Out of all the Icarus stories in China tech, Luckin Coffee’s is one of the most spectacular. Founded in 2017, in under two years the delivery-focused company was the country’s second-biggest coffee chain, raising half a billion dollars in a US IPO. By the end of 2019, it had more stores in China than Starbucks—and had the larger chain beat on prices.

It didn’t last. In April 2020, Luckin Coffee admitted to fabricating $310 million in sales, the most spectacular fraud admission we had seen in a while in China tech. As shares of the company plunged by as much as 75% in a single day of trading, the Chinese internet wrote it off with a snarky epitaph: “Hey Wall Street, thanks for the free coffee!” By May 22, 2020 shares hit $1.39, from a January high of $50.02.

The disgraced company faced multiple class action lawsuits from shareholders and was delisted from Nasdaq on June 29, 2020. Chairman Lu Zhengyao defaulted on a $518 million loan. In February this year, the company filed for bankruptcy.

But Luckin is still very much alive: despite some closures, its stores are still a ubiquitous presence in Chinese office districts, and this summer it even launched a new range of fruit drinks. On the over the counter markets—the largely unregulated home for stocks that can’t make into a traditional exchange, its stock has recovered to around $9 per share. It’s even reporting higher revenue despite cutting stores.

Is Luckin a comeback story?

It’s hard to say. 

With high-profile marketing campaigns and steep discounts, Luckin changed habits for millions of Chinese consumers. It helped get office workers hooked on reasonably priced coffee, and it still dwarfs its closest competitors in size. But with hipper, low-priced beverage chains nipping at its heels, it’s not clear if Luckin will be the beneficiary of the coffee culture it built.

Luckin seeks profit

Luckin went into bankruptcy with a huge asset: a vast network of busy stores. With its meteoric rise ended, the company has promised to stop burning cash for growth, and raised prices in an effort to turn a profit with the business it has. Bankruptcy administrators Alvarez & Marsal have told the court they are “optimistic” the firm will survive and resume growth.

Price increase & less coupons: For consumers, the most obvious change is increased prices and fewer coupons. Luckin told Chinese media in May that store heads could apply to raise prices up to RMB 3 for each drink, amounting to a RMB 1 or RMB 2 rise considering discounts. Meanwhile, the company stopped giving free drink coupons to first-time buyers. Its current coupons offer around 50% discount, compared with the more aggressive 80% or 90% discounts at the peak of its marketing campaign before the scandal.

Wang Jia, a 38-year-old avid coffee drinker from Shanghai, told TechNode she still orders regularly from Luckin, but receives fewer coupons compared with one year ago.

TechNode staff in Beijing and Shanghai were able to order a black coffee with delivery for RMB 14 ($2.17), discounted from a notional standard price of RMB 26. In China, the most basic drink is an Americano, usually priced at RMB 20.  

Fewer stores: To cut costs, Luckin also closed down about 609 of its self-operated stores, bringing the total from 4,507 to 3,898 at the end of November 2020. The chain is no longer bigger than Starbucks, but it remains a clear second. No other coffee chain has 1,000 stores.

“Luckin has made a decision to turn away from an expansion-at-all-costs approach and prune its network of coffee chains. From outward appearances and occasional company updates, this decision has reduced the number of under-performing stores.” Michael Norris, research and strategy head at institute AgencyChina. 

Existing stores are operated thinly to manage staffing costs. A 40-square-meter Luckin store TechNode visited in downtown Shanghai depends on only one staff member to handle more than 700 orders per day, an employee told TechNode.

Franchise model: Luckin, which previously insisted on running its own stores, launched a franchise model in January. The company does not collect franchise fees from its partners, but becoming a Luckin franchisee requires an upfront investment of between RMB 35,000 to RMB 37,000 for storefront decoration, equipment, and a deposit. Luckin then takes up to 40% of the store’s profits once it reaches an agreed earnings threshold, depending on the size of the store.

Double down on existing users: Instead of spending heavily to acquire new users, Luckin focuses on getting value from regular customers, encouraging repurchasing by funneling them to a private user pool on social network tools such as WeChat Work. After scanning a QR code in a Luckin store at the request of a staff member, TechNode joined a WeChat group where the company sends discounts and coupons to nearly 100 customers. The tactic, commonly known as “private traffic,” is a popular marketing tool in China for increased user intimacy with brands and improved consumer retention rate.

Is it working?

Since delisting, Luckin has not published financial reports, so it’s hard to say whether the company is making headway on profits. In April, Luckin said it will publish corrected 2019 and 2020 earnings “as soon as possible.” But some figures have come out through the bankruptcy process.

When last seen, the company’s bottom line was in the red: in Luckin’s last financial statement, it claimed a loss attributable to shareholders of $324 million for the nine months ending September 2019. Of course, without the fake sales it would probably have looked worse.

Luckin appointed Alvarez & Marsal (A&M), a Cayman Islands-based consultancy which oversaw the liquidation of Lehman Brothers, to oversee its restructuring. The coffee chain owes millions to investors who bought into its January 2020 bond offering. The liquidators most recently released revenue information for 2020, reporting increased revenue despite a steep cut in store numbers. 

