Does China ban Bitcoin & Co?

The Cyberspace Administration of China (CAC) as official internet regulator has introduced new anti-anonymity regulations for blockchain firms that are operating in the country. The announcement was published on the CAC website on Thursday, January 10th 2019.

Not surprisingly the CAC guidelines "...contribute to the healthy development of the industry." and will enter into force on February 15th, 2019.

Let′s have a closer look: The document describes the firms that are subject to regulations as websites or mobile apps that provide information and technical support to the public using blockchain technologies. As soon as the regulations come into power, they will be obliged to register their names, domains and server addresses at the CAC within 20 days.

Official announcement of Cyberspace Administration of China:

The guidelines require blockchain startups to allow authorities access to stored data, and to introduce registry procedures that would require ID card or mobile numbers from its users. Moreover, they will be obliged to oversee content and censor information that is prohibited under current Chinese law.

If a firm fails to comply with the regulations, it might face fines from 20,000 to 30,000 yuans (€2.600 and € 4.000). In case of serial offences, the company might face a criminal investigation.

China first released draft guidelines in October 2018 for blockchain companies, which also contained recommendations that sought to eliminate anonymity in blockchain.

At the time, Asian newspaper The South China Morning Post wrote about an anonymous open letter that alleged sexual harassment at a top Chinese university that was published on the Ethereum (ETH) blockchain in April. The media outlet believes the publication of the letter could be a motivation behind the new regulations.

China is currently mainly piloting blockchain legislation in the three regions Beijing, Shanghai and Guangzhou. According to a December report by local finance publication Securities Daily, there are 11 blockchain-related policy projects concentrated in these areas.

In the meantime, the country has upheld a de facto ban on domestic crypto trading since 2017, which was completed in February 2018 when the government added international crypto exchanges and initial coin offering websites (ICOs) to its Great Firewall.

Chinese government shall have complete control over the information published on any blockchain in China; that users cannot be anonymous; and that blockchain providers need to start showing their users formal terms and conditions and service agreements that highlight the responsibilities of each party.

Here are some rules roughly translated from the Chinese version:

1. All blockchain providers within China are required to operate according to these standards. The Internet Information Office of each relevant region will be responsible for enforcing the laws.
2. Self-policing will be encouraged. It is preferred that everyone working on or with blockchain in China will be urged to get acquainted with and apply the new rules.
3. Blockchain providers must be able to control the blockchain, including the ability to remove illegal content from the blockchain and control what kind of information is published on it.
4. Blockchain providers will be required to collect personal identification information from blockchain users, based on their company, ID card number or mobile phone numbers. Blockchain providers cannot serve anonymous users.
5. Blockchain providers will be required to codify the terms and conditions of their platform, and obligations of providers and users, under formal service agreements.
6. Anytime a blockchain provider develops new products, features, functions or starts offering new services, it should report to the local Internet Information Office to subject it to a "safety assessment".
7. Blockchain providers and users should not use blockchains for illegal purposes (go figure), including those which "disrupt social order". Prohibited content shall not be copied, published or disseminated on blockchains.
8. Blockchain providers must be registered, must clearly show the details of its registration so people know it's a legitimate service, and will be periodically inspected.

...

Does is mean a ban for Cryptocurrencies?

Bitcoin and Ethereum might be right out, then. And does this mean EOS can only be legal in China if at least two thirds of its block producers are located in China so they can tamper with the blockchain as requested?

Other cryptocurrencies might fare better and it could actually bode well for the centralised ones which might accrue users from the exodus elsewhere. For example, China-based VeChain and its highly-malleable reputation-based DPOS system might do alright.

But what this means for China's cryptocurrency miners is another big question that might be tough to answer? Plus, there seems to be some broadness around the definition of a blockchain service provider. The regulations describe blockchain providers as "...the entities or nodes that provide the blockchain information service to the public" and "...the organisation that provides technical support for the blockchain information service".

China calls for the blockchain industry to "strengthen self-discipline" and "improve the professional quality of the staff of the blockchain information service"

At the same time, it also calls for the blockchain industry to "strengthen self-discipline" and "improve the professional quality of the staff of the blockchain information service", although that part still seems to be a general guideline and doesn't have any penalties attached to it.

On the whole it sounds like there might be enough wiggle room for unpleasant things to happen to developers, node operators, wallet providers, blockchain users of any kind, and anyone else in China who can be identified as having touched an illegal blockchain in an illegal way.

