Unblocking the Blockchain

Bitcoin’s potential bubbles have provoked Chinese concerns and a crackdown, but its underlying technology is considered by some to be the future of wealth and the key to national competitiveness

The cat-and-mouse game between the market and regulators over the virtual cryptocurrency Bitcoin continued in 2017. The price is still hovering above US$10,000, nearly 10 times what it was worth a year ago. In the US, the Securities and Exchange Commission (SEC) has repeatedly issued investment alerts for the asset, and recently required several companies to withdraw their filings because they offered Bitcoin trading products. The People's Bank of China, along with several other regulatory agencies, made plain that Bitcoin and other virtual currencies could not be used in China as a means of real-world payment at the end of 2013. The red-hot business of initial coin offerings (ICOS), which raise funds by issuing virtual currencies, was banned by Chinese regulators in September 2017.

In contrast, blockchain, the technology that Bitcoin runs on, has been embraced warmly by both the market and regulators. It is said to improve transparency and efficiency in transactions. Financial and Internet companies are frontrunners in developing and applying the technology. In 2014, the Bank of England was the first central bank to explore the potential use of blockchain in the financial sector. The US Federal Reserve showed similar interest in a 2016 report which acknowledged the potential advantages of reducing “operational and financial frictions” in payments, settlements and clearing services.

China's central bank has been preparing to issue a digital fiat currency (money considered to be legal tender by a government) based on blockchain since 2014. On February 26, 2018, Party newspaper the People’s Daily ran three articles on blockchain, saying China should seize the “strategic opportunity” by winning the “international competition” over blockchain technology. On Chinese social media, articles boasting “the best way to understand the blockchain trend” are widely circulated. A Wechat account with 500 well-known investors and even pop stars renamed itself “Sleepless at 3am for blockchain,” showing their eagerness to seize a gold-rush moment.

Blockchain technology is high on the agenda of key player the National Internet Finance Association of China (NIFA). Its working group on blockchain has joined with finance and tech companies, as well as following developments made in other countries in the area.

In an interview with Newschina, Li Lihui, leader of the NIFA working group, discussed his views on some of the concepts, progress and prospects of blockchain technology in China. Li has been a member of the Financial and Economic Affairs Committee of the 12th National People's Congress, China's parliament, since 2014. He was president of the Bank of China from 2004 to 2014.

Newschina: How do you define ‘blockchain'?

Li Lihui: Blockchain is a chain of blocks of data. It is a ledger maintained and shared by all participants in transactions on the basis of their consensus. The core of the blockchain involves three technologies which are based on consensus, encryption and smart contracts. There are three key concepts in the technology.

First, blockchain is a data chain based on the sequence of time and maintained via the consensus of participants. It is like a distributed ledger. Put simply, data is packed into blocks within 0.1 to one second. The more data the block includes, the longer it takes to create a block. The speed of data processing is higher when there are fewer blocks. The blocks are created in a time sequence. The blocks are trackable and tamper-proof.

Second, blockchain is a real-time system based on consensus among multiple participants. They all add data in real time using the same algorithm which they agree upon in advance.

Third, blockchains are enforced using a system of smart contracts. A conventional business contract, whether written or spoken, is reached before it is enforced. The opposite is true of blockchains: an algorithm is