There is an old slogan in China, “building the road is the first step to becoming rich”, Asian countries use infrastructure to boost the economy, and China is probably the most aggressive one - its annual average infrastructure spending is one of the highest among all at 8.3 percent of its GDP in 2010-2015, according to data from Statista.
In the last two decades, China has built the most highways and high-speed railways, it now has decided to extend the infrastructure building to digital dimension. In China’s “new infrastructure” plan (April 2020), it includes blockchain, 5G, AI and cloud computing as the new information infrastructure.
China's research and exploration of blockchain and digital currencies has a longer history than people usually thought. It started in 2014 when China’s central bank formed a special study group to research the feasibility of issuing digital currencies.
It wasn't until October 2019 that President Xi announced that “blockchain is a core technology breakthrough”, bringing this national strategy to people’s attention. The subsequent rollout of DCEP (Digital Currency Electronic Payment) trials and BSN (Blockchain-based Service Network) is a sign that the strategy is getting accelerated forward this year.
China’s Blockchain Vision
Prior to blockchain, each participant in the network could only use their own database, and as the number of participants in the network increased, the validation of the data demand grows exponentially, leading to high cost and inefficiency.
If all the participants maintain one database together, the frequency and cost of interactions between participants can be greatly reduced. Blockchain technology is a tamper-proof, public database that records all operations and data since day one. You can trust the history of transactions, basically the state of the ledger, without having to trust any particular actor to verify that information.
So instead of having to have auditors come in and pull data from all these different points and reconcile, you can directly audit the blockchain itself. Or potentially, regulators can come in and use the blockchain itself as the canonical source of information.
Using blockchain technology, we can create applications that could not have existed before. Satoshi Nakamoto used a blockchain to record a cash ledger, and thus Bitcoin was born, which showed the immensity potential of the technology.
However, China has its own vision of using the technology. “It wants to use blockchain to improve data sharing, optimize business processes, reduce operating costs and establish better credit systems, to solve the common problems in SME finance, banks’ risk control and legal supervision etc.” as stated in Xi’s announcement.
In short: China is not playing catch-up here, but rather exploring aggressively pragmatic ways to deploy a digital infrastructure for the whole economy. It wants to embrace blockchain to increase efficiency, lower cost while easy for supervisions.
Let’s take a look at the two major initiatives under such vision.
DCEP: The Sovereign Digital Currency
The digital format of the Chinese national currency, or DCEP, is an example that shows how China is using blockchain upon deliberate considerations.
“The primary purpose of introducing a central bank digital currency is to protect monetary sovereignty, out of concern that Bitcoin and other cryptocurrencies can have an impact on”, says Mu Changchun, the head of the central bank’s digital currency research institute in a recent report, “DCEP will also improve the efficiency of payment system and enhance the convenience of RMB payments”.
After reading all the existing materials, what caught my attention is that DCEP is capable of:
You don’t need to open a bank account to use DCEP (the current electronic payment would require a linked bank account), e.g. you just need to open a DCEP wallet.
Allowing small amount anonymous payment which is not supported by current electronic payment system. For larger amount transaction, the DCEP wallet has to pass KYC for anti- money laundering, anti-tax evasion, anti-corruption and anti-terrorist financing reasons.
Doing off-line peer to peer transactions once the wallet is setup, just like cash.
Integrating with smart contracts for targeted issuance and monitoring of usage. In a trial use in Suzhou, DCEP was used to pay government employees for public transportation subsidies.
Mu also said after years of research on technical specs of blockchain, the policy maker came to a conclusion that blockchain tech at its current stage, still has security issue and can’t handle the high concurrency for payment, hence it does not use blockchain for the digital currency issuance.
Blockchain itself is a combination of many existing mature technologies, such as asymmetric cryptography, consensus algorithm, time-stamping etc. As seen from its latest disclosed patent, DCEP is integrated with asymmetric cryptography, unspent transaction output (UTXO), and smart contracts.
The digital yuan adopts a two-layered system for issuance and distribution – the central bank issues DCEP to banks or other financial institutions, and then these institutions further distribute the digital currency to the public. While the issuance of DCEP is centralized, the circulation could be based on traditional financial account systems or blockchains.
DCEP transactions - that NOT based on financial accounts - could go around the SWIFT system and more convenient for cross-border payments, says Dr. Zou Chuanwei, chief economist at Wanxiang Blockchain in a recent report.
“Foreign entities can simply open a DCEP wallet to conduct the cross-boarder transaction. The requirements to open a DCEP wallet are much lower than those to open a RMB deposit account. Peer-to-peer transactions can be initiated between any two DCEP wallets.” As an example, he said, this explains why the People's Bank of China had previously announced that the DCEP pilot scenario included Winter Olympics venues.
