on Thursday elevated blockchain, the encrypted digital ledger technology, to “core” technology status in China, virtually guaranteeing significant investment. Prices for blockchain technology companies and the popular blockchain-based cryptocurrency bitcoin leapt, with the latter up by around 30%. Is this the next big Chinese technology investment opportunity?
Investors should be very cautious. Rather than bitcoin, a more likely longer-term beneficiary of the new investment push is the Chinese central bank’s own yuan-based digital currency with a likely launch date sometime in the next 18 months. Some Chinese blockchain technology companies will undoubtedly benefit.
But, as is generally the case when new industries are pushed by Beijing, many firms with dubious technology or only a loose connection to the industry in question will try to take advantage of policy incentives and bubbly sentiment. Solar panels, rare earths, robotics and electric vehicles are just some examples that produced decidedly mixed results for investors. Moreover, Chinese blockchain companies could also eventually face the kind of political risk bedeviling Chinese surveillance and network technology firms.
The reasons to be skeptical that bitcoin and its independent cryptocurrency peers will benefit is simple: China’s government is obsessed with controlling flows of information and capital. Bitcoin is designed precisely to avoid control and surveillance by governments. Bitcoin trading in China was banned in 2017 partly due to its potential to help Chinese citizens circumvent controls on moving money overseas. The huge bitcoin price rally in early 2017 came, probably not coincidentally, shortly after the imposition of draconian Chinese capital controls in late 2016 that tanked conventional measures of overseas investment.
There is, however, one feature of cryptocurrencies that must be very attractive to Beijing: the idea of a unified, secure record of transactions. China’s regulatory state is very powerful but suffers two persistent, related problems: a lack of quality, timely information—due in part to heavy censorship—and corruption. Recurring food and safety problems like the current swine-fever outbreak, persistent “unofficial” capital outflows that regulators can’t account for and poor credit access for companies without political connections are among the results. China’s nascent corporate social-credit system is one attempt to address these deficiencies. Blockchain’s secure ledger technology clearly has the potential to help as well—as long as the identities of the parties involved are viewable by Beijing, which isn’t the case for cryptocurrencies like Bitcoin. Mr. Xi highlighted supply-chain management, food safety, credit access for small companies, and banks’ risk management as among the areas where blockchain could provide solutions, according to official media. He was silent on cryptocurrencies themselves.
This is, needless to say, a far cry from the libertarian, decentralized vision of blockchain envisioned by its Western advocates. And even if China is successful in its blockchain efforts, Chinese companies that become enmeshed in the state’s surveillance and regulatory architecture are increasingly coming under scrutiny from Western regulators. For potential foreign investors, that leaves much to be desired.
Write to Nathaniel Taplin at email@example.com
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