China passes new cryptography law, laying ground for digital currency rollout

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China passed a new law to regulate cryptography on Saturday at the closing meeting of a bimonthly session of the Standing Committee of the National People’s Congress (NPC), according to state-run media Xinhua Net.

Why it matters: Chinese authorities expect the newly approved law, which will take effect on Jan. 1, 2020, to facilitate the development of cryptography in the country and enhance the security of information in cyberspace.

  • The approval of the new law comes on the heels of President Xi Jinping’s call on Thursday for more research and investment into the development of blockchain technology.
  • The central bank said last month that no official timetable has been set for the launch of the digital currency. However, the new cryptography law will help lay the “political and legal foundation for the upcoming digital renminbi,” according to Dovey Wan, founding partner of Primitive Ventures.

Details: According to the National People’s Congress Constitution and Law Committee, the law is “necessary for regulating the utilization and management of cryptography, facilitating the development of the cryptography business, and ensuring the security of cyberspace and information.”

  • The new law encourages and supports the research and application of cryptography and aims to protect the intellectual property rights in the sector.
  • The law categorizes the technology into core, common, and commercial cryptography.
  • Core and common crytography are strictly managed by authorities. It stipulates that the state’s confidential information must use core and common cryptography for encrypted data protection and security certification.
  • Commercial cryptography, on the other hand, is for the protection of information not considered state secrets. It can be used by businesses and individuals to enhance the security of information sent into cyberspace.
  • The law also specifically highlights legal liabilities for misconduct involving cryptography technology. For example, those who discover vulnerabilities in core and common cryptography but fail to respond or report it to authorities in a timely manner will face legal consequences. In addition, individuals involved in commercial activities relating to unauthorized cryptography products and services will also face consequences.

Context: China is embracing blockchain and cryptography technologies as it paves the way for its digital currency rollout.

  • The Chinese central bank’s digital currency has been in the works for the past five years. Blockchain and cryptography will likely be crucial to the development of the architecture of the planned digital currency. Facebook’s announcement of its own cryptocurrency project Libra in June prompted the central bank to ramp up the development of its own digital currency.
  • Earlier this year at the Two Sessions, a major event on the country’s political calendar, blockchain- and cryptocurrency-related topics were featured more than previous years.
  • On Feb. 15, draft regulations for blockchain-based services released by China’s Cyberspace Affairs Commission (CAC) came into effect. It aims to promote “orderly development” and requires companies to implement real-name registration, maintain correspondence with authorities, and provide relevant information as requested.
  • China’s country’s cyberspace watchdog last week released a second batch of 309 approved blockchain projects, comprising companies in the financial services, healthcare, auto manufacturing, e-commerce, and logistics sectors.
  • While cryptocurrency is still outlawed in the country, Xi’s remarks on Thursday supporting blockchain technology has generated interest. The search for keywords related to the technology spiked on search engine Baidu and social media the following day.