What if DCEP transactions happen on public blockchains? I assume it will probably help the yuan to internationalize.
Blockchain-based Applications
To explore the possibilities of blockchain-based applications, China has invited banks, telecoms and internet companies, which have filed the most blockchain patents in the world.
In areas where there is a high requirement for trustworthy information sharing and a low requirement for concurrency, such as transaction settlement, trade finance, transfer of property rights, blockchain is already being used widely and the majority of blockchain applications are built on permission/consortium blockchains.
For example, Chinese banks began to explore the use of blockchain in various segments since 2016. Some of the largest projects currently in service are as below:
Bay Area Trade Finance Blockchain Platform (initiated by the central bank, launched in 2018)
As of December 17, 2019, 38 banks joined the platform, with business volumes over RMB 87 billion.
State Administration of Foreign Exchange Cross-border Trade Blockchain Service Platform (first blockchain application built by a national regulator, launched in 2019)
As of January 10, 2020, the platform had completed a total of $13.9 billion in accounts receivable financing lending, 170 banks joined the platform, serving 2,276 enterprises (70% are SMEs)
Blockchain e-invoicing (initiated by Shenzhen Tax Bureau and Tencent, launched in 2018)
As of April 2020, more than 18 million blockchain e-invoices have been issued by 15,000 enterprises.
The Need for Public Blockchains
From the use cases above, it seems the enterprise blockchains can meet the requirements of the application scenarios in terms of performance and privacy, and improve the efficiency with cost reduction.
However, any new participant has to first trust in the collective behavior of multiple participants in a permission blockchain, to be willing to join and collaborate, and vice versa.
If you want to broaden the boundaries of your application scenario and get more participants, you will need to use open and permission-less blockchains, which can be freely accessed by the public and, more importantly, it creates a consensus by all without the need to get permission to enter and exit.
While the current use cases in China have been on enterprise blockchains, I believe it will eventually converge on the power of public, open blockchains, as latter are the stronger form of technology.
Compared to enterprise blockchains, the permission-less blockchain is more like an board-less infrastructure and similar to the internet's TCP/IP standard. The boundaries at which it can work depend on network effects - the larger the network, the greater the value of the assets could be circulated in the network.
If a greater global consensus is to be achieved, it can only be achieved via public and open blockchain networks.
It seems China's policymakers are clearly aware of this, which is reflected into the technical design of BSN.
BSN: A National "IDE" for Building Blockchain Applications
Led by the State Information Center, China Mobile Communication Corporation, China Union Pay, the BSN aims to advocate the industry's use of blockchain by lowering the technical difficulty and cost of deploying blockchain applications.
According to its Introductory white paper, BSN intends to support several enterprise blockchains (Hyperledger Fabric, FISCO BCOS, Baidu XuperChain and CITA) and public blockchain frameworks like Ethereum and EOS. In its technical white paper, it aims to support as many blockchain frameworks as possible.
BSN itself is not a blockchain protocol, it's a centralized platform, more like what we call a large "IDE" for developers, providing a low-cost environment for developing, deploying, maintaining, interoperating, and monitoring applications that integrates multiple cloud resources, underlying blockchain frameworks, operational environment, key management, developer SDK and gateway APIs.
"We wanted to find and provide a low-cost deployment solution to allow a large number of small and medium-sized businesses, and even individuals, including students, to It is possible to use blockchain technology for innovation and entrepreneurship, thus facilitating the rapid development and diffusion of blockchain technology." So says BSN's chief architect, Ma Xiaojun in a recent interview.
BSN does the heavy lifting for developers, so they can plug in and play, deploying applications on blockchains at a cost as low as $150-$300 per year. Regardless of whether the underlying layer is heterogeneous or not, all application chains on BSN can interact with each other, resulting in a similar situation as communication on the internet.
As with any technology, affordability can meaningfully accelerate the adoption curve. BSN has the potential to unlock the potential of blockchain technology.
In the pilot phase, BSN will roll out more than 110 city nodes across China and overseas, it is reported that hundreds of blockchain applications have been deployed within the BSN from beta to current commercial use, including public data security sharing service, intelligent sterilization supervision platform, electronic contract management, government affairs depository as well as commodity traceability.
Ma believes that blockchain technology can be used in cross-border payments, letters of credit, payment clearing and other financial areas, as well as election voting, welfare lottery, public welfare and says the philanthropic utility sector may be the first to mature and make great use of blockchains.
Including various enterprise and public blockchain frameworks in the BSN is a strong strategic position and BSN will act as an abstract layer connecting permission blockchains with open and permission-less blockchains, of which are just two formats of using a technology and together they will weave an efficient and reliable network for the digital economy.
*The article was firstly published on cointelegraph opinion.
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