Luckin scored revenue growth in 2020, A&M said. The auditor estimated the net revenue for 2020 to be between RMB 3.8 billion and RMB 4.2 billion, compared with RMB 3.0 billion net revenue for 2019. That’s a 27% to 40% year-on-year increase. Nothing significant compared with three-digit growth before, but healthy enough for a tumultuous year. 

“It’s a reach to make predictions about the company’s current operating status based on last year’s data because there have been lots of developments in the market since then. But consumers and the market reckon that the company’s operations are getting better. The beverage industry is highly profitable. Avoiding large-scale store closures during the most difficult times in last year’s pandemic is obvious evidence that the company is doing well,” Mark Zhang, analyst from Tiger Brokers told TechNode (our translation).

Some of its stores managed to break even for the first time in August 2020, and in September 2020, 60% of Luckin’s self-operated stores were profitable on the store level, the liquidators reported. The company claimed $710.3 million in cash and cash equivalents as of Nov. 30, 2020.

New business focuses start to pay off

• As of Nov. 30, 2020, Luckin has 894 franchised “partnership stores.”. This line of business was loss-making as of June 2020, but by November, 70% had reached the profit threshold required to share profits with the company. These thresholds vary between stores.
• A&M claim that “increased number of our transacting customers, purchasing  frequency per customer, higher effective selling prices of freshly-brewed products and our increased efforts in enriching our product portfolio” drove higher returns.

The company still faces debt trouble

• $467 million from 0.75% convertible senior notes are due 2025. One group of investors that holds 84% of said bonds has sued Luckin in the Cayman islands.
• Luckin entered into a restructuring agreement with a group controlling 59% of aggregate principal of the shares on March 16, which will give them back 91%-96% of the value.
• Ordinary shareholders also have claims based on the fact that the company misrepresented its financials. In a statement, the company said it is negotiating non-disclosure agreements with these plaintiffs.
• Luckin paid a $180 million penalty to settle accounting fraud charges brought by the US Securities and Exchange Commission.

Raising money: The company received new investments from Centurium Capital and Joy Capital on April 15. Centurium Capital put in $240 million and Joy Capital invested an additional $10 million in senior convertible shares. Both of the funders were early-stage investors of the company and sat on the original board of Luckin. 

“The company’s original investors, a motley crew with ties to Lu Zhengyao, haven’t given up on the concept. Query, however, whether they believe in the company’s strategy and competitive position or whether they are clinging onto the prospect of a lucrative exit,” Norris said. Norris previously criticized the company’s reliance on the personal networks of its founder in a 2019 TechNode article.

Vending machines: In January 2020, Luckin announced $865 million in post-IPO fundraising to fund growth and “unmanned” vending machine strategy. Due the the turmoil caused by its fraud admission, the firm suspended all expansion of the vending machines business in May 2020.

• Luckin started recruiting partners for its coffee vending machine program, Luckin Express, in March this year. As of December 2020, the company operated 150 vending machines for the program, which is loss making, according to the A&M report.
• The company has nothing about snack vending initiative Luckin Pop Mini, so local media supposes they have dropped the latter.
• A short report that rocked Luckin’s shares in January 2020 focused on vending machines, alleging that the company overpaid for the machines in a related party transaction.

Fool me once…? 

Luckin admitted to bad corporate governance and simply inventing sales figures out of whole cloth. Has it changed enough to be trusted?

• Luckin’s board of directors has undergone a slew of changes since its fraud admission, including the ousting of Charles Lu and Sean Shao in July, and reinstating of Sean Shao at Centurium Capital’s request in September.
• Transparency about the company’s financial status remains limited, with auditors being replaced twice. Auditor EY was replaced by Marcum Bernstein & Pinchuk LLP in December 2020. The latter was subsequently replaced by Centurion ZD in April 2021. Marcum says it “believes that it has not gathered sufficient independent third-party data or conducted sufficient audit procedures to complete the audit.”
• Only two out of the eight directors on the board had no personal ties with the company as of June 2020. The majority of directors must be independent to list on Nasdaq, where Luckin shares were traded before being delisted last year.

The Luckin legacy

Luckin is alive, and so is the model it started. But the world is different now—in part because of Luckin’s success. Coffee shops and beverage chains mushroomed in China over the past year. 

“Previously, Luckin was fighting to take shares from Starbucks. Now, Luckin is trying to complete the same objective, while grappling with Luckin-imitator coffee chains, such as Manner Coffee. It’s unclear whether the company has what it takes to fight a two-front war for coffee-drinkers’ wallets,” said AgencyChina’s Norris.

