The Chinese government views cryptocurrency as a serious systemic financial risk and has taken strong measures to minimize its usage in the world’s second largest economy. Though China retains a thriving underground crypto ecosystem, Beijing’s different bans on digital assets ensure that the average Chinese citizen will not be exposed to them.
That said, Beijing has not expressed any opposition to blockchain/DLT technology; on the contrary, the Chinese government believes that it can use blockchain for a wide variety of applications, from trade finance to improving supply chain safety. Local governments in China, taking a cue from the central government, have been busily rolling out every manner of blockchain project – some valid, some not – in a bid to qualify for related funding and boost economic output.
The question now is whether Web3 can be presented as an offshoot of blockchain – and thus be deemed legitimate and useful in Beijing’s view – or whether the Chinese authorities will view it as part of the cryptocurrency ecosystem and eventually impose related harsh restrictions as they have with decentralized digital currencies.
NFTs with Chinese characteristics
The most prevalent iteration of Web3 in China at the moment is in the form of a local version of non-fungible tokens (NFTs), known as “digital collectibles.” Given regulatory concerns about trading and speculation, as well as China’s ban on crypto, these digital collectibles differ from typical NFTs in important ways.
In most of the world, NFTs exist on open networks that anyone can use, like the Ethereum
In January 2022, the infrastructure, known as BSN-DDC (distributed digital certificates) launched, with its leadership promising it would serve as a one-stop shop for businesses to create and manage their own NFTs in a crypto-free manner. The name “DDC” was chosen to emphasize its focus on technology rather than speculation. He Yifan, chief executive officer of BSN founding member Red Date, has described it as “certification and distributed database technology that can be applied in any scenario where digital proof is required.”
BSN-DDC is shaping up to be a unique, China-centric piece of Web3 infrastructure with a nascent ecosystem. It has integrated with various other blockchains, among them adapted versions of Ethereum’s and Corda’s, as well as Tencent-backed Fisco Bcos. The transaction fees for BSN-DDC are paid in non-tradeable token (NTT) instead of cryptocurrency like Ether, Ethereum’s native token. Additionally, NTT cannot be transferred to other wallets.
As a state-backed platform benefiting from government support, BSN can offer certain advantages to users, such as low fees. Currently, minting a standard NFT on BSN’s version of Ethereum is just US$0.03.
Despite the significant constraints China’s NFT market faces, it has been growing expeditiously. According to Gyroscope Finance, which tracks metaverse activity, there were 681 NFT trading platforms exist in China as of June 2022 with 100 set up in March, April and May respectively. ResearchandMarkets.com estimates that China’s NFT market reached US$4.8 billion in value in 2022 and will expand at a CAGR of 49.6 between 2022 and 2028.
In recognition of the burgeoning NFT market, China in January launched its first national digital asset workplace. Unsurprisingly, it includes a heavy state presence. Two of its three operators are state-backed, China Technology Exchange and Art Exhibitions China, while Huban Digital is a private company. It will also be used to trade digital copyrights and property rights as well as collectibles.
Great Firewall 3.0
Given the heavy government intervention in China’s NFT ecosystem, the market will likely develop in a very different manner than elsewhere. To that end, He Yifan, chief executive officer of the Hong Kong-based tech firm Red Date, a founding member of BSN, told PingWest in September 2022 that he expects “billions of DDCs issued annually in China in the future. The biggest market for DDCs lies in certificate and account management for all types of businesses.”
Beijing’s unwillingness to allow the integration of its NFT ecosystem with the much larger decentralized global version, and its continuing opposition to cryptocurrency, suggests it plans to develop a self-contained Web3 as it has done for the first and second iterations of the internet. The Chinese government will pick and choose the aspects of this next-generation internet that it wants to adopt, while rejecting those it sees as problematic. While in earlier versions of the internet the primary problem was how the technologies represented a perceived threat to social stability and government control, this time there are genuine risks to the financial system to consider as well.
Just like with Web 1.0 and 2.0, China’s preference for its own unique version of the next-generation internet will come at the expense of certain things – though the potential to reach economies of scale in the enormous domestic market could attract a huge amount of investor interest.
“Great creator artists, they will come to like the real Web3 because it is what they really stand for and there also is a global market,” Qinwen Wang, China community leader at blockchain project Polkadot
Empowering the private sector
The key for Web3 in China to thrive is not so much relenting on opposition to crypto – we think China can probably ultimately work around that – but to empower the country’s dynamic private sector to lead the way. We need only look at the results when companies such as Alibaba and Tencent were given space to develop – world-leading e-commerce and fintech innovation, for instance, to see how such an approach can bear fruit.
However, if Beijing chooses to rely on state-owned companies to spearhead its push into Web3, the results may disappoint. The government should focus on establishing the regulatory bottom lines and let the private sector figure out the best business models.
And when it comes to regulations, greater clarity would be highly beneficial. Given how China suddenly cracked down on cryptocurrency in late 2017, there are concerns the same thing could happen with Web3 and NFTs in particular.
Absent a clear policy stance on Web3 technologies, uncertainty will pervade, which could eventually stymie market growth.