopher Udemans and Nicole Jao.