Local rivals like Manner Coffee (in Chinese) and Coffee Box have become new investor darlings in the coffee segment. Manner, which operates more than 100 mostly Shanghai-based stores, eschews discounts and deliveries, offering app-based pick up at a consistent price (RMB 15 for an Americano, with few to no discounts). Coffee Box, which started as a delivery service for Starbucks and Costa before setting up its own brand in 2014, shut down almost all of its brick-and-mortar stores to focus on online channels after setting up a joint venture in June last year with China’s largest gas station chain Sinopec. The joint venture plans to sell coffee in Sinopec’s Yijie convenience stores as “Yijie Coffee,” and targets 3,000 locations in gas stations and beyond by 2023.

Milk tea and fruity drinks chains also pose a challenge as the boundary between the coffee and tea fads is blurring. That means coffee chains also face competition from IPO candidates like Naixue’s Tea and Heytea, both of which now serve coffee. HeyTea operates more than 700 stores as of December, up from 390 one year ago, while Naixue’s Tea has nearly 500 stores as of 2020.

And, of course, Luckin faces international competitors. Starbucks is becoming more localized and online through a partnership with Alibaba. Fast food chains KFC and McDonald are increasing their coffee forays. Canadian coffee chain Tim Hortons is expanding its China operations after an investment from Tencent in February. 

“There are too many beverage brands to choose from in big cities like Shanghai. Instead of constantly purchasing from one single brand, I buy from several brands, and will choose whichever brands that are most accessible or most affordable at the time,” said Wang Jia.

UPDATE: An interview has been rephrased to remove the implication that Seesaw is a Luckin imitator.

Additional contributions by Julia Lu and Louis Hinnant

The crypto mining world remains in suspense about the future of Sichuan-based crypto mines after a regulators’ meeting on June 2. Two sources who know meeting attendees and asked not to be named told TechNode that Sichuan regulators have asked crypto mining companies to make plans to exit the province after September.

Following talk of a crackdown on bitcoin mining from top-level government officials, Sichuan officials met to discuss the effect of crypto mining on electricity consumption. 

Regulators told crypto mining companies to make plans to move their operations elsewhere and not to add any more new rigs during this transition, two sources who know someone in the meeting told TechNode.

Industry insider Molly Mo first reported that the Sichuan meeting was positive towards the industry.

Local authorities don’t want any sudden shocks to the local economy, so they will allow miners to stay through the end of the rainy season, which usually lasts until the end of September, one source said. 

At the time of the publication, no official statements or regulations have come out of the meeting, which took place on June 2.  

Why it matters: The southwestern province is a major crypto mining hub, due to its abundance of cheap electricity from hydropower plants during the rainy season. A crackdown there would significantly disrupt global crypto mining operations. 

• Another major crypto mining hub, Inner Mongolia, proposed a set of eight measures on May 25 that will likely kill the province’s mining industry.

READ MORE: Crypto miners start move to North America as China vows crackdown

Details: No policies have been officially released since the meeting. It was “inconclusive,” reported Chinese blockchain news outlet PANews (in Chinese).

• Sichuan energy regulators called the meeting to gather information about how the region’s crypto mining industry affects electricity consumption and what would happen if they shut down the mining industry. The Block first reported the news on May 27.

Context: After the State Council’s Financial Stability committee discussed a crackdown on Bitcoin mining at a meeting on May 21, the global crypto community has been anxiously waiting for a decision from Sichuan provincial officials. The State Council is China’s cabinet of ministers. 

• Bitcoin mining’s high energy consumption has reportedly caught the attention of Chinese regulators as they are ramping up sustainability efforts. Beijing wants the country to be carbon neutral by 2060, according to the latest Five Year Plan.  
• Beijing authorities also see crypto trading as speculative investment that has become popular with mom-and-pop investors, bringing financial risk to the economy. 

READ MORE: INSIGHTS | A turning point for China crypto?

This story has been updated with more information.

The team behind Chinese blockchain Nervos are building a cross-chain bridge to connect with Cardano, which users to use both chains’ native tokens interchangeably.

Why it matters: The bridge could be a major boost for Nervos user numbers. Cardano is the world’s sixth-largest cryptocurrency, with a $55.6 billion market cap, almost 10 times Nervos’s.

• It will also grant Cardano developers access to Nervos development tools, which are oriented towards the growing field of decentralized finance (DeFi). 
• This is Cardano’s first cross-chain bridge.
• Blockchain development teams are to form an internet to connect different networks. It’s a race to see which companies will make the best tools to connect blockchains. 

Details: The cross-chain asset bridge will allow users to use the two networks’ native tokens interchangeably across the two blockchains, using their existing wallets, Nervos said in a statement sent to TechNode. The bridge will use Nervos’s own cross-chain technology, Force Bridge. 

• Users will also be able to move and trade user-defined tokens across the two blockchains. The two public blockchains allow developers to build their own tokens, mainly used for decentralized applications (dapps), using either chain’s software development kits.
• By connecting the two blockchains and enabling transactions between their native tokens, Cardano and CKB, developers will tap into both networks’ user bases. The bridge could make both networks a more appealing ecosystem for developers.

Nervos: Hangzhou-based Nervos is building a fully-fledged public blockchain protocol, including a virtual machine.

