Opinion: America loses to China in blockchain technology development
The casual observer of the bitcoin world could be forgiven for thinking that China is hostile to blockchain development.
Last month, there were headlines about the crackdown on everything from bitcoin mining to a warning from the People’s Bank of China that banks and payment companies should not provide services related to the cryptography.
However, intuitive as such an observation might sound, it would be wrong. In fact, as someone living on the ground in Beijing and actively involved in the development of blockchain projects in China and around the world, I would say that China has been, in its own way, the place where the best projects can be found. ‘flourish, even to a greater degree than in the United States.
How could it be so? Officially, the Chinese government is a strong supporter of blockchain technology and is arguably the biggest and most powerful advocate for the industry in the world. The leadership in China is aware that blockchain is one of the most strategic emerging technologies in the world today. It is leadership that thinks and plans decades into the future.
Don’t cross the red line
The problems with the national crackdown in China are largely related to where activities surrounding blockchain technology cross certain “red lines” of government regulation and policy. Typically: fraudulent behavior or the sale of tokens, particularly to retail buyers, and criminal activities such as money laundering and evasion of capital controls.
More recently, a new red line has appeared related to energy consumption. On June 3, the highest level of China’s central government issued strict requirements to reduce energy consumption. Bitcoin BTCUSD,
and other types of high-energy cryptocurrency mining that underpin the ‘proof of work’ consensus mechanisms, cross this new ‘red line’ of promoting energy conservation and therefore are not more welcome in china. It is not specifically about cryptocurrency; these are key national policy initiatives in all sectors.
The timing of the crackdown is also important to understand in context. On July 1, China celebrates the 100th anniversary of the Chinese Communist Party. Prior to these important political milestones, shutdown of various industries is not uncommon, such as the recent crackdown on China’s $ 120 billion private tutoring industry.
China as a technological sandbox
Westerners may find all of this difficult to understand. For example, officially there can be no advocacy for tokens / cryptocurrencies. Yet any expert in blockchain technology knows that without tokens, blockchain technology is emptied.
So, in some ways, China can be considered the largest regulatory blockchain “sandbox” in the world today. The nascent technological development and its use takes place as long as the external borders of this sandbox (ie the “red lines”) are not crossed. Obey the red lines and respect authority, and within those limits there is organic growth.
This wise and practical approach to developing technology at an early stage is what has made China one of the world leaders in Internet technologies and platforms; especially mobile internet technology where today’s Chinese platforms, in my humble opinion, make American competitors look like obsolete copiers.
We have seen this same top-down approach adopted by China two decades ago to the early growth of Internet technology: government support with practical “do no harm” support. It allowed embryonic entrepreneurs to grow organically without the weight of excessive regulation, as long as the “red lines” of the domestic “sandbox” were not crossed.
By comparison, in the United States, the Clinton administration definitely made the right decision to officially adopt a “do no harm” approach to the development of Internet technology in the late 1990s and beyond as well; free organic growth without the burden of excessive regulation and government interference. The result was that the most popular Internet technologies and platforms originated from the United States.
However, the reverse is true for the development of web 3.0 and blockchain technology in the United States. Complex and sometimes contradictory regulations regarding blockchains and their fundamental component – tokens – have plagued entrepreneurs in the United States. Seasoned lawyers fear the complexity of the regulatory gymnastics required to navigate the legal landscape, forcing many lawyers and law firms to withdraw from the industry for fear of being held accountable.
Even the best-intentioned entrepreneurs who trusted their lawyers’ advice in interpreting common law court decisions decades ago have faced enforcement action after enforcement action. For example, college students at the University of Maryland who developed blockchain technology from their dorms were the target of federal enforcement action, which ultimately resulted in their businesses being shut down and the inability of these enterprising students. to move on to other activities. – like opening their own personal bank accounts – because the task that such draconian government action has left them.
Examples like these should make the blood of most American capitalists boil, because it goes to the heart of American innovation and ingenuity. Some of America’s most famous blockchain entrepreneurs have traveled overseas to places like Hong Kong, Singapore, Switzerland, and other parts of Europe where blockchain innovators are welcome.
China adopts blockchain
In contrast, in October 2019, President Xi Jinping announced that the development of blockchain technology is a national priority. This top-down approach has led China to deploy its own digital currency, its own national blockchain called BSN, and dominate various aspects of blockchain adoption (such as, so far, bitcoin mining) and the development of intellectual property.
China is home to the largest number of blockchain patent filings in any market. Comparatively, America has had no national blockchain policy, and the leadership has remained silent. In Biden’s Day 100 speech, he spoke about the importance of innovation, but without mentioning blockchain. The former White House occupant’s most memorable statement on the subject was an overnight tweet on the toilet: “I’m not a fan of bitcoin and other cryptocurrencies.”
The good news in America, and elsewhere in the world, is that younger, better-informed leaders will eventually emerge, such as the new SEC chief Gary Gensler, who, along with other officers from the federal authorities and the representatives of Congress, has views than their predecessors. Ultimately, time is on the blockchain side.
As blockchain technology and associated tokens become more impactful nationally, we can expect Chinese regulators to place more restrictions on certain activities, primarily because they cross ‘red lines’. Expect more repression and potentially regulations in the future related to anti-money laundering or capital flight.
Also potentially for situations where retail buyers enter the market and expose the financial markets to systemic risk from overheated speculative investment decisions. The high leverage that some traders have taken can reach that level of hitting the sandbox borders because they cross the red lines of domestic politics.
Yet with the official top-down approach to supporting China’s sector and a generally favorable, but unofficial, “do no harm” approach, where the development and use of blockchain technology continues as long as the red lines are carefully respected, China has emerged as one of the world leaders – and will likely stay ahead of most other countries.
Omer Ozden is CEO of RockTree Capital, an investment bank and fund focused on mobile internet and blockchain projects with offices in Beijing, Shanghai, New York and Toronto. The company is the founding investor of CasperLabs and is its growth partner in China. He is also an international partner of ZhenFund, an angel fund in China.