Web3 with Chinese characteristics: Finding China's solution for regulators, developers and users

Crypto ban notwithstanding, China’s getting firmly in the act of building Web3 infrastructure to its specifications. While China is unlikely to allow global Web3 to play a role in its economy or the lives of its citizens, Chinese developers and entrepreneurs remain fascinated by the promise of global Web3 platforms and cryptocurrencies. This portends the development of two blockchain markets in China: one which caters to those who “jump” the virtual fence to join in the global Web3 movement, and one which uses blockchain in line with Beijing’s vision.
Silhouettes of laptop users are seen next to a screen projection of binary code are seen in this picture illustration taken 28 March 2018. (Dado Ruvic/Illustration/File Photo/Reuters)
Silhouettes of laptop users are seen next to a screen projection of binary code are seen in this picture illustration taken 28 March 2018. (Dado Ruvic/Illustration/File Photo/Reuters)

The idea of Web3 — an internet built on decentralised blockchains — has been the subject of many discussions in cyberspace and in the news. Even though China has declared all cryptocurrency transactions illegal, banning fiat-to-crypto transactions and initial coin offerings, domestic mining, crypto-to-crypto transactions, and even blocking access to foreign cryptocurrency exchanges, it has no shortage of ambition for its goals in blockchain technology. At the same time, China has a thriving Web3 community that has no intention of staying behind a new “Great Firewall”.

The Chinese government has essentially set its sights on developing domestic Web3 technology without the volatility of cryptocurrencies. It put in place the cryptocurrency bans to safeguard China’s economy as it sees cryptocurrencies as “special virtual commodities” with excessive volatility and a vehicle for fraud and money laundering.

But Chinese universities are now offering courses in blockchain, local city governments are piloting uses of blockchain technology in govtech, and funding is reserved to support research and application of blockchain by private entities. The 14th Five-Year Plan for National Informatization touts the implementation of blockchain technology — the same technology that enables Web3 — as a key part of China’s digital future.

The nearest manifestation of Western-like Web3 in China is the BSN — the Blockchain Service Network — a government-backed network developed by Red Date Technology...

Blockchain with Chinese characteristics

Private blockchain solutions exist in China, with both public and private use cases. Ant Group’s AntChain, is an example of a private blockchain solution that provides Blockchain as a Service (BaaS) to clients, bringing blockchain solutions to developers in the public and private sectors.

These solutions can be seen as analogous to Amazon’s Blockchain on AWS or IBM’s IBM Blockchain. They are private, permissioned chains that are not publicly accessible and are not related to the revolution of public blockchain that allowed cryptocurrencies like Bitcoin and Ethereum to redefine digital life.

However, the presence of Non-Fungible Token (NFT) platforms in these closed ecosystems hints that this closed environment will be a key factor in how China decides to define its own Web3 future.

The nearest manifestation of Western-like Web3 in China is the BSN — the Blockchain Service Network — a government-backed network developed by Red Date Technology in partnership with the State Information Center of China, China Mobile, China UnionPay and China Mobile Financial Technology.

The BSN provides a regulation-compliant infrastructure that allows developers to develop Decentralized Apps (DApps) in China. Its closed environment provides capabilities that allow it and its developers to comply with China’s strict regulations. 

The BSN is unique in that it offers nodes outside of China’s borders, in Japan, Australia, South Africa, and even the US... Unlike the Great Firewall in the Web2 era, this opens Beijing’s version of Web3 and interconnected blockchain to people outside of China.

A man, wearing a face mask following the Covid-19 outbreak, uses his mobile phone in front of a Unionpay advertisement for the 618 shopping festival displayed at a bus stop, in Beijing, China, 14 June 2022. (Carlos Garcia Rawlins/Reuters)
A man, wearing a face mask following the Covid-19 outbreak, uses his mobile phone in front of a Unionpay advertisement for the 618 shopping festival displayed at a bus stop, in Beijing, China, 14 June 2022. (Carlos Garcia Rawlins/Reuters)

For example, developers can specify the geography of the nodes that support their application’s blockchain, complying with regulations that require Chinese user data to be located in China and handled in accordance with Chinese law.

On the infrastructure side, nodes can only be operated by operators approved by the BSN consortium (which includes Chinese government entities), to ensure that the infrastructure would be able to cooperate with the Chinese government or law enforcement.

What brings the BSN closer to the open chains that operate globally is the interoperability of chains to share data between apps. In addition to private chains that are the backbone of most closed corporate blockchain applications, the BSN supports “open permissioned” chains — Ethereum and other typically public and global chains, operating in closed instances on the BSN’s infrastructure to allow for Ethereum-based and other DApps to run in China.

These closed blockchain ecosystems do not interact with the greater global ecosystem, and any fees required by the chain (such as Ethereum gas fees) are replaced by payment in RMB.

The BSN is unique in that it offers nodes outside of China’s borders, in Japan, Australia, South Africa, and even the US. These nodes are offered through a global site instead of the Chinese site, however, it’s notable that developers outside of China’s cyber-ecosystem will be able to choose to take part in it. This may also mean that DApp developers will be able to go to one service provider for both China-compliant and international infrastructure. Unlike the Great Firewall in the Web2 era, this opens Beijing’s version of Web3 and interconnected blockchain to people outside of China.

The strict regulatory environment of crypto and blockchain in China means that entrepreneurs, researchers and the like can expect a stable environment to build their applications.

Not NFTs but DDCs

One popular application of Web3 is NFTs. A regulatory-compliant analogue to NFTs has emerged in China called Distributed Digital Certificates (DDCs). DDCs are similar to NFTs in that they are digital collectibles that exist on blockchains; however, they differ in key areas.

