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

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China’s blockchain market has grown rapidly in recent years, growing 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 only accounted for around 19.9% ​​of the global blockchain market. in 2021, as new investment in China is overtaken by investment abroad.

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

The emergence of non-cryptographic blockchain in China

The Chinese government regards the blockchain industry as very important and has provided it with substantial policy support 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 has become 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 the blockchain, the Chinese government considers it a potential security risk if used for tokens and cryptocurrencies. In 2013 and 2017, China issued regulations targeting cryptocurrencies and initial coin offerings (ICOs), banning banks from handling bitcoin transactions, and then banning ICOs. Finally, in September 2021, China effectively banned all cryptocurrency-related activities. Therefore, companies in China avoided attaching cryptocurrencies to their blockchain services early on and instead started focusing on developing other applications of blockchain technology.

The application of non-cryptographic blockchain

China is now focusing on research and development (R&D) for blockchain functions beyond the original cryptocurrency transaction ledger, 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 of finance and digital governance through three scenarios:

On-chain repository: where the blockchain acts as a trusted ledger for the repository of evidence, subsequently improving traceability and auditing. It is primarily used in industries with high requirements for network-wide data consistency, such as digital governance. The Chinese judicial system has already started storing evidence on the blockchain. On-chain coordination: where blockchain provides a trusted machine for multi-party collaboration, enabling data sharing and systems interconnection. Six major Chinese banks use cross-chain protocols for cross-bank information sharing and are currently working to achieve cross-chain transfers of credit card points and other on-chain assets. On-chain value transfers: where blockchain is used for asset mapping, accounting and circulation. The main on-chain value transfer scenarios include cross-border trade, such as Industrial and Commercial Bank of China’s Sino-Europe Trade Link and e-CNY payments.

Additionally, the Chinese government has developed Blockchain-as-a-Service (BaaS) to further promote non-crypto blockchain technology. BaaS refers to the creation and management by third parties of cloud-based networks for enterprises in the creation of 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 on cloud services, portals and frameworks. underlyings. 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 decentralized blockchain, BSN has adopted a consortium blockchain model, also known as permissioned blockchain. All business attributes are formulated by the application owner and users must obtain approval from the application owner before they can use it. Under this model, developers will be able to build decentralized applications (DApps) using BSN installations. State-backed BaaS will facilitate the deployment of blockchain technology as infrastructure and accelerate the digital transformation of businesses. Additionally, BSN has developed another set of blockchains to sell its services overseas, with BSN facilities now available in eight cities outside of China, including Paris, Sydney and Tokyo.

The outlook for non-crypto blockchain in China

As China actively promotes nationwide digital transformation and digital economy, the government will continue to prioritize the development of blockchain. In the 14th Five-Year Plan, blockchain was listed for the first time as one of the seven major industries in the digital economy. It is expected that blockchain application revenue will grow 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 is likely to become critical information infrastructure (CII) once the technology is applied in different sectors, receiving increased attention from regulators.

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

Opportunities for multinationals

Multinationals can seek business and engagement opportunities related to blockchain technology 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, especially agriculture, which the central government wants to boost. As well as advanced manufacturing and the consumer goods industry, which the government will rely on to drive economic recovery. BSN’s international expansion efforts, which will require infrastructural support such as cloud computing and data centers, as well as Chinese companies’ aspirations to participate in global blockchain standardization.

In the coming years, the Chinese government and industries will pay increasing attention to unencrypted blockchain as a crucial technology that will support China’s continued digitization. This gives multinationals plenty of opportunities to proactively offer their experience and seek investment opportunities to establish a firm foothold in this emerging sector in China.

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