More of which that might impact Casper / CSPR out of the Fuzhou test case
iss.europa.eu
China's blockchain and cryptocurrency ambitions
The first-mover advantage
13 July 2021
IntroductionChina was initially cautious in the development and application of blockchain technology. Among the technology’s best-known attributes are the relative anonymity and immutability of the information, as every blockchain transaction has a digital record and signature that can be identified, validated, stored and shared. This technology could therefore become a double-edged sword for the Communist Party of China (CPC), as it goes against the government’s efforts to censor content it considers sensitive and, in more general terms, efforts to assert its cyber-sovereignty.
However, after at first observing the emergence of blockchain technology with concern, China’s central government has increasingly seen it as an opportunity, as has been the case with most emerging technologies. Since the launch of the 13th five-year plan in 2016 and the release of the first White Paper on Blockchain Technology and Application Development by the Ministry of Industry and Information Technology the same year, the CPC has increasingly considered that blockchain could become an economic, political and geopolitical asset for the country, if ‘guided’ well.
China has continued to shape its positioning on and conceptualisation of blockchain technology on a regular basis over the last 5 years: the China Blockchain Industry White Paper (1) was published in 2018, another White Paper entitled Blockchain Technology Application in Judicial Evidence Storage was published in 2019 (2) and the 14th five-year plan (2021–2025), released in March 2021, also refers to blockchain and cryptocurrency (see timeline diagram on page 7) (3).
China’s unique approach to blockchain is conditioned precisely by this paradox, stemming from the decentralised nature of the technology and the highly centralised nature of the Chinese political system. While blockchain technology is essentially decentralised, regulations in China have aimed to guarantee state control over its development and application.
As part of this dual policy, which is analysed in the first part of the Brief, the Chinese government has launched its own digital currency – the digital yuan. At the same time, it dislikes bitcoin, which relies on a truly decentralised type of blockchain. Although blockchain is best known for being the technology behind cryptocurrency, the Chinese government’s approach towards blockchain is very comprehensive, going far beyond cryptocurrencies. It promotes application of the technology in a variety of fields, ranging from energy conservation to urban management and law enforcement, and has strong ambitions to become the world leader in the field. In October 2019, China’s President Xi Jinping, speaking at a study session for members of the Politburo, declared that he wanted the country to be a ‘rule-maker’ on blockchain, suggesting that this technology will increasingly become a key arena in the country’s race against the United States for technological supremacy (4). Blockchain has become a fast-growing sector in China over the last two years.
But is China likely to succeed in the global promotion of an alternative form of blockchain? This Brief answers this question by analysing the development of different applications at national level, before and during the Covid-19 pandemic, but also the emergence of international cooperation on blockchain and cryptocurrency.
Several developments described above may have international repercussions, as Beijing has placed blockchain on its diplomatic agenda since 2018 and promoted cooperation in the field through existing forums. For instance, blockchain was addressed at the 2019 China-Central and Eastern European Countries (CEEC) Cooperation Forum and the possibility of establishing a China–CEEC blockchain centre of excellence was mentioned in the Dubrovnik Guidelines for Cooperation (33). A first China–CEEC Blockchain Summit was held in Slovakia in December 2019 (34). Blockchain has also been addressed as part of other summits and initiatives, including the ‘Belt and Road Initiative’(BRI) (35), the 2018 Boao Forum for Asia (36) and the second China International Import Expo in 2019 (37), as well as in bilateral meetings (38).
In a context of intensifying trade tensions and technological rivalry between Washington and Beijing, blacklisting is likely to spill over to blockchain, further fragmenting the blockchain industry, which has emerged in a rather disparate way. Many applications of blockchain (urban governance, logistics, supply chain management, customs and cross-border trade) could be hindered because of interoperability concerns (39). In any case, China’s ambition to lead the world in blockchain development is posing two key geopolitical challenges: one related to China’s development of blockchain as a whole, and one related to the development of the digital yuan more specifically.
