Record keeping is at the core of any good business. History shows that the science of accounting dates back thousands of years, while the double-entry accounting system that many businesses use today was invented nearly 700 years ago. Still, after all of this time, there are still major issues with accounting processes; ledgers are insecure, alterable without detection, and oftentimes inefficient. The modern solution is a form of distributed ledger technology (“DLT”) called blockchain.
Blockchain technology addresses issues in record keeping by acting as a transparent, distributed ledger that records transactions in a verifiable, immutable, and secure manner. Business adoption of blockchain solutions has been rising across the globe, and the technology has the potential to re-calibrate economic and social systems over the coming decades.
Through pragmatic government support, China has cultivated a hot bed for innovation within its technology industry, which has given way to widespread adoption and created tremendous value for SME and MNCs, alike; moreover, it has resulted in the creation of new business models in China’s digital ecosystem.
Is Blockchain Different From Digital Currency?
Due to stories of mega-fortunes won and lost in the wild west of cryptocurrency markets, blockchain technology has largely been associated with digital currencies, such as Bitcoin and Ethereum. While most digital currencies – specifically those from the subclass called cryptocurrencies – are a blockchain innovation, blockchain is simply the underlying technology that enables these digital currencies to circulate and can be decoupled from digital currencies for more wide-reaching application.
What Is Blockchain Technology?
At its core, the blockchain is a database of transactions. A database is an assortment of information stored electronically, usually in table format for easy access. Blockchain collects data in groups, known as blocks, which hold sequences of information, such as a list of transactions. Once a block’s storage capacity has been reached, they are in effect “chained” to the previous block by a network of validators who have digitally approved each transaction.
Decentralization is a key function of blockchain technology. With each “node,” or point of data entry, connected in a network, the decentralized nature of blockchain removes the need for third-party intermediaries to verify ownership or proof of transaction. Blockchain also allows for a greater degree of transparency and security, as any attempt to alter its data would lead to all other nodes cross-referencing transaction histories to identify the inconsistent transaction entry and approximate the location of the threat. Transactions on the blockchain are therefore immutable, which, in the context of business, can increase efficiency, simplify auditing and accounting, and strengthen data integrity.
How Did China Become the Leader in Blockchain Technology?
The Early Push for Blockchain
China’s Ministry of Information and Industry Technology (MIIT) produced the country’s first whitepaper on blockchain, entitled “The Blockchain Technology and Application Whitepaper,” in 2016 as part of the 13th Five-Year Plan. Chinese policymakers originally identified the financial sector – particularly in areas of asset management, securities, and settlement – to benefit the most from this nascent technology. Blockchain would, according to the whitepaper, reduce transaction costs in the asset management field and pave the way for smart contracts, or automated pieces of code that execute when certain criteria are met, to be used in the securities and lending sectors, particularly in relation to syndicated loans and other commercial banking solutions.
Expanding Blockchain to Other Industries
While digital currencies have generated the most noise among all the solutions offered by blockchain technology, Chinese policymakers were quick to see use cases outside of payments. In 2018, the China Academy of Information and Communication Technology, a scientific research institute under the purview of MIIT, published the “Blockchain Whitepaper.” The 2018 analysis went into detail on the fundamentals of blockchain technology and how its nationwide rollout cost could be greatly reduced if combined with cloud technologies to form Blockchain-as-a-Service, or ‘BaaS.’ BaaS would then enable developers to test the applicability of blockchain technology across a variety of industries and business models.
The evolution of BaaS led to the 2020 launch of the Blockchain Service Network (BSN). The BSN was created by the State Information Center, a public institution affiliated with the National Development and Reform Commission (“NDRC”), to reduce the cost of blockchain adoption while also lowering its operational and maintenance costs. The form of blockchain services offered by the BSN straddles between centralized and decentralized, with data entry effectively managed by the “owner,” or Chinese regulators. This has resulted in widespread application of blockchain technology throughout various industries that is by nature subject to comprehensive state policy and government oversight. The BSN has also been integral to the rollout of China’s smart city initiatives.
Local Governments Lead in Blockchain Support
At the local level, policymakers have used a variety of measures to spur blockchain innovation. In 2018, the same year that Hainan gained free trade pilot zone status, China’s first blockchain pilot zone was established in the island’s capital of Haikou. In 2020, policymakers released a “master plan” to develop the Hainan free trade port that called upon blockchain technology to strengthen intellectual property protections, modernize governance systems, increase accountability in financial sectors, and more.
Other locales have followed suit. For example, Hangzhou is an emerging leader in China’s blockchain development. The Zhejiang Patent Office launched China’s first blockchain intellectual property certification platform, while Hangzhou’s Internet Court was the first court to accept blockchain certification as credible evidence in 2018. Hangzhou’s city government also has a 30% stake in the Xiong’An Global Blockchain Innovation Fund, a US$1 billion fund that provides seed capital to promising blockchain startups and projects.
Innovating Business Using Blockchain
China’s blockchain evolution has primarily focused on the technology’s scalability. Chinese policymakers want to position the nation as a global leader in blockchain, which, in simplistic terms, can be measured by industry innovations. The campaign appears to be working; in 2019, China surpassed the US as the top international patent filer for blockchain technologies.
China’s application of blockchain technology has extended beyond its initial focus on digital currency to create a diverse ecosystem of business innovations. Enterprise blockchain platforms (“EBP”), or platforms on which businesses can utilize blockchain for their various needs, are a rapidly growing market segment in China.
One such example is Guangdong province’s SME-focused blockchain platform, which aims to increase the speed of credit analysis and loan processing for SMEs. The platform was developed by PingAn’s fintech subsidiary, OneConnect, and is expected to reach 1 million users by 2022. It made history as the first blockchain-based application that provided an automated unsecured loan and has since given rise to the “Guangdong model” in which SMEs can obtain financing more quickly through blockchain-backed streamlined corporate financing. This is just one example of the way that the blockchain technology has been leveraged to foster innovation and evolve the digital business ecosystem in China.
Tech Giants and Blockchain
As with most things technology in China, national champions like Baidu, Alibaba, Tencent, and others have led the march in blockchain innovation. According to the earlier mentioned 2020 whitepaper, Alibaba obtained the most blockchain patent applications in 2020 after submitting 200 applications.
Public-private partnerships have also seen creative implementations of blockchain technologies. In 2018, Tencent partnered with the Shenzhen tax bureau to develop a blockchain-based invoicing system that was deployed across Shenzhen’s transportation systems, which included taxis, subways, and more. The system makes trip invoices available to all parties, including regulatory authorities, and allows for coordinated management by stakeholders throughout the whole blockchain.
Blockchain technologies have also allowed philanthropic organizations in China to revamped their business innovation models. Ant’s blockchain, or AntChain, created a public service ledger on Alipay to better streamline donation demand, verify user information, and reduce bureaucratic processes and red tape.
Blockchain technology has the potential to substantially strengthen global economic systems and output. China’s leadership in blockchain development has the potential to scale along with the international adoption of the technology and keep the nation and its tech giants at the forefront of industry innovation. With significant funding and resources funneling into blockchain as policymakers name it a key strategic technology, the future is the limit for this emerging technology behind some of the greatest economic and societal innovations of our generation.