• The protocol has attracted investors’ interest because it promises scalability without sacrificing decentralization, which is a good fit for DeFi. 

Connect chains: Nervos is also trying to tap into the growing need for interoperability, connecting distributed ledgers to form a blockchain web.

• In addition to Force Bridge, Nervos has built PW Core, a software development kit that allows developers to build dapps that different blockchains can access. It also built Polyjuice, a blockchain layer that lets developers move smart contracts from Ethereum to Nervos. 
• Other Chinese blockchain startups like Neo and Conflux are also working on interoperability.

Crypto mining 

China’s crypto mining industry is anxiously waiting to see how local officials will carry out a crackdown on bitcoin mining ordered by a State Council committee meeting on May 21 led by Vice Premier Liu He. 

• Government officials in Sichuan province will hold a meeting on June 2 to examine the effect of mining on the region’s hydroelectricity consumption before making any regulatory moves. (The Block)
• Prices of Bitmain’s newest crypto mining rig, the Antminer S19, have dropped 30% from their previous high of $12,000. The supply of mining rigs on Alibaba’s second-hand marketplace has increased. (Wu Blockchain)
• Meanwhile, a May 29 story about a crypto mining facility in the UK that was busted for illegally tapping into the national grid has gone viral on China’s Twitter-like Weibo. The related hashtag has been viewed 210 million times as of the time of writing.
• Despite power outages and the announcement of a mining crackdown, China still accounted for 70% of the global Bitcoin hashrate, said crypto research firm Elliptic. Hashrate is a measure of the computing power on the bitcoin network. (Sina Finance, in Chinese) This topic has been viewed over 1 million times on Weibo. 

READ MORE: INSIGHTS | A turning point for China crypto?

No more high-leverage crypto trading? 

Crypto trading platforms continue to cut off service to Chinese users following the State Council’s announcement on a mining crackdown, particularly from derivatives trading like perpetual contracts. 

• Chinese state news agency Xinhua published an article criticizing high-leverage crypto futures trading on May 29. It said those contracts gave investors the illusion of hedging risks, but can “cause people to lose their life’s savings” in a volatile market. (Xinhua)
• Binance changed all simplified Chinese language on its website related to perpetual contracts and leverage to traditional Chinese, Chinese journalist Colin Wu reported on May 31. Mainland Chinese primarily use simplified Chinese, while people in Hong Kong and Taiwan use traditional Chinese. Most simplified users can read traditional. (Wu Blockchain Twitter)
• Bitmart will suspend perpetual contracts trading for mainland users starting June 3, the crypto exchange said on May 31. Perpetual contracts are a type of derivative trade that have no expiration date. (Wu Blockchain Twitter)
• MXC, another Chinese crypto exchange popular for altcoin trading, will suspend margin trading and futures for new users from some regions. Wu said this will include China. (Wu Blockchain Twitter)

READ MORE: Crypto mining armageddon? Blockheads

Digital yuan on blockchain

Yao Qian, Director of the Science and Technology Regulatory Bureau of the China Securities Regulatory Commission said at a late May speech that China’s digital currency could run on blockchain networks like Ethereum, which would enable better financial inclusion. 

Before 2018, Yao was involved in the Digital Currency Electronic Payment (DCEP), the project under which the digital yuan is developed, while it was still in its early stages, when he worked at the People’s Bank of China.

“We can imagine that if digital dollars and digital yen run directly on blockchain networks such as Ethereum and Diem, then central banks can use their BaaS [blockchain as a service] services to directly provide users with central bank digital currencies without the need for intermediaries. Layered operations can enable the central bank’s digital currency to better benefit groups without bank accounts and achieve financial inclusion.”

—Yao Qian, Director of the Science and Technology Regulatory Bureau of the China Securities Regulatory Commission

Yao also said that the central bank’s motivation for working on the digital yuan is not to monitor people’s financial activities, adding that popular third-party digital payments apps such as Alipay and WeChat pay already “make all transactions transparent in real-time.” DCEP is the central bank’s attempt to keep up with the pace of digitalization, Yao said. (Sina Finance)

China’s crypto mining industry is facing the biggest regulatory threat of the last three years.

On May 21, China’s cabinet of ministers, the State Council, explicitly discussed cracking down on cryptocurrency mining. It was the first time the government body explicitly targeted the industry.

Just four days later, Inner Mongolia proposed a set of eight measures that will likely stifle crypto mining in the province.

The crypto world is waiting with bated breath for regional authorities in China’s other crypto mining hubs—Sichuan, Xinjiang, and Yunnan—to write rules.

Many crypto mining companies are already packing their bags, filling them with their most precious productive asset; mining rigs. Crypto exchanges and other crypto companies are holding out.

So is crypto in China over?

Bottom line: It’s too soon to say, but things are not going to be the same. Many crypto mining companies are already moving their rigs out of the country. Crypto exchanges and other crypto-linked companies are still holding out. But blockchain isn’t all crypto, and the wider ecosystem is still in good shape, perhaps the best shape it’s ever been in.

