The Chinese government is starting to pay more and more attention to cryptocurrencies and blockchain technology. With the recent ban on initial coin offerings (ICO) issued by China’s central bank together with other related agencies on 4 September 2017, the debate has only intensified.
What is Blockchain?
But what makes blockchain so interesting that it is so thoroughly investigated by Chinese authorities? It all begins with a concept of ‘the trust economy’ which can be compared to the network in which participants exchange goods and services using virtual or cryptocurrencies, such as Ether or Bitcoins. These currencies are traded on online exchange platforms, where users can buy and sell their currencies.
The blockchain is a system that in a way removes the middleman from the interaction between two parties and makes it a peer-to-peer relationship. In that way, any person that is connected to the blockchain has access to all the information about actions that have been undertaken within the blockchain. The identities are hidden, but the transactions are public so that any party can easily verify them. The blockchain is in a way becoming a trusted gatekeeper which enables the transparency of the transaction.
How to create trust?
So what makes this different from ordinary digital money transfers? In order to carry out a digital transaction, both the buyer and the seller have to provide a lot of information about themselves, ensuring that both are legally entitled, capable and, above all, solvent enough to honor the transaction. This information is essentially required to create the ‘trust’ needed to convince people to engage in the exchange in the first place. But it also favors large institutions, such as banks, clearing houses, etc., which will store all these data about their users, causing not only concern about data protection but also about the considerable amount of power amassed by these institutions.
A model of exchange, where such transparency is not needed, is, obviously, a cash transaction. All that the trading parties need to know is that the money which is changing hands is authentic. Apart from this, neither the vendor nor the buyer has to reveal much private information.
Blockchain and crypto-currencies follow a similar principle. Instead of being account holder focused like banks, blockchain creates a ledger, which traces the cryptocurrency rather than the transactions of a single individual. All that has to be proven in the ledger is the genuineness, and thus validity, of the currency or original coin. And since all the ledgers are public, it is very easy to ensure the authenticity of the transaction by tracing it back to the initial token or coin offering (ICO).
Trust is also generated by the irreversibility of the transaction. Since the ledger follows the currency and registers transactions rather than individual information, once a transaction is conducted, it can’t be reversed. Similar to a cash transaction without money-back guarantee, the transfer is definite. This, of course, bears some risks for the seller but increases the trust for the buyer because it does not need to worry about the solvency of the other party.
What benefits does Blockchain create?
It not only saves the time that would be needed for a third-party verification but also enables increasing the efficacy and lowering the costs. Goods or securities can change their owner quickly with no need for an additional third-party verification by a bank, stock exchange or a payment processor. In a way, public ledgers are replacing the intermediaries as guards of the transaction’s transparency.
When it comes to contracts, they can be easily simplified or even replaced by self-governing contracts that have all the terms and rules recorded in the contract’s code. The implementation of contracts can be done thanks to the presence of the shared network, as well as the contract’s verification. There is no need for additional costly services because everything can occur within the blockchain. The same applies to accounting services.
Potential and Risks
Since its first appearance in 2009, Bitcoin has attracted the attention from governments all over the world. China is no exception. But it took 4 years before the Chinese government issued the first circular on 6 December 2013, which declared that the Bitcoin lacked the basic requirements of a legal currency and should therefore not be considered as a legal means of payment.
However, in the wake of tightening capital controls and the more recent crackdown on risky financial vehicles and over-leveraging, cryptocurrencies have become an attractive target for Chinese investors and fundraising.
In February, the People’s Bank of China, China’s Central Bank, launched an investigation into China’s biggest Bitcoin exchanges, which, as a result, stopped all Bitcoin transactions. Although most of the exchanges have resumed operations and introduced new rules, such as real name registration and other requirements, financial authorities have kept a wary eye on the crypto-currency market.
Nonetheless, the tightening financing rules and the increasing difficulties in accessing legal financing options led to e renewed surge in the popularity of crypto-currencies and ICOs as a tool to raise cash. Unsurprisingly, Chinese regulators did not wait long to act. On 4 September 2017, a joint notice from China’s central bank and other financial regulators banned any further ICOs.
According to the note, platforms are not allowed to engage in the following activities:
– Exchange between crypto-currencies and real or fiat currencies (i.e. RMB)
– Buy or sell tokens for crypto-currencies
– Offer bidding or middlemen services for token exchanges
If any of these rules are violated, the relevant telecommunication department has the right to stop operations of the website or the application. Apps will also be removed by the Cyberspace Administration of China from all app stores and the business license will be revoked by the State Administration for Industry and Commerce.
However, not everything is bad for the development of blockchain technology in China. Thus, the China Banking Regulatory Commission, in a document issued on 1 June 2017 (the article in Chinese can be found here) stated that this subject has to be immediately regulated and the regulations will be to some degree inspired by the solutions introduced in the United States and the United Kingdom. The agency also underlines the role of the government in the blockchain introduction process in order to minimize the potential lawless behavior of organizations and enterprises. But the agency also sees a lot of potential in blockchain technology. As it is stated in the document, it will contribute to the strengthening of China’s securities market security deposits.
The People Bank’s of China has announced a five-year plan regarding the modern technologies’ influence on the state’s financial industry. The central bank announced that it will support new technological development in the FinTech sector as well as the relevant research in this matter. The People’s Bank of China’s plan focuses on the following goals: establishing a durable technological infrastructure, enabling innovations in the FinTech sector, implementation of a standardization strategy and improving the financial security system. It is an official endorsement for entering into a Chinese digital era.
It is not the first investigation into blockchain technologies run by the Chinese authorities. In January 2017, The People’s Bank of China started to test a possibility of creating a blockchain-based digital currency. The central bank underlines that the digital currency would increase the financial sector’s transparency and curb money laundering as well as tax evasion.
Many Chinese corporations are already using blockchain technologies. For example, Alibaba has built a platform that allows preventing counterfeit of food, which is a big issue in China. If this platform is successful, it will be applied to all goods that are available on Alibaba’s e-commerce platforms. The Industrial Commercial Bank of China, the largest bank in the world, is starting to implement blockchain technologies and has established seven innovation labs that will be investigating solutions to remaining problems.
Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs. Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact: email@example.com
|Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter, give us a call +49 (0) 6221-9985639 or contact us directly via firstname.lastname@example.org|