Since 2016 China issued the 13th Five-Year National Informatization Plan, China has set out to establish national standards for blockchain technology, policy frameworks, and relevant legal standards. This plan listed blockchain as one of the key cutting-edge technologies, and emphasized the need to strengthen the innovation, test, and application of new technologies, including blockchain.
The People Bank Of China (PBOC) development plan 2019-2021 has further identified six priority tasks required to strengthen the strategic development of financial technology in China.
This PBOC plan refers to the Chinese government’s investment guideline “Made in China 2025” project, that aims to create a core portfolio of national assets as models to be utilized for export abroad.
Cloud infrastructures, artificial intelligence (AI), blockchain and digital currencies will play a key role in order to converge data and transaction flows from corporations and institutions to end users, consumers and vice versa. This technological framework will constitute a “new engine for high quality financial services development and for supervised system against cyber security risks”.
The main authorities involved in regulating blockchain industry are: “CAC” Cyberspace Administration of China over blockchain server providers, the Ministry of Information Technology “MIT” and for Industry and Commerce “SAIC”.
From financial point of view, PBOC and China Banking and Insurance Regulatory Commission “CBIRC” play a key role in order to harmonize this cutting-edge technology within finance ecosystem and regulation.
China is trying to give a clearer regulatory framework over technology implementation, for instance, since the beginning of 2020 came into force the cryptography law stated to implement safer prescriptions for commercial transfers of data and legal liabilities for misconducts.
All supports that technology will boost strategic economic development plans contributing to the building of a digital Silk Road.
In this document we are focusing on two key pillars: Blockchain Service Network (BSN) and Digital Currency Electronic Payment system (DCEP), already in testing by PBOC.
Around these two pillars, Chinese corporations and associations will provide their blockchain operation services: IT, trade finance, supply chain, healthcare, insurance, digital identity by enterprises networks consortiums.
BSN is a technological alliance between the State Information Center of China, China Mobile Communications Corporation, China UnionPay Corporation, China Mobile Financial Technology Co Ltd and Beijing Red Date Technology Co Ltd.
This alliance is building the first “national supported” cloud architecture operative worldwide, offering a lead to Chinese corporations in terms of data internationalization. It is clearly one of the main points supporting “Made in China 2025” initiatives in terms of new advanced information technology to export worldwide. From a technical point of view, BSN works as a multi-hybrid cloud architecture offering IaaS solutions through public city nodes and PaaS through BSN portals. It is able to connect China mainland and overseas strategic locations offering blockchain solutions “BaaS” by Chinese IT providers working in a range of business sectors (finance, logistics, healthcare etc).
The project’s timeline has been delayed due to Covid-19 and is scheduled to officially launch internationally on July 31st, 2020. The project has a start phase of 200 nodes around China mainland and overseas locations. BSN has partnered with AWS China to speed up the process for internationalization. BSN can be seen as a way to let easily enable enterprises and government to interoperate through cloud infrastructure. It can represent a perfect duo to let private and public data achieving the best performance results.
DCEP is a software solution enabling PBOC to issue and manage the first sovereign digital currency backed to the “fiat” value of renminbi (RMB). It is mainly a technical transformation of the mechanism for the issuance and circulation of RMB.
It is sectioned in two operative layers: the first involving PBOC and commercial banks, the second involving Chinese commercial banks to end users (business or individual).
Currently DCEP does not use blockchain technology, but it does however use asymmetric cryptography, which is the fundamental reason for the efficiency and security of electronic payments that DCEP provides and is fully implemented on distributed ledger technology for securing transactions.
DCEP also provides the possibility to execute smart contracts and storage feature into a digital wallet so technology still sounds close, but it comes from a more centralized perspective.
It is possible that a blockchain solution will be implemented only at the first layer of the operative system in terms that consent to notify, allocate and record digital currency operations from PBOC to other commercial banks.
How will the other big financial players in China (Alipay and Wechat Pay) be involved in the system? Will they be involved, or will this potentially make them redundant, or force them to offer different services?
Our suggestion is that pre-existing digital currency channels will be involved in transferring money to consumers. Due to their position in the market these players have a vital role in ensuring the security of holdings and the facilitation of transactions.
In the longer term it is likely to see an interaction in terms of using off chain transactions in the context of a second layer for connecting consumers while the first layer would be supported by on chain transactions connected with a centralized authority (PBOC). This solution may help to structure a payment system able to better perform in dealing with a huge number of transactions per second.
In addition, China UnionPay Corporation and China Mobile Financial Technology Co Ltd are now involved in digital transfers of currency and are founders of BSN. That recalls a possible integration of DCEP over BSN to empower the accountability of mainland and overseas transfers.
How might BSN and DCEP interoperate?
BSN is still at the first layer. It is working as a cloud solution for blockchain application providers, but the fact that big players such as China Union Pay are involved in the project may lead to the conclusion that digital state currency issued by PBOC may be installed on the network.
In the medium-term, it is our opinion the two pillars will work in the following way: DCEP will act as a centralized digital currency running over a decentralized cloud architecture (BSN) able to provide different blockchain solution to different business enterprises. In that way the combination of these two assets will constitute a safer, stronger, quicker way for supporting investments.
Supporting to this assumption BSN has also recently announced a partnership with Chainlink technologies in order to set up Cross chain communication hubs to implement the mechanism in which Dapps interact with data stored outside the network like weather info, stock info, Iot data.
This key integration will enable governments and enterprises to incorporate validated real-world data into their BSN applications using Chainlink oracles via the Iris foundation interchain service hub.
Chainlink oracle network will help BSN with sourcing of reliable information about the real world. Meanwhile, Iris Foundation., will integrate businesses by Cosmos network assisting BSN with interoperability, or allowing different systems to work in conjunction with each other.
Business point of view, this feature will be fundamental let BSN interoperate with other systems (like DCEP) and in supporting chinese and foreign corporations to collect and deploy a trusted stream of data for securing strategic investments plans.
At the completion he project will offer three services: cross BaaS solutions, cross cloud portal connections, cross framework interoperation.
Business sector associations such as the Chinese Bank Association are starting to implement their own solutions focusing on industries such as trade finance, supply chain finance, supply chain operations and logistics, copyright and IP, judicial and legal, health and digital identity.
Proposed by Eugenio Reggianini & Andrea Frosinini