The status quo

A legal grey zone: Beijing has been suspicious of cryptocurrencies for a long time, but much crypto activity is tolerated. The Chinese government banned companies from issuing new tokens back in 2017. They also banned fiat to crypto conversion services, which led to the exchanges being kicked out of China, they stopped trading for Chinese mainland users, and moved their headquarters to other countries.

• This hasn’t stopped companies from issuing tokens, or exchanges from operating in China. At most, it has impeded China crypto people from shamelessly marketing tokens to Chinese consumers.
• It’s all about knowing how to navigate local laws and knowing the right people.
• But as many in the industry euphemistically say, “the trend is regulation.”

Vibrant community: China’s crypto industry may operate in a grey zone, but nobody is in hiding. Some parts of the industry are pretty swish, complete with fancy offices in central Beijing and lavish five-course dinners at private clubs. But the crypto industry is a lot more diverse than stereotypical tech.

• Some players are after a crypto-utopian dream, others are looking to line their pockets, some are simply ultra nerds, others old-school entrepreneurs. Of course, plenty of people are just there to earn a paycheck.
• The mining scene in particular is a great example of this. Many miners are (or were) down to earth people from the provinces, more comfortable in dialect than standard Mandarin.
• I’ve heard many in the industry describing Chongqing-born Wu Jihan, one of the founders of Bitmain, as a passionate genius who hates the spotlight. Wu reportedly hates interviews, and rarely speaks in public.
• This rag-to-riches spirit is true for other tech industries as well. But crypto is far newer—post-2008 and mostly post-2011—and a lot more centered around China, so the vibe is especially strong here.
• New hires in crypto companies increasingly herald from more affluent parts of China. Two internationally educated workers I know in their late 20s in Shanghai tell me they have a hard time understanding what their company is doing.
• Founders of many newer companies came from traditional finance. Former JP Morgan and Goldman Sachs traders, analysts, and executives, abound in crypto.

The crackdown

Change in tone: The China crypto scene has been facing increased regulatory pressure in the last year. By all accounts, there’s two motivations behind the talk at the highest levels of the Chinese government against mining: environmental and financial.

Why the crackdown? It’s one part green: In the last year, China has accelerated its move towards a greener future. In the 14th Five Year Plan, it pledged big reductions in carbon emissions.

• Unfortunately for China’s crypto industry, the type of mining Bitcoin network uses, known as proof-of-work, burns a lot of electricity. In regions like Inner Mongolia and Xinjiang, where electricity primarily comes from coal plants, mining is a big contributor to carbon emissions.
• It’s a little trickier to determine whether mining in other regions, like Sichuan and Yunnan, where electricity comes from hydropower plants, will suffer from the environmental guillotine.

One part financial stability: At the same time, finance authorities have their own beef with Bitcoin. The May 21 statement that got crypto peeps worried didn’t come from China’s environmental authorities. It came from the State Council’s Financial Stability Committee, which said that “it’s looking to control financial risk.”

• Regulators likely fear that Chinese retail investors,  en masse, are putting themselves at risk with bets on cryptocurrencies.
• If crypto markets were to crash, not only miners, but mom and pop investors would lose their money.
• Chinese regulators have a history of protecting retail investors with costly bailouts when things go wrong in the market.

Not everybody likes the bull market: State bodies and media have been bashing cryptocurrency “speculation” in the last few months, as the bull market was raging, even as some officials have recognized Bitcoin as an asset.

• Just on May 15, Xinhua republished the story of a certain “auntie Meng,” who lost her life’s savings (RMB 600,000, or about $94,000, according to the article), and a large bank loan she took out to invest in what turned out to be a Ponzi scheme. The article said that the “chaos” of the bull market is dangerous to ordinary investors.
• When a bull market sent Bitcoin soaring to $60,000, it attracted the interest of Chinese social media and retail investors. But in the last year, Chinese police have continued to uncover scams and heists related to crypto.

Crypto financial services: More than the miners, in the last year, we’ve seen crypto financial services providers have been targeted.

• Over-the-counter traders, which help people and especially miners quickly exchange fiat to crypto and vice versa, were the target of a crackdown starting in September 2020.
• Crypto exchanges also took some heat: Huobi COO Leon Li, disappeared in November 2020 as he was assisting police with an investigation.
• Such events and crackdowns are not unheard of in the crypto world. They are part of a cat and mouse game that has lasted for years.
• But it is entirely possible that such financial services providers will face increased pressure as the Financial Stability Committee tries to limit risks to auntie Meng.

Blockchain boom: Meanwhile, the non-crypto blockchain ecosystem has seen unprecedented support from the central and local governments. In 2019, the technology was endorsed by President Xi Jinping, and in 2021 the technology was mentioned by name in the national five year plan.

• The government-backed Blockchain Services Network is forging ahead with its plan to build a global “internet of blockchains.”
• Local governments started to throw money at blockchain in the last year. The city of Beijing announced plans to use blockchain in governance in July. In January 2021, Shanghai invested $5 million in Conflux, a blockchain startup.

