China’s local governments ramp up blockchain projects amid cryptocurrency clampdown

More local governments in China are pushing forward with blockchain-related programmes and investments that will benefit start-ups using the technology

PUBLISHED : Tuesday, 24 April, 2018, 6:30am
UPDATED : Tuesday, 24 April, 2018, 11:54am

China is ratcheting up its adoption of blockchain, the distributed ledger technology behind bitcoin, even as regulators continue the clampdown on cryptocurrency fundraising schemes in the country.

That drive was manifested over the weekend in the publication of the master plan for the Xiongan New Area economic zone outside Beijing and the launch of a new fund that aims to invest in blockchain-related projects.

The plan for Xiongan, created last year under direct orders from President Xi Jinping, set out the use of several advanced technologies, including blockchain and cognitive computing, to transform the area – comprising three counties in the northern province of Hebei – into a smart city.

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Shenzhen, the sprawling metropolis in the southeastern province of Guangdong, established a new local government-backed fund focused on blockchain investments. The fund has an initial war chest of 500 million yuan (US$79.4 million), 40 per cent of which is financed by the Shenzhen Angel Capital Guiding Fund, also known as the Angel Fund of Funds.

“Those two initiatives imply that more local governments in China are paying attention to blockchain technology,” said Katt Gu, the managing director at iBlock, an incubator for blockchain projects at the University of Illinois at Urbana – Champaign, a public research academic institution in the United States.

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Blockchain first burst onto the scene when the cryptocurrency bitcoin was introduced by its pseudonymous inventor, Satoshi Nakamoto, through a technical paper published in October 2008. Blockchain provides a distributed online database of encrypted transactions that multiple parties share and everyone can trust, which enables a full audit trail of cryptocurrency trades.

China helped raise the profile of blockchain when it became one of the first countries in the world to include the technology as part of a state-level policy. In 2016, Premier Li Keqiang announced that blockchain was written into the 13th Five-Year Plan, a road map for the country’s development in the five years to 2020.

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That bolstered how blockchain provides a high level of security and privacy that can be adopted in areas such as financial services, data storage, and identity monitoring and authentication, according to Gu of iBlock.

Industry applications for blockchain include enhancing banks’ trade finance services by enabling so-called “smart contracts”, or agreements where the terms can be preprogrammed to self execute and self enforce. In manufacturing, blockchain can be used to improve supply chain management.

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Chinese regulators, however, have taken a stricter stance towards initial coin offerings (ICOs) and other cryptocurrency-related activities since last year. 

In September, China ordered the closure of all cryptocurrency exchanges and pronounced all ICOs as illegal, which prompted a number of bitcoin traders to relocate to other countries. 

The warmer tone towards blockchain points to a dualism in official policy, as Beijing has been steadfast in efforts to quash cryptocurrency trading as part of a campaign to root out financial risks, especially highly volatile activities that could leave investors with big losses.

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It is a policy welcomed by some of China’s equity venture capitalists. 

“Some months ago, when equity investors had no sense of blockchain technology, we fell out of favour with start-ups,” said Sun Jiangtao, an angel investor and the co-founder of Beijing-based Goopal Group, which builds blockchain-based applications. 

“But when the regulators got a deeper understanding of blockchain and cracked down on ICOs, VCs and big companies found back their competitiveness,” Sun said.

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At least nine provincial-level governments in China have issued guidance on blockchain as of November last year, according to 8btc, a Chinese-language blockchain information provider.

Earlier this month, the government of Hangzhou, the capital of Zhejiang province in eastern China, announced its plan to invest 10 billion yuan in a blockchain fund, which officials claimed as the world’s biggest fund investing in blockchain projects.

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In the first quarter of this year, 41 per cent of start-ups that received funding in China were blockchain-related, according to a report by information service provider ITJUZI.

More local governments in China are paying attention to blockchain technology
Katt Gu, managing director at iBlock

Still, technology research firm Gartner said it does not expect large returns on blockchain until 2025. It means companies today will have to try different blockchain projects to determine if the technology provides value for them – that is, whether there will be new revenue possibilities, cost savings or improvements in their customers’ user experience, a recent Gartner report said.

Few blockchain start-ups have been able to build a sustainable business yet, and many have struggled to build a marketable product around the technology. 

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“Anyone can claim to be launching a blockchain start-up. But no one is equipped or experienced enough to assess their claims,” Neil Woodfine, a Beijing-based growth manager for Asia at Wyre, a cross-border payments company from San Francisco, California, said earlier this month.