BLOCKCHAIN: GEOPOLITICAL, INDUSTRIAL AND NORMATIVE IMPLICATIONSBeijing has strengthened research capabilities in the field of blockchain over the last 5 years in part with the aim of shaping blockchain standards. China leads the international research group on the Internet of Things and blockchain standardisation, created in 2018 (40). In addition, in the first half of 2019, China announced a total of 3 547 patents on blockchain technologies, more than in the whole of 2018 and accounting for over half of the world’s total (41). In October 2019, Xi Jinping stressed ‘the importance of stepping up research on the standardization of blockchain to increase China’s influence and rule-making power in the global arena.’ (42)
The BSN mentioned above is China’s most ambitious and comprehensive project on shaping blockchain at the global level. While the BSN is largely driven by economic and commercial concerns, it certainly has geopolitical ramifications. First, the BSN is envisaged as an international project, and as a network used to operate different types of blockchain applications. So far, the overwhelming majority of nodes are located within China (more than 100); there are eight overseas city nodes, distributed over six continents (43). Second, although the BSN allows organisations to establish their own nodes, at the top of the pyramid it will be managed by a consortium formed by Chinese companies and a state government agency. Third, the BSN could support further deployment of China’s BRI,
and particularly the ‘Digital silk road’ and Beijing’s e-commerce ambitions. Fourth, through its BSN project, China is planning to pilot integration with global central bank digital currencies. In particular, it intends to build a universal digital payment network (UDPN) based on CBDCs of various countries as part of its 2021 roadmap. With the UDPN, the BSN aims to enable a standardised digital currency transfer method and payment procedure, and increase cross-currency settlement. The beta version of the UDPN is expected to launch in the second half of 2021, and its full development is planned to be completed within 5 years (44). The list of cooperating countries has not yet been disclosed, but in February 2021 China co-founded a project dubbed the ‘Multiple Central Bank Digital Currency Bridge’ along with the Bank of Thailand, the Central Bank of the United Arab Emirates and the Hong Kong Monetary Authority with the aim to explore the use of CBDCs in several cross-border payment scenarios (45).
Internationally, various protocols are competing for adoption but none has gained prevalence so far. Through the BSN, China offers infrastructure to other countries and could in turn gain some first-mover advantages (46). If the BSN gains international appeal, it could push China to the forefront of blockchain rule-making.
However, it is unlikely that the BSN will exert universal appeal. US-China technological tensions are likely to have an impact. For instance, companies such as China Mobile, whose operations are banned in the United States because of security concerns, are involved in the BSN. Still, China is well ahead of the curve in terms of blockchain conceptualisation and promotion, and countries that are not opposed to Chinese technologies (in parts of South-East Asia, Africa and Latin America, but also the EU’s neighbourhood) may remain open to China’s blockchain proposals in the coming years.
DIGITAL YUAN: GEO-ECONOMIC IMPLICATIONSTheoretically, the release of the digital yuan could sustain China’s efforts to internationalise its currency and, in the long term, challenge the supremacy of the US dollar and the SWIFT system. But any assessment of the potential of the digital yuan to accomplish this should be cautious given the current centrality of the US financial system. To date, the yuan, and its forthcoming digital version, have not challenged the US dollar. China’s currency makes up about 2 % of global foreign exchange reserves, compared with nearly 60 % for the US dollar (47). Technical developments alone will not be enough to accelerate the internationalisation of the yuan; policy decisions will also be necessary, as China maintains a strict regime of capital controls.
Still, the development of the digital yuan is raising concerns in the US and has intensified the debate there on launching a digital dollar – in particular since Janet Yellen was appointed as Secretary of the Treasury in January 2021 – but this would still take time to take shape.
With the launch of the DCEP, China is expecting to enhance the renminbi’s global standing (48)and progressively convince a number of countries to use its digital currency for cross-border exchanges. The distribution of the digital yuan could be advanced through trade and infrastructure deals alongside China’s BRI, for instance by requiring countries to repay their loans in this currency. Other forums could be receptive to using the digital yuan for international settlements – for instance, the Shanghai Cooperation Organisation or the BRICS countries (Brazil, Russia, India, China and South Africa) could be candidates for this experiment. In 2019, the BRICS countries began cooperating on this at the proposal of Russia, with the objective of reducing dependency on the US dollar and facilitating trade (49). In addition, it might be easier for China to promote the adoption of the digital yuan in countries where Alipay and WeChat Pay are more advanced. Finally, as has occurred with other technologies, Beijing could leverage its consolidated expertise to promote its digital currency in other countries, through training and technical assistance. Other governments, keen to evade US oversight, may be eager to take advantage of this.
In concrete terms, some sanctioned countries could avoid having to use the US dollar for transactions, therefore impairing the ability of the United States to monitor critical revenue streams to such countries and to enforce economic sanctions (50). Besides undermining Washington’s ability to resort to sanctions as a means of deterrence, the United States would lose overall oversight of funding of underground activities (such as terrorism or missile development) if such payments are not made under its system.
