Blockchain In China: Productive Disruption

Blockchain, Investing, Regulation | November 13, 2018 By:

 Technology investing is now China’s business, and business is good. Asset management in China is one of world’s largest, crossing the 100 trillion Yuan mark last year. This is roughly about as big as the US GDP.

Chinese VC firms put over 1.2 trillion Yuan into tech startups in 2017. This is equal to Greece’s GDP.

 About one-quarter of the world’s 200 unicorns ($1B-valued tech companies) are based in China. Not counting the US, half of the world’s unicorns combined are not even equal to half the number of Chinese billion-dollar startups.

And what is technology business if not disruption? The biggest opportunity any business wants is an ‘unfair’ disruptive tech advantage over competitors in costs, quality, speed, reliability, security, and other aspects important to customers. The hottest high-tech trend since the advent of the Internet is certainly blockchain.

And the Chinese entrepreneurs have been at the forefront of the blockchain revolution since the very beginning. By different estimates, 40-50% of all the world’s cryptocurrency mining, which means the process of validation of cryptocurrency-based transactions and of adding the records of transactions to the blockchain ledger, is based in China. Interestingly, Sichuan Province is where 75% of cryptocurrency mining in China is based, which demonstrates that Sichuan is where at least every 3rd crypto coin in the world is mined.

Cryptocurrency miners get compensated for their services by cryptocurrencies. Typically, miners convert some of their crypto assets into fiat (government-backed currencies), and invest some into tokens which are also known as virtual currencies, which represent utility, a promise of a service, or equity in a company. As a result, no other market has been as active in blockchain investing as China.

However, a year ago, the Government of the People’s Republic cracked down on ICOs. Initial coin offerings are the blockchain alternative to IPOs, in which investors buy tokens in blockchain startups in exchange for crypto and fiat currencies. China effectively was stating that almost all ICOs were pyramid schemes and banned them in order to protect its citizens from fraud. In fact, some observers in China believe that only about 1% of ICOs were legitimate fundraising operations working to fund real businesses and not deploying some aspects of pyramid schemes.

This decision protected numerous Chinese investors lacking sophistication and experience, but also sent earthquake-level shocks through the crypto universe, eventually influencing the value of cryptocurrencies and marking the end of 2017 as the end of the crypto bull market.

The positive outcome of that major shift was the growing realization that crypto doesn’t equal blockchain.  There is life in blockchain beyond cryptocurrencies. Other ways of funding blockchain startups emerged. Private coin offerings, with deals moved mostly outside of the People’s Republic of China, turned out to have numerous advantages over ICOs, and professional investors started playing much more important roles in the deals.

This development made a major difference in the market, turning it into a serious industry and boding very well for the Chinese economy as it strives to become more transparent. Half a year ago, China’s Ministry of Industry and Information Technology released the ‘2018 China Blockchain Industry White Paper’ at the China Blockchain Industry Summit Forum.

The report demonstrated that blockchain is now playing a major role in China’s fast growing high tech. Blockchain now empowers many existing businesses in China, reflecting the global trend. For example, the IBM Institute for Business Value recently revealed that ‘91% of banks use blockchain in 2018’. Blockchain is already playing major role in Chinese business, empowering corporate governance and protecting data and assuring its immutability.

“A new generation of technology represented by artificial intelligence, quantum information, mobile communications, internet of things and blockchain is accelerating breakthrough applications,” said President Xi Jinping, describing the core of the new industrial revolution.

This was underpinned by the Chinese government creating a $1.6bn fund to finance more projects in the blockchain space, which was more proof that it has embraced the technology.

Blockchain technologies are not only a part of the future, they are among the most advantageous new trends, and not only sophisticated investors, but also smart governments and businesses are quickly understanding that backing up successful blockchain technologies and startups bring significant and fast returns.

Some examples include the Hangzhou Blockchain Industrial Park is investing 10 billion Yuan to support blockchain projects. The Shenzhen government launched an investment fund of 5 billion Yuan (US$792 million). Nanjing, the capital of Jiangsu province, announced a 10 billion Yuan blockchain fund, which is planning to support token economy and public blockchain projects.

Other Chinese companies have begun blockchain based pilot tests, processing data in real time and in a decentralised manner. AliPay and TencentPay, two of the biggest FinTech applications in China, have expressed their optimism towards implementing blockchain-based payment systems. JD.com, a major Chinese retailer, is using blockchain technology to track the shipping of domestic and international beef products, and insurance firm ZhongAn has been utilizing blockchain-based systems to trace and monitor the life cycles of poultry.

The Chinese government is adapting quickly and quietly to this new disruptive technology, knowing that it can accelerate the next financial revolution by not only coming to terms with blockchain, but by becoming the global epicenter for blockchain.