Is Blockchain’s Trajectory Tied to Chinese Money?

Though blockchain is a distributed, democratic framework that establishes collective worldwide services, it’s still subject to outside influence. It’s resistant to hackers, middlemen, and entrenched intermediaries yet remains susceptible to the sway of government. Regardless of how anonymous, encrypted or far-reaching any single blockchain solution is, the fact remains that a government can simply set up roadblocks preventing its proliferation within specific geographic borders. 

Wishy-Washy Stance on Blockchain

China’s historically wishy-washy stance on blockchain has caused some market hiccups and been the cause of much worry in the cryptocurrency industry, but the contrast between the government’s position and the opinion of its citizens is black and white. Chinese bitcoin mining operations represent over 80% of bitcoins mined today, largely due to cheap state-subsidized energy. Despite a string of bans, it remains popular among urban residents and in regions like Hong Kong, where Western-style laws complement the general obsession over crypto.

While restrictions on bitcoin remain, the country loves blockchain technology. The bumpy road to regulation has demonstrated otherwise, but China is now one of the biggest patrons of blockchain innovation in the world, even as other countries spurn the technology. However, the massive sums of money being poured into blockchain by Chinese institutions, both private and public, lend credence to reservations that the young industry might be too reliant on the country’s money.

Battling With Bitcoin

By finally settling on the definition of bitcoin as a security, the Chinese government and People’s Bank of China have arrived on a non-threatening compromise and can now focus on where their real goals lie: blockchain. Bitcoin is resilient and remains a common hobby for enthusiasts and traders, especially younger Chinese, but few in the country see it as the future. It’s used to gamble, speculate on, and rarely, to pay for goods. The popularity of hands-free payment methods like WeChat have already achieved bitcoin’s ambitions, so many see it as a novelty and nothing more. Blockchain is now the center of China’s focus instead.

Onlookers need only to witness events like the Shenzhen-led investment in blockchain companies within the city. The municipality recently slated $80 million, or 500 million Renminbi, to be invested in blockchain ventures that could aid the area’s many hardware factories. The countless enormous factories dotting Shenzhen’s landscape can benefit from the integration of decentralized ledger technology (DLT) and IoT devices to compete more effectively.

Shenzhen’s blockchain project follows a CNY 3 billion investment announcement from Hangzhou just two weeks earlier which will be placed in a fund co-managed by Tulan Investment and INBlockchain. The fund is reminiscent of other venture capital firms, except it nurtures companies using DLT and blockchain exclusively. Hangzhou and Shenzhen are pertinent for blockchain due to their close relationship with China’s budding tech scene—the former being the home of dominant e-retailer Alibaba and the latter likened to China’s Silicon Valley.

China is also the begrudging home of Hong Kong, a sprawling urban metropolis that exempts its residents from the legal strictures of greater China. Hong Kong is an excellent place for blockchain solutions to thrive without the looming threat of a shutdown. Here, companies like Senno—a sentiment analysis platform for cryptocurrency trading—can flourish. Companies involved with cryptocurrency can incorporate Senno’s open API to derive insights from crowd behavior in real-time. Per Co-Founder and CEO Elad Peled:

“Hong Kong plays a significant role as the bridge between the Western world and China, and as such, it is the perfect location for Senno headquarters. Asia-Pacific is a significant emerging market and with a constantly growing demand for smartphones (compared to a stable demand in the rest of the world), user-generated content is expected to grow exponentially in the upcoming years. Add in the fact that many Asian countries are heading into regulation of cryptocurrencies and that the market is known for its early adaptation of crypto technologies, making it feel natural for us to work from here. We also chose NEO as our blockchain platform since we feel NEO shares the same vision as ours for the future of cryptocurrencies both in Asia and worldwide.”

Separating Retail From Institutional

Retail blockchain investors and speculators have long known that the market is largely built on money from the Eastern hemisphere, especially countries like Japan, South Korea, and China. Japan was the first jurisdiction where bitcoin was made legal tender, despite the fact that the seminal cryptocurrency hasn’t demonstrated an ability to process payments well. South Korea has a love affair with low market capitalization tokens and was a large contributor to 2017’s altcoin boom. China, however, represents the perfect storm of cryptocurrency enthusiasm. With a scarcity of investment options for citizens, tight capital controls, and rampant inequality, retail investors leaped at the opportunity to invest in cryptocurrency, and even after concurrent bans found ways to circumvent restrictions and join the new market, according to Faizan Anees, Director and Co-Founder at ThinkCoin,

Given the sheer scale of its economy, it’s not surprising that the actions of both the Chinese government and its citizens have had a huge impact on the blockchain space and ICOs in particular. With around 70% of bitcoin mining operations located in the People’s Republic last year, the government’s request for what they called an ‘orderly exit’ by this operation is having a huge impact on the most prominent cryptocurrency as these miners look for new homes. In a similar vein, the government’s crackdown on domestic ICOs has had a mixed effect: crypto investors have had to look to invest in Hong Kong or Singapore via VPNs or rely on OTC markets.

It’s hard not to conclude that China’s tightening of restrictions was a key factor in the brutal price corrections across the crypto space in early 2018 – but it’s also difficult not to see these restrictions as being key drivers in the blockchain booms being experienced elsewhere in Asia as enterprising Chinese investors find ways around the often confused and clumsy government response. It’s clear to see that cryptos are here to stay and the Chinese economy is so energetic it’s unthinkable they won’t be welcomed back at some point. The only questions are when, and under what regulatory framework.”

Investors are painfully familiar with China’s effect on crypto markets, with both bans—one in late 2017 and another in early 2018—causing rapid market declines and subsequent bounces. When something impacts Chinese citizens’ ability to access cryptocurrency, it sparks fear. Institutional investment in blockchain technology, not cryptocurrency, looks set to follow the same trend. With countries like the UK and Germany suspicious of ICOs and hesitant to build favorable regulations, China has fostered a large head start. Though the private ICO sphere isn’t any better off in China and is arguably more restricted, the country is demonstrating to peers how its government-sourced blockchain investments can make it the beneficiary of new technology without losing control to it.

However, if other countries are taking cues from China, they’re doing it covertly. Those like Estonia, Gibraltar, and Sweden are putting their chips on blockchain in both the public and private sectors, extolling the virtues of blockchain immersion for international competitiveness, but also cooperation. In places where DLT technology is given a healthy chance at growth, companies like ThinkCoin, a service that incorporates ideas like self-sovereign identities, incentive-based liquidity and more into their ‘virtual trading pit’ are helping mature the nascent industry. Furthermore, with an eye towards interoperability, these platforms will break down barriers stymieing cross-border value exchange, whether fiat or crypto, while providing that much more momentum to the national blockchain environment.

China’s Emphasis on Blockchain Isn’t a Threat

Armed with the knowledge of blockchain’s potential relevance to future economic prosperity, the stifling of private blockchain solutions and mass investment into Chinese government-backed blockchains might seem worrisome. These fears are easily dismissed by those who understand why China is so taken with the technology. The country doesn’t need to recall very far back when it was a largely rural civilization, confined by Western dominance in the post-WWII era. Its embrace of blockchain is simply a chance to establish even footing with the rest of the world, and if anything, is a positive sign for fans of decentralized services.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.