Unlike NFTs, which are found on global decentralised chains, DDCs only exist on centralised, private platforms such as Ant Group’s Topnod or on BSN’s DDC network. Secondary markets for DDCs are banned, meaning that once purchased, there is no ability to sell (or try to profit from the resale of) DDCs.

Visitors walk in front of "HOLD ONTO YOUR BITCOIN" by Gustav Szabo, known as Szabotage, which will be converted into NFT and auctioned online at Sotheby's, at the Digital Art Fair, in Hong Kong, China, 30 September 2021. (Tyrone Siu/File Photo/Reuters)
Visitors walk in front of "HOLD ONTO YOUR BITCOIN" by Gustav Szabo, known as Szabotage, which will be converted into NFT and auctioned online at Sotheby's, at the Digital Art Fair, in Hong Kong, China, 30 September 2021. (Tyrone Siu/File Photo/Reuters)

The strict regulatory environment of crypto and blockchain in China means that entrepreneurs, researchers and the like can expect a stable environment to build their applications.

The environment that China has built for Web3 should be thought of as technology catching up to regulation rather than regulation subtracting from technology. China’s strict data protection and cybersecurity policies also mean that Web3 in China has the geographic specificity of Web2 and administrators have greater administrative power over their chains.

Furthermore, because the BSN has nodes out of China, this expression of Web3 with Chinese characteristics is available for developers out of China, giving users and developers the option to try the Beijing-endorsed version of Web3, although willingness to exercise this option has yet to be seen. 

...we can expect to see more enterprise and consumer products being built with BSN’s infrastructure and other Chinese blockchain offerings.

China’s future

China has ambitious plans for the blockchain and Web3 space. The DDC has been a success in Beijing’s eyes, and the BSN’s “open permissioned” chains proves that to a certain degree, blockchain-based technology can coexist with Chinese legislation.

Although the open-sourced, permissionless Web3 projects such as Ethereum and Solana still capture the fascination of China’s young programmers, we can expect to see more enterprise and consumer products being built with BSN’s infrastructure and other Chinese blockchain offerings.

Especially given pilot programmes of blockchain-applied govtech, for instance in Xiong’An New Area, and the lofty goals set forth in the 14th Five-Year Plan for National Informatization, China is pushing for blockchain-based technologies to become a founding part of its digital economy.

China’s ecosystem will lack the volatile but lucrative markets fuelled by crypto’s rise globally, and its industry will reflect that.

A representation of cryptocurrency Ethereum is seen next to non-fungible tokens (NFTs) of Yuga Labs "Bored Ape Yacht Club" collection displayed on its website, in this illustration picture taken 24 March 2022. (Florence Lo/Illustration/File Photo/Reuters)
A representation of cryptocurrency Ethereum is seen next to non-fungible tokens (NFTs) of Yuga Labs "Bored Ape Yacht Club" collection displayed on its website, in this illustration picture taken 24 March 2022. (Florence Lo/Illustration/File Photo/Reuters)

This does not come without its challenges. By sequestering cryptocurrencies and secondary markets for NFTs, the burden of financing and incentivising blockchain’s rise will have to come from Beijing and the tech giants. China’s ecosystem will lack the volatile but lucrative markets fuelled by crypto’s rise globally, and its industry will reflect that. Perhaps due to this lack of volatility and flair, many developers seem oblivious to the government-endorsed version of Web3.

Chinese developers and entrepreneurs remained fascinated by the promise of global Web3 platforms and cryptocurrencies. For example, there is no shortage of traditional internet companies that work around the Web3 ecosystem, providing services such as cybersecurity to their users, and no shortage of expert Ethereum or Solana developers in China. Shanghai even hosts one of Ethereum’s global summits and hackathons. 

... it is highly unlikely that China would go back on their history of internet censorship and control to permit global Web3 to play a role in its economy or the lives of its citizens.

Given China’s goals with blockchain technology and its success in creating its own version of Web3 (after all, the BSN calls DDC “NFTs with Chinese Characteristics”), the Chinese government has little need to relent on its ban on cryptocurrencies.

Furthermore, as we’ve seen in the Web2 space, the establishment of successful blockchain technologies and the continuation of longstanding internet regulation to regulate Web3 means that it is highly unlikely that China would go back on their history of internet censorship and control to permit global Web3 to play a role in its economy or the lives of its citizens.

Chinese citizens will find ways to access a Web3 that lets them express themselves in ways they would not be able to domestically.

Likewise, we’ll see the same reaction from China’s netizens updated for Web3 in the way that they have “jumped over the Firewall” in Web2. Citizens have already used global, decentralised Web3 platforms to discuss and post censored content where Beijing’s censors cannot reach.

Similar to the existence of banned VPNs in China, global chains will remain accessible to those with the will to access them. Chinese citizens will find ways to access a Web3 that lets them express themselves in ways they would not be able to domestically.

From the international outlook, global blockchain enterprises will need to rewrite or reconfigure their applications if they want to cater to the Beijing-approved Chinese market. This means that there will be two blockchain markets in China: one which caters to those who “jump” the virtual fence to join in the global Web3 movement, and one which uses blockchain in line with Beijing’s vision.

Related: Metaverse: What is it and who's in control? | The uncertain future of NFTs in China | Will overregulation kill Chinese firms' metaverse ambitions? | China’s crackdown on cryptocurrencies: Bitcoin miners eyeing overseas ventures | A metaverse with Chinese characteristics?