Outside the Box: America is losing out to China in the development of blockchain technology

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The casual observer of the world of bitcoin could be forgiven for thinking that China is hostile to the development of blockchain.

Just last month there were headlines about crackdowns on everything from bitcoin mining to a warning from the People’s Bank of China that banks and payment firms shouldn’t be providing crypto-related services.

However, as intuitive as such an observation feels, it would be wrong. In fact, as someone who lives on the ground in Beijing and is actively involved in the development of blockchain projects in China and around the world, I would argue that China has been, in its own way, the place where top projects can flourish, even to a greater degree than in the United States.

How could that be so? Officially, China’s government is a strong proponent of blockchain technology, and arguably is the sector’s largest and most powerful advocate globally. The leadership in China is attuned to the understanding that blockchain is one of the most strategically impactful nascent technologies in the world today. This is leadership that thinks and plans decades into the future. 

Don’t cross the red line

Where the issues arise with domestic crackdowns in China are largely related to where activities surrounding blockchain technology cross certain “red lines” of governmental regulation and policy. Typically: fraudulent behavior, or the sale of tokens, particularly to retail purchasers, and criminal activities such as money laundering and evasion of capital controls.

More recently, a new red line has emerged related to the consumption of energy. On June 3, the highest level of China’s central government released strict requirements aimed at curbing energy usage. Bitcoin
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and other types of high-energy cryptocurrency mining that underpin “proof of work” consensus mechanisms, cross this new “red line” of promoting energy conservation, and thus are no longer welcome in China. It’s not about cryptocurrency specifically; it’s about key domestic policy initiatives across all sectors.  

The timing of the crackdowns is also important to understand in context. On July 1, China is celebrating the 100th anniversary of the Chinese Communist Party. Prior to such important political milestones, suppression of various sectors is not uncommon, such as recent crackdowns on China’s $120 billion private tutoring industry. 

China as a technology sandbox

Westerners can find it all difficult to comprehend. For instance, officially, there can be no advocacy of tokens/cryptocurrencies. Yet any expert in blockchain technology knows that without tokens, blockchain technology is gutted.

So in some ways, China can be seen as the largest regulatory blockchain “sandbox” in the world today. Nascent technology development and its adoption of use occurs, so long as the outer borders of that sandbox (i.e. the “red lines”) are not crossed. Obey the red lines and respect authority, and within those confines, there is organic growth.

This wise and practical approach to the development of early stage technologies is what made China one of the global leaders in internet technologies and platforms; particularly mobile internet technology where China’s platforms today, in my humble opinion, make American competitors look like antiquated copiers.   

We saw this same top-down approach taken by China two decades ago with respect to the early growth of internet technology: governmental support with a practical “do no harm” nurturing. It allowed entrepreneurs during the embryonic phase to develop organically without the burden of overregulation, so long as the “red lines” of the domestic “sandbox” were not crossed. 

Comparatively, in the United States, the Clinton administration definitively made the right decision to officially also take a “do no harm” approach to the development of internet technology in the late 1990s and beyond; organic free growth without the burden of overregulation and governmental interference. The result was that the most pervasive internet technologies and platforms emanated from the U.S. 

Regulatory gymnastics

Yet the opposite is true for the development of web 3.0 and blockchain technology in the United States. Complex, sometimes contradictory regulation with respect to blockchains and their fundamental component — tokens — have plagued entrepreneurs in the United States. Seasoned lawyers cringe at the complexity of the regulatory gymnastics required to navigate the legal landscape, forcing many lawyers and law firms to retreat from the sector for fear of liability.

Even the best-intentioned entrepreneurs which trusted their lawyer’s advice for the interpretation of common law court decisions from decades ago have been met with enforcement action after enforcement action. For example, college kids at the University of Maryland who developed a blockchain technology out of their dorm room were the target of federal enforcement actions, which ultimately resulted in the closure of their company and the inability for these enterprising students to move on to other endeavors — such as opening their own personal bank accounts — because the stain such draconian governmental action has left on them.

Examples like these should make the blood boil of most American capitalists, as this strikes right at the heart of American innovation and ingenuity. Some of America’s most famous blockchain entrepreneurs have gone offshore to places like Hong Kong, Singapore, Switzerland and other parts of Europe where innovators in blockchain are welcome. 

China embraces blockchain

By contrast, in October 2019, President Xi Jinping announced that the development of blockchain technology is a national priority. This top-down approach has resulted in China rolling out its own digital currency, its own national blockchain called the BSN, and dominance in various aspects of blockchain adoption (such as, up till now, bitcoin mining) and intellectual property development.

China is home to the most blockchain patent filings out of any market. Comparatively, America has had no national policy on blockchain, and leadership has been silent. In Biden’s 100th Day speech,  he talked about the importance of innovation, yet failed to mention blockchain. The prior White House occupant’s most memorable utterance on the subject was a night-time toilet tweet: “I am not a fan of bitcoin and other Cryptocurrencies.” 

The good news in America, and elsewhere in the world, is that eventually younger, better informed leaders will emerge, such as the new head of the SEC, Gary Gensler, who along with other officers of federal authorities and congressional representatives, have more informed viewpoints than their predecessors. Ultimately, time is on the side of blockchain.

As blockchain technology and related tokens become more impactful domestically, we can expect China’s regulators to have more restrictions on certain activities, primarily because they cross “red lines.” Expect more crackdowns and potentially regulations in the future related to curbing money laundering or capital flight.

Also potentially for situations where retail purchasers enter the market and expose financial markets to the systemic risk of overheated speculatory investment decisions. The high leverage that certain traders have taken may rise to this level of hitting the borders of the sandbox because they cross redlines of domestic policy.

Yet with China’s official top-down approach of support for the sector, and a generally supportive, yet unofficial “do no harm” approach, where the development and usage of blockchain technology continues so long as the red lines are carefully respected, China has emerged as one of the global leaders — and will likely remain leaps and bounds ahead of most other countries.

Omer Ozden is CEO of RockTree Capital, a merchant bank and fund focused on mobile internet and blockchain projects with offices in Beijing, Shanghai, New York and Toronto. The firm is founding investor in CasperLabs and serves as its China growth partner. He is also international partner of ZhenFund, an angel fund in China.

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