Smith Brain Trust / October 31, 2019

What China's Move Means for Blockchain

Amid renewed interest from Beijing, a look into the open-ledger technology

What China's Move Means for Blockchain

SMITH BRAIN TRUST  Bitcoin and Chinese stocks surged with China President Xi Jinping’s public embrace of blockchain technology to spur innovation. But beyond this show of confidence as power, what are the realistic prospects for economic growth here?

China’s People’s Daily just released a book, “Blockchain – A Guide for Officials,” as a primer on blockchain and its implications for China.

But a quicker, yet deep, dive into this development is provided by Anil K. Gupta, Maryland Smith’s Michael Dingman Chair in Strategy and Globalization. It’s via a Q&A (below) initiated by Maryland Smith’s China Office Executive Director David Liu-Yanxiang.

Gupta, ranked by Thinkers50 as one of the “world’s most influential living management thinkers,” first points out that “as a technology, blockchain is fairly mature, unlike, say, AI, robotics, or 5G. So, this is about deployment -- rather than development -- of technology. This has almost no implications for the US-China technology race.”

What are the key features of blockchain?

Blockchain technology achieved initial popularity as a mechanism to record bitcoin transactions in a digital ledger. Since then, it has also found use in managing supply chains, banking, insurance and some other applications.

The term blockchain refers to a chain of blocks – think of them as digital records – that are chronologically linked to each other cryptographically. Like the pages in a book, each block comes after a previous one.

Each block contains some information, e.g., a transaction between parties A and B, a medical record, or a land title. It also includes a unique encrypted identifier, a timestamp about when it was created, as well as the unique identifier of an earlier block, where some change to the earlier block -- such as change in ownership of the particular land -- resulted in the creation of the current block.

The entire chain is copied and stored in a decentralized, distributed and often public network of computers. The information in an earlier block cannot be changed without changing the contents of all blocks that came after it and a majority consensus of the computers where copies of the blockchain are stored. This makes tampering any record almost impossible. Adding a new block also requires majority consensus of the computers in the network.

The decentralized, distributed, chronological, and majority consensus features of a blockchain – coupled with reliance on cryptography – make it virtually immune to hacking, fraud or the destruction of any centralized server. This is why blockchains are viewed as a highly-trusted method for storing records.

How will China's blockchain develop in the future?

The term “blockchain” is used in two very different ways. One, as a technology to create a distributed digital ledger system that is immune to hacking and fraud. Second, as a particular chain of blocks (i.e., time-stamped digital records) that record the evolution of specific transactions around some specific asset among some specific parties.

Compared to other technologies such as AI, IoT, and 5G, blockchain technology is somewhat “mature” or at least slow-moving in terms of its evolution. Also, the underlying technology is pretty global. Thus, I expect that, on the technology dimension, its development in China also will be somewhat slow, in line with global developments.

However, on the application side, given President Xi’s endorsement, we can expect to see a faster adoption of this technology in China. In particular, I’d expect much faster adoption by state-owned enterprises in manufacturing (for supply chain management), and banking and insurance (for ensuring greater trust and reducing risk). This wider adoption should be help the country’s economy positively.

What factors need to be addressed to speed up blockchain adoption in China? What are the conditions for the implementation of this technology?

Let me focus on the top three factors.

First, because the underlying principle of blockchain technology is that no single party can unilaterally create a new block by changing the records of an earlier block, there is latency-by-design in the use of blockchains, i.e., it takes 10 minutes for a new transaction to be recorded. This means that blockchains cannot currently be used for fast-moving transactions, e.g., buying subway tickets or a cup of coffee. You can reduce the latency only at the risk of reducing the need for the verifiability of the transaction. Thus, blockchain is unlikely to become a substitute for systems such as Alipay or WeChat Pay.

Second, if the volume of transactions and the number of parties in a blockchain goes up, the demand for electricity for the processing of all the data by a large number of computers to verify and copy the transaction goes up dramatically. This constraint also makes the use of blockchains uneconomical for a large range of transactions, especially where the transaction amount is small and the volume of transactions is very large.

Third, in most areas (other than cryptocurrencies such as bitcoin), the parties in a blockchain do not want the data in a record to be open and visible to everybody else, such as competitors. As an example, in the case of the supply chain blockchains being deployed by the global shipper Maersk (in partnership with IBM), each blockchain is a private chain where the data in a block can be accessed by other parties only on a permission-granted basis. This aspect of blockchains raises an important question: Would government agencies have visibility into the blockchain transactions? Of course, this is possible if government agencies are a party to the blockchain. In some cases, this is easy, e.g., exports and imports because customs authorities already have access to the data. This should also be easy where the blockchain manages the records pertaining to SOEs. However, what if it’s a blockchain involving only private sector companies domestically?

Given these factors, I see no justification for the massive run-up in the stock prices of blockchain-connected companies. Certainly, the rise in the price of bitcoin was totally mindless. I cannot imagine that the Chinese government (or any other government) would be happy with greater use of bitcoin – because then the government would lose control over capital flows and monetary policy, while also helping criminals and money launderers.

What opportunities and challenges face China's blockchain in global competition?

Unlike AI or 5G, I don’t think there’s any sort of competition between China and other countries regarding blockchain technology. As I noted above, this is a relatively slow-moving technology. The key bottlenecks are in adoption of the technology rather than access to the technology itself.

Regarding adoption, if it’s just a domestic blockchain within China, then, by definition, there’s no global competition with other countries’ domestic blockchains.

What about international trade? Of course, in the case of exports from China or imports into China, customs and border protection authorities in China and the partner country already have access to the data. Here, I see a high likelihood of blockchain adoption. However, it won’t really matter whether the underlying technology comes from a Chinese company (such as Alibaba) or an American company (such as IBM).

Beyond that, it’s hard to see that domestic blockchains within the U.S., Europe or many other countries would want to use blockchain technologies developed by Chinese companies. Whether justified or not, there’d always be concern about whether the Chinese government would have access to the data.

I could see the Chinese central bank issuing a digital currency with its value is tied to the yuan. This would be similar to ideas being discussed by other central banks, e.g., the U.S. Federal Reserve or the European Central Bank. However, these developments would not have much impact on the global role of any currency whether it’s the Chinese yuan, the U.S. dollar, or the Euro. The global role would depend on – as it currently does – multiple other factors, but not the underlying technology.



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