What’s to come? Crypto mining firms will increasingly face pressure from authorities, following the State Council committee’s meeting. It is also likely that authorities will crack down on companies bringing crypto trading to Auntie Meng—piling onto their moves on crypto financial services from last year.

But the rest of China’s blockchain ecosystem will keep going. Authorities have shown tolerance and even support for companies working on fundamental blockchain technology, be it public or consortium chains. These same firms issue cryptocurrencies to keep their public chain protocols going. As long as they don’t encourage Auntie Meng to take on too much risk by investing in crypto, they will likely be fine.

Miningeddon

• On May 21, the State Council’s Financial Stability Committee discussed plans to “crack down on Bitcoin mining and trading” at a meeting chaired by Vice Premier Liu He. Authorities have yet to release specific policies against crypto mining, but some major Chinese companies are preparing to move their operations to North America. (TechNode)
• Mining pool BTC.TOP and HashCow, as well as Huobi Mall, the website where the crypto exchange sells mining pool services, halted all or part of their China operations following the State Council Committee’s statement. (Reuters)
• The announcement also sparked a sell-off of stablecoin USD Tether against the Renminbi on over-the-counter desks, which China’s miners rely on to convert crypto to traditional currency. (The Block)

Minerdämmerung

• Three Chinese finance industry bodies reiterated a 2017 ban prohibiting banks and payment institutions from offering crypto-related services. Bitcoin briefly plunged to $30,000 when the news was reported in English. (TechNode)
• The Development and Reform Commission of Inner Mongolia set up a hotline, email, and mail address for the public to report crypto mining operations. The regional government is considering a total ban on crypto mining amid a push to reduce electricity use. (The Block)
• The hashrate for major Chinese mining pools dropped by as much as 23% on May 19, before mostly recovering. The drop has been widely attributed to power outages in Sichuan. (8btc.com)

The digital yuan

• Changsha launched a second digital RMB lottery May 22 to distribute RMB 40 million of the digital currency. The lottery is supported by the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, Construction Bank of China, Bank of Communications and Postal Savings Bank, Hunan Rural Credit Union, and Bank of Changsha. (Rednet, in Chinese)
• A Hainan company completed the first cross-border e-CNY transaction for e-commerce, according to a statement May 18. (People’s Daily Overseas Network)

The blockchain stocks

Chinese blockchain stocks outperformed their international counterparts last week amid falling Bitcoin prices. (Bloomberg)

Major Chinese crypto mining companies are moving their operations to North America in anticipation of a renewed crackdown on the industry in China, two industry insiders told TechNode.

One source within a Chinese mining firm told TechNode the company has made arrangements to ship thousands of mining rigs to facilities in Texas in the US and Alberta in Canada. The two regions are top destinations for Chinese mining companies looking to move overseas, the source added.

On May 21, the State Council’s Financial Stability Committee resolved to “crack down on Bitcoin mining and trading” to curb related financial risk at a meeting chaired by Vice Premier Liu He, according to a statement released late the same evening.

This is the first time China’s cabinet has explicitly targeted crypto mining.

China accounts for about 70% of the world’s Bitcoin hashrate, a measure of computing power in the network. The price of Bitcoin plunged 13% to $35,000 in the six hours following the statement.

China’s mining industry has flourished largely due to the wide availability of cheap electricity in regions like Sichuan, Inner Mongolia, and Xinjiang.

Electricity in Texas can cost as little as $0.02 per kilowatt hour (KwH), Ethan Vera, co-founder of a US mining firm told TechNode back in September 2020. The average price for electricity for industrial use in China is $0.084 KwH, but in Sichuan it has been reported to be as low as $0.01 per KwH during the rainy season due to abundant hydropower.

Gathering storm

The crypto mining industry has been operating in a legal grey zone, and the central government hasn’t made previously taken decisive moves to embrace or crush it. A year ago, the government of Sichuan appeared to be opening up to crypto mining.

READ MORE: INSIGHTS | Markets, not floods, will drown bitcoin miners

But the 14th Five Year Plan’s sustainability goals spelled trouble for crypto mining in China.

Bitcoin mining has been widely criticized for using up a lot of electricity. By some estimates the network uses up more power than the entirety of Argentina.

Following the plan, Inner Mongolia, whose cheap electricity comes primarily from coal plants, proposed a ban on crypto mining citing environmental concerns. Chinese media reported earlier in May that miners in Sichuan have been expecting increased pressure from provincial authorities as they pursue sustainability goals.

However, the recent move came from financial, not environmental, authorities.

The rising popularity of infamously volatile cryptocurrency marketshas brought negative attention to digital currencies in the last few months. On May 15, state-owned news agency Xinhua published an op-ed criticizing the bull run and calling for more regulation.

Last week, crypto markets crashed briefly three financial industry associations issued a statement calling attention to a 2017 ban disallowing banks and payment institutions from providing crypto services.

