Developments and Opportunities in Web3

Blockchain technologies are inherently international, and like the U.S., China has had its share of news lately in connection with this realm – from reports of China seeing “the most blockchain [and broader web3] patent applications of any country” to date, according to Chinese government officials, to budding plans at the local government level to attract talent to develop metaverse research platforms and projects. These new technologies – which serve as the foundation for Web3 – present challenges and opportunities both inside and outside China, as well as from business and national security perspectives. With that in mind, it is worth taking a at for-profit blockchain developments and opportunities in China.

How Do Most Governments View Web3 Developments?

In most countries, including the U.S. and China, disruptive technology of this caliber is often inextricably intertwined with key sovereign state issues, including government trust, social stability, monetary and fiscal policy, national security, high tech infrastructure, and poverty alleviation. Governments want their citizens to engage in entrepreneurial efforts that will increase the size of their country’s economic pie. They also want to ensure that transactions that should be taxed are reported and taxed, as governments without a healthy tax base provide fewer of the key services mentioned above.

Governments want to ensure that domestic and international criminals cannot access legitimate financial systems to wash their ill-gotten funds, no matter the currency or cryptocurrency those funds reside in or move through. And still yet, they also want to ensure that their citizens are not being duped or defrauded. China’s government shares all of these sentiments.

How Do China’s Regulators View Web3 Developments?

China’s regulators have a love-hate relationship with blockchain technology (and Web3 more broadly) because, like much technology deployed in China, it represents both an economic growth opportunity and a potential tool for government oversight. Neither of these reasons is inherently suspect or foreign to the way other governments view blockchain technologies, including Western governments. However, in China, social stability via government oversight and intervention comes first. Virtually every law in China has a catchall carveout that reserves the government’s right to intervene in anything or deal with anyone who is deemed to be “endangering national security or public security.”

China’s Regulators Need Blockchain Innovations

China’s economic slowdown over the past several years is due, in part, to the Trump Administration’s trade war. That was followed by the Covid-19 pandemic and heightened further by China’s internal zero tolerance policy. China needs to right-side its declining economic growth curve. While it has been focused on modernizing its economy and country for decades, this process was markedly accelerated by the announcement in 2015 of its Made in China 2025 plan.

Blockchain technologies do not explicitly fit into the 10 key industries championed in the 2025 plan, but they fit squarely within China’s stated goals of continuous innovation and becoming the dominant global superpower by 2049 in all high-tech areas. And it is worth noting that the number of trademarks and patents registered are some of the key indicators upon which Chinese government bureaucrats are evaluated and rewarded. 

A blockchain-related patent for agricultural technology that improves track and trace systems or fertilizer application history is valuable and fits in the Made in China 2025 plan framework. So does a permissioned blockchain that facilitates AI development in any number of the core plan technologies: electric cars and new energy vehicles, next-generation IT and telecoms, aerospace engineering, high-tech maritime engineering, high-end rail infrastructure, emerging bio-medicine, advanced electrical equipment, or new synthetic materials. Blockchain technology can – and is – being applied in all of these focus industries.

But China’s Regulators Loathe Cryptocurrencies & Probably Always Will

Cryptocurrencies are one of the exceptions to web3 developments in China where the government has predictably taken an overtly hostile position. In September 2021, the who’s who of Chinese authoritative bodies issued the Notice on Further Preventing and Dealing with the Risk of Speculation in Virtual Currency Transactions. It was signed by every agency that matters in China: The Supreme People’s Court, the Central Cyberspace Administration, the People’s Bank of China, the Supreme People’s Procuratorate, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the Securities Regulatory Commission, and the Foreign Exchange Bureau.

This hardline stance is largely due to the decentralized nature of decentralized finance (“defi”) and the technology’s potential to move funds out of China or enable entities to engage in criminal activities, such as money laundering and garden-variety fraud (with a blockchain flavor). The Chinese government is not expected to change its tune on cryptocurrencies, but that does not mean there are not many other viable opportunities to engage with China when it comes to blockchain technologies.

What are Chinese Entrepreneurs Doing?

As China-focused blockchain reporter Shuyao Kong wrote recently, Chinese web3 participants – or “degens” – have taken one of three positions in the still nascent blockchain ecosystem: They are: (1) remaining anonymous; (2) continuing to build under the aegis of academic connections in the name of blockchain research; or (3) moving founders outside China but keeping some development teams in China.

Predictably, many Chinese blockchain projects that operate in the daylight focus on safer areas like non-fungible tokens (“NFTs”) and gaming, and avoid anything that smacks of cryptocurrencies, tokens, or coins. Even NFTs in China are sometimes referred to as digital collectibles, placing the focus on their affinity with .jpgs – instead of fully timbered digital assets – in order to avoid regulatory scrutiny.

Opportunities for Blockchain Businesses in China & Beyond

Companies that are already in China or want to be selling in China or to Chinese diaspora should not abandon time-tested market development strategies. In plain terms, this means first understanding the Chinese consumer market you are targeting and then building and leveraging loyalty to your superior products or services through traditional channels. Only then should you look to add web3 technologies to your business plan. Look at Starbucks’ recent announcement regarding its improvements to its customer loyalty program, fueled by NFTs.

Starbucks’ CMO said, “The company wanted to invest in this area, but not as a ‘stunt’ side project, as many companies are doing. Rather, it wanted to find a way to use the technology to enhance its business and expand its existing loyalty program.” This is exactly the type of opportunity that smart foreign brands will deploy in China and to Chinese consumers in their key markets. The Chinese market is – and will continue to be – largely receptive to blockchain technologies that are tied to existing successful brands.

Jonathan Bench is chair of Harris Bricken’s corporate practice group and managing attorney of the firm’s Salt Lake City office, where he helps public and private companies with international and domestic business transactions.