On the other hand, China’s increased ability to monitor financial activity could raise serious concerns regarding privacy. The digital yuan could potentially be leveraged to monitor political dissidents beyond its borders. Washington would be likely to seek to retain its oversight and China would be likely to enhance its monitoring capability. This could materialise in efforts to ban each other’s systems or discourage their use (e.g. a Huawei 5G-like scenario of exerting pressure for its adoption/rejection) and in the issue of the interoperability/convertibility of digital currencies.
Blockchain is an emerging technology that remains largely in the experimentation phase, with its full potential not yet unleashed. Hence, it is still too early to accurately evaluate China’s blockchain strategy. However, blockchain is already becoming an arena for competition between countries, especially between the United States and China. In addition to the emerging geopolitical and geo-economic challenges identified in this Brief, political challenges are also emerging with the development of blockchain: because truly decentralised blockchain is challenging the ability of authoritarian governments to maintain tight control over their populations, several of these governments – especially China’s – are investing massively in blockchain to reshape it in a way that is compatible with the one-party system.
The ambition is that ‘blockchain with Chinese characteristics’ could even reinforce the CPC’s control over the daily life of the national population. And the development of the digital yuan itself may reinforce the government’s surveillance capabilities at both micro- and macroeconomic levels (control of transactions and overall consumption, but also inflation). To some extent, China could emerge as a model for other undemocratic countries in developing blockchain with surveillance and censorship capabilities (51).
China’s approach to blockchain is growing more confident and unequivocal, whereas other countries have been more uncertain about endorsing this technology. The EU has had some degree of ambition internationally. Blockchain has also been publicly recognised by European institutions as an emerging technology to invest in. Key initiatives at the EU level have included the decision in 2018 by 21 EU Member States and Norway to set up the European Blockchain Partnership to enable cooperation on the creation of a European Blockchain Services Infrastructure (EBSI). In parallel, an EU Blockchain Observatory and Forum was set up in 2018 with the aim of accelerating blockchain innovation (52). In 2019, the European Commission launched the International Blockchain Association, comprising 105 organisations from the public and private sectors. The coronavirus crisis has also been seen as giving an impetus to the European Commission’s digital agenda. (53) Elements of an EU blockchain strategy are emerging, with strong consideration of the issues around standards and interoperability (54).
However, although blockchain has not been absent from the European debate, over the last 3 years China has largely outpaced the EU not only on blockchain investment (55) but also on the concrete implementation and testing of the technology.
To address this gap, and because the blockchain structure and applications reshaped by the Chinese government have lost fundamental elements of the original technology, it would be timely if the EU could fine-tune its own conception of blockchain, and potentially reject the use of the term ‘blockchain’ to designate non-transparent and centrally controlled systems. Clarification of what blockchain is and means in EU terms would help Member States develop on their territories a type of blockchain that is fully compatible with their interests and values, and identify blockchain networks that could represent threats to their national sovereignty. It would also help reinforce cooperation with various (extra-European) central banks for the bridging and joint development of CBDC initiatives among countries that share a similar conception of blockchain.
To date, the EU seems more focused on the private and financial dimensions of blockchain applications and less so on its potential for use in governance than China. The launch of the EBSI – a network of distributed nodes across the EU that will deliver cross-border public services, which is planned to come into production in 2021 – is a first step but it would gain from being developed more ambitiously and comprehensively in the coming years. The EU would also gain from fully integrating blockchain in its connectivity agenda, as the technology provides a network that has the ability to reinforce interoperability between different cities and regions on European territory, as well as between the EU and various foreign partners sharing similar approaches towards the network.
The European Commission is already taking an active role in the shaping of blockchain standards, but the standards landscape is complex, fragmented and competitive – with China also being active in promoting its own standards. In this context, the EU could reinforce its position as a standard-setter in the field, especially through active participation in supranational and industry bodies.
Within Europe, the European Central Bank will decide whether to launch a digital euro project towards the end of 2021, with a formal launch still perhaps being around 5 years away (56). If the digital euro project is adopted, the implementation process would need to be fast-paced, with the aim being to develop a digital currency that is strong and compatible with a democratic context – addressing data, privacy and liability issues (maintaining, for instance, the same level of anonymity that is associated with cash).
In broader terms, the EU would also gain from addressing the governance potential of the technology, considering that blockchain can either support or undermine a democratic system depending on how it is developed. Like the internet, blockchain raises a myriad of political challenges and is already emerging as a battlefield for competition between different types of governance systems. |