READ MORE: Bitcoin crashes on minor news from China

Correction: A previous version of this article misstated the date of the State Council meeting.

Cryptocurrency markets crashed on Wednesday night, with Bitcoin hitting $30,000 its lowest price since January. The abrupt sell-off came amid a plunging market and was widely attributed to a “ban” on crypto in China. As of writing, Bitcoin prices have recovered from the Wednesday drop, but are still far off their April peak. 

So, did China crash Bitcoin? 

The news that came out of China was very minor: Chinese authorities didn’t instate any new restrictions on cryptocurrencies this week. On Tuesday, three Chinese finance industry associations reiterated a 2017 ban on providing crypto related services. The effects on China’s crypto industry will likely be minor.

But the insignificance of the news didn’t determine the perception and consequent actions of already-skittish investors. It appears likely this minor news, in translation, really did set off a market crash.

Timing lines up

The timing of the news breaking and the sell-off suggests that international traders were responding to news from China. 

The statement was posted on the evening of May 18, while Bitcoin was trading at around $45,000, after falling 30% in the previous 30 days. 

Stories on a crypto “ban” in China made the rounds in international media on the afternoon of May 19, meanwhile the price of Bitcoin started to drop faster, losing $2,000 in a couple of hours. 

Google searches for the keywords “China,”  “crypto,” “bitcoin,” and “ban” started increasing around 10:00 p.m. China Standard Time on May 18. Around 9:00 p.m. May 19, searches spiked, at almost the same time that Bitcoin spiked downward to $30,000 just after 9:00 p.m. the next night.

But the Chinese internet was not very interested in the associations’ statement. 

Chinese state-owned TV channel CCTV reported on the statement a little after 10.00 a.m. on March 19. The news then circulated in Chinese social media. On China’s Twitter-like platform Weibo, related hashtags started picking up steam in the afternoon. As of the time of writing, they have been viewed at least 2.5 million times. That makes the news a mid-sized Weibo trend, garnering similar views as news on US artist Beeple selling a non-fungible token (NFTs) for $69 million back in March. 

Only when Bitcoin entered freefall on the evening of March 19 did Weibo blow up. Related hashtags have been viewed at least 800 million times since Wednesday night. The hashtag “Bitcoin collapse” was Weibo’s number three trending topic last night. 

What did China do? 

The government didn’t do anything, but some industry associations reminded finance and payments providers that they are not allowed to offer crypto services.

Some in China’s crypto community have pointed fingers at Reuters for distorting the news.

The China Internet Finance Association, the China Banking Association, and the China Payment and Settlement Association said that financial and payments providers are prohibited from conducting business related to virtual currencies, reiterating a 2017 regulation on cryptocurrency activities. Their statement was posted on the People’s Bank of China official WeChat account. 

The list of prohibitions for finance and payments providers is longer and more comprehensive, compared to the 2017 rules, but they broadly refer to the same types of activities. The associations’ words are not legally binding, unlike the 2017 regulations. 

The 2017 rules essentially banned IPO-like initial coin offerings (ICOs) and exchanges. The rules prohibited exchange platforms from converting fiat currencies like the Renminbi to virtual currencies like Bitcoin, companies from issuing crypto tokens in initial coin offerings, and financial and non-bank payment institutions from offering crypto-related services: 

Financial institutions and non-bank payment institutions shall not conduct business related to token issuance financing transactions. Financial institutions and non-bank payment institutions shall not directly or indirectly provide account opening, registration, trading, clearing, settlement and other products or services for token issuance financing and “virtual currency,” and shall not underwrite related tokens and “virtual currency.” The insurance business may include tokens and “virtual currency” into the scope of insurance liability. Financial institutions and non-bank payment institutions shall promptly report to the relevant authorities if they find clues about the illegality of token issuance financing transactions.

September 2017 statement from People’s Bank of China, Central Cyberspace Administration, Ministry of Industry and Information Technology, State Administration for Industry and Commerce, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission

In the four years since the 2017 rules, crypto exchanges have continued to offer their services and run massive offices in China, blockchain companies have launched ICOs, and most of the world’s crypto mining has been in China. 

Last year, however, authorities cracked down on crypto exchanges and particularly over-the-counter traders. 

The three industry bodies’ Tuesday announcement said essentially the same thing;: that financial and payment companies should not provide crypto services:

Financial institutions, payment institutions and other members must effectively strengthen their social responsibilities. They must not use virtual currency to price products and services, and must not underwrite insurance businesses related to virtual currencies or include virtual currencies in the scope of insurance liability. They must not directly or indirectly provide customers with other services. Services related to virtual currency, including but not limited to: providing customers with virtual currency registration, trading, clearing, settlement and other services; accepting virtual currency or using virtual currency as a payment and settlement tool; developing virtual currency exchange services with RMB and foreign currencies; develop virtual currency storage, custody, mortgage and other businesses; issue financial products related to virtual currency; use virtual currency as investment targets for trusts, funds, etc. Financial institutions, payment institutions and other member units should effectively strengthen the monitoring of virtual currency transaction funds, rely on industry self-discipline mechanisms, strengthen risk information sharing, and improve the level of industry risk joint prevention and control; if clues of violations of laws and regulations are found, they must promptly adopt restrictions, suspensions or procedures in accordance with procedures. Terminate relevant transactions, services, and other measures, and report to relevant departments; at the same time, actively use multi-channel and diversified access methods to strengthen customer publicity and warning education, and take the initiative to make warnings about risks related to virtual currencies. Internet platform corporate member units shall not provide services such as online business premises, commercial display, marketing and publicity, and paid diversion for virtual currency-related business activities. If clues of related problems are found, they shall promptly report to relevant departments and provide technical support for related investigations and assistance. 

