Blockchain technology has quickly gained popularity in China, and the country has become the world leader in the application of the technology.
Not only did China at one point account for more than 80% of the world's Bitcoin hash rate (and even now, Chinese mining accounts for more than 50%) – the first application of Blockchain technology – China has started to use this technology in many other industries, from food quality control and logistics chains to finance.
According to the Industrial and Commercial Bank of China (ICBC), as of the end of 2019, 420 companies in China were providing information services using a Blockchain, and 72 companies were providing financial services based on this technology.
However, there have been no comprehensive rules governing the application of the blockchain in the financial sector so far. The new document says companies should independently evaluate their blockchain product according to three categories: level of technology development, efficiency, security.
The rules also offer methodology and criteria for appropriate evaluation. The multi-page document describes the standards that should be applied to the product software working on Blockchain technology, its functionality and security.
Financial security, as well as personal data security in general, is stressed throughout the document. The new rules require companies to create internal security services that will monitor Blockchain applications in real-time and respond quickly to any potential security threats.
The document does not simply focus so much on security. China, despite its success in implementing innovative financial products, is somewhat lagging in terms of regulatory legislation. On the one hand, this approach has contributed to the rapid development of new services.
But, on the other hand, it has created significant risks of fraudulent schemes.
Bian Yongzu, an expert at the Chongyang Institute of Financial Studies at the Renmin University of China, believes that China has great advantages in the field of innovation in finance, including Blockchain, but it is important to make the industry healthy, protected from fraud, manipulation and other risks.
“Chinese companies have devised a variety of scenarios for the Blockchain application: for example, for the fast-growing e-commerce sector or personal data protection. Furthermore, many companies in China are involved in the development of products that utilize this technology”.
The expert believes that this also creates a basis and a good environment for the popularisation of the technology, although he notes that there are of course some obstacles on this path.
“In China, for example, there are many Internet users but not everyone has a deep understanding of how Blockchain technology works. This creates fertile soil for the emergence of so-called pseudo-Blockchain companies, which are involved in fraud. This is also a significant problem for Chinese companies”, he says.
According to Bian Yongzu, the Central Bank of China seeks to create a unified legal framework for the functioning of the Blockchain in the financial sector also because it would provide a good basis for the implementation of a single national digital currency DCEP, which China's regulator is actively working on.
“The Blockchain is now able to provide new ways of solving some social and economic problems. This technology has been tested in recent years and is considered applicable in many areas. In fact, we can already see a Blockchain boom in China as many companies are deeply engaged in developing appropriate products and applications that work on blockchain technology. And this has also affected government institutions”.
However, the level of technical competence of companies is not uniform, the expert notes. That is why the Central Bank of China has issued a relevant document that should unify and standardise the development of this technology so that there would be no pseudo-blockchain companies. Besides, the document can be considered as groundwork for accelerating the launch of the Chinese digital currency.
The current document of the Central Bank of the People's Republic of China can be regarded as another step towards streamlining and introducing into a single legal field the functioning of the Blockchain and digital currencies in the country.
The People's Bank of China has already filed more than 80 patent applications for the digital yuan project, describing protocols to control its issuance and circulation.
The digital currency in China has not yet been introduced widely and is only being pilot tested in Chengdu, Suzhou, Hunan, and Shenzhen. These regions can use digital currency in selected local cafes, cinemas, as well as for transportation.
In addition to the Central Bank of China, four of the country's largest commercial banks, as well as a big three mobile operators and the largest technology companies – Alibaba, Tencent, Huawei – allow the circulation of crypto yuan.