However, Bobby C Lee, early Bitcoiner and founder of China′s first Cryptocurrency Exchange recently explained who Chinese traders still manage to circumvent Chinese crypto bans (see my blog article of Bobby C Lee presenting at a Conference in Seoul)

How will this affect cryptocurrencies?

"Heavily" seems like an obvious answer. And the markets wasted no time throwing themselves off a cliff.

It might be time to start dividing cryptocurrencies into two groups: the potentially legal and the soon to be illegal in China.

The strictest element of the new regulations, which will probably be the deal breaker for most, is that it's only legal to provide or use a blockchain if the Chinese government is able to control the data on it, including removing it if needed. This means there has to be some kind of backdoor or way for a single entity to control transactions, remove blocks and so on.

Bitcoin and Ethereum might be right out, then. And does this mean EOS can only be legal in China if at least two thirds of its block producers are located in China so they can tamper with the blockchain as requested?

Other cryptocurrencies might fare better and it could actually bode well for the centralised ones which might accrue users from the exodus elsewhere. For example, China-based VeChain and its highly-malleable reputation-based DPOS system might do alright.

But what this means for China's cryptocurrency miners is another big question that might be tough to answer.

Is it actually enforceable?

The regulations come into play on 15 February, so the world won't have to wait too long to find out how this all plays out.

Wherever there is some kind of central authority behind a cryptocurrency, or where there's a wallet provider serving residents of China or where there's a mining manufacturer, they might have to start collecting user identities and showing terms and conditions if either they are based in China, or if the user is.

Of course, there's still nothing preventing people from just keeping on anonymously using international wallets, public blockchains and similar, but it might still whittle down user numbers considerably.

And there may also be the possibility that it's all just too difficult to effectively enforce so people kind of awkwardly ignore it, or that there's a lack of clarity in the formal definition of "blockchain" being used in these regulations. Arguably blockchains are decentralised by definition, so any network which meets the requirements imposed by these regulations isn't actually a blockchain.

Baidu’s XuperChain will become large part of its business

The new legislation supports the Chinese search engine Baidu, a main competitor of Google . Baidu has released its first ever blockchain white paper, and revealed big plans. The tech giant, which reports quarterly revenues of over $3bn, and is the world’s eighth-largest company, is seeking to capitalise on DLT to solve computer storage problems and take advantage of micropayments on its platform.

The ‘Baidu Blockchain White Paper V1.0’, was issued by the company’s internal Blockchain Lab on Wednesday and announces the development of its SuperChain – or, rather, XuperChain – network. It’s technicians claim that the system could handle more than 10,000 transactions per second.

XuperChain will be open source, say Baidu, allowing developers to use the tech to build or upgrade their own versions. The 48-page white paper also reveals that Baidu will include blockchain technology in large parts of its core businesses, including in solving intellectual property disputes, speeding up supply chain financing and even in online trading.

Chinese court accepted evidence stored on Blockchain

However, there are some very interesting good news! The Chinese short-video app Douyin has used the newly-established Beijing Internet Court to file a copyright infringement law suit against Baidu’s Huopai Video platform

The court announced in September 2018 that it would hear the case and will recognise evidence stored on blockchain, a first in the country’s video streaming industry.

The court announced that it would hear the case and will recognise evidence stored on blockchain, a first in the country’s video streaming industry.

Douyin is seeking compensation of around 1 million yuan (€ $120.000) from Huopai for unauthorised operation and downloads of a short video in May.

Spokeswomen from Douyn and Baidu did not immediately respond to requests for comment.

Douyin requested a third-party company, Beijing Zhongjing Tianping, to store evidence on blockchain relating to the content Huopai had allegedly published illegally, according to Chinese-language law magazine People’s Rule of Law.

China’s internet courts now accept and process internet-related legal cases online, according to a ruling by the Supreme People’s Court. Beijing internet Court, launched on Sunday, said it had already received 207 legal complaints as of 6pm Monday. Hangzhou internet Court, China’s first internet court, was launched last August.

China is not the first to accept blockchain records as legal evidence. The US state of Vermont passed a law two years ago that allows courts to use data on blockchain as evidence.

However, the acceptance of evidence stored on the blockchain may have little impact on non-internet-related civil or criminal lawsuits. Blockchain data being legal evidence is relatively new and courts’ acceptance of it will depend on individual courts and situations.

Source: Cointelegraph, CBC, South China Morning Post

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