March 18 statement from China Internet Finance Association, China Banking Association, and China Payment and Settlement Association

Carbon complications

An overblown story from China doesn’t explain all of the recent drop in crypto markets. In the last month, Bitcoin has lost 30% of its value, likely because investors are skittish amid looming environmental and regulatory concerns. 

A further plunge crstarted after tech CEO Elon Musk tweeted that Tesla will not accept Bitcoin as payment on March 13, citing environmental concerns. The digital asset has lost 30% of its value in the week since Musks’s statement. 

“This recent crash reflects the misunderstandings [of the effects of] Bitcoin mining on the environment in my opinion, but perhaps also has been driven by the ESG-minded companies that have been influenced by Musk’s latest stance on Bitcoin,” Flex Yang, CEO and co-founder of Babel Finance, a crypto financial services firm, told TechNode. 

The associations’ statement probably won’t bring dramatic change to China’s rules on crypto, but concerns about environmental regulation are mounting for crypto miners in the country. 

As the central government pursues carbon neutrality, local governments are increasingly hostile to crypto mining activities. Inner Mongolia has already proposed a ban on the industry, and crypto miners in Sichuan, which is usually more friendly, are expecting increased pressure in the coming months. 

READ MORE:  Losercoin, and a new crypto mining crackdown? Blockheads

The Nervos Foundation and China Merchants Bank International (CMBI), a wholly-owned subsidiary of China Merchants Bank, launched a $50 million venture capital fund to invest in blockchain startups.

Why it matters: The fund will look for startups with plans to integrate in the Nervos ecosystem. This will help the blockchain network grow.

• The fund is also the first joint investment vehicle between a bank and a Chinese public blockchain startup.

Details: The fund, dubbed InNervation, will invest in early and growth-stage startups globally, focusing on decentralized applications (dapps), decentralized finance (DeFi) protocols, distributed ledger platforms, and non-fungible token (NFT) marketplaces, according to a press release.

• Asked about InNervation’s investment strategy, Nervos co-founder Kevin Wang also pointed to “a lot of interesting emerging use cases at the intersection of DeFi and NFTs, like using NFTs as collateral for decentralized lending products.”
• The capital will be distributed over three years, with investments from $200,000 to $2 million.

We’re not in this for quick returns so it’s difficult to say when we expect to see ROI on the projects we invest in. […] Many of the investments made will be strategic to the Nervos ecosystem, so we’re taking a longer-term approach.

Nervos co-founder, Kevin Wang

Context: Backed by major investors, Nervos is one of the most respected Chinese startups working on “layer one” blockchain technology. Layer one refers to basic architecture that can support a range of blockchain applications.

• It has received $100 million in six funding rounds, data from Crunchbase says. Investors include Sequoia China, and some of the country’s best-known blockchain funds, including Wanxiang Blockchain and Hashkey Capital.
• Nervos’s partners include major blockchain projects like the Blockchain Services Network, oracle provider Chainlink, and crypto wallet RenrenBit. 
• Hong Kong-based CMBI has invested in Nervos through the CKB token, Nervos’s native cryptocurrency, The Block reported. The two partnered in 2019 to develop dapps for financial services.

READ MORE: Nervos launches new token standards, furthering Defi push

The crypto mining crackdown?

• Miners in southwest China, including Sichuan, could be under greater than normal pressure from regulators, as provincial authorities pursue carbon neutrality goals. On May 16, major Chinese crypto mining pools saw their hashrate fall by around 20%, in part because of inspections from government authorities. Hashrate is a measure of computing power on the Bitcoin network. Usually, during the wet summer months, Sichuan accounts for around 30% of China’s Bitcoin hashrate. (Wu Blockchain, in Chinese)
• On May 15, state-owned news agency Xinhua criticized the latest crypto bull run, and called for more regulation. The article said that the industry’s “chaos” increasingly “threatens” the wealth of citizens, citing examples of small investors who were scammed out of their money. (Xinhua)

The losercoin

A new cryptocurrency looking to own failure is picking up steam in China. Losercoin, the native token of decentralized exchange LoserSwap, is a project initiated by a team that describes itself as “two poor guys” from rural China, who “lost a ton of money” in crypto trading, according to its website.

The founders appear to have tapped into a rich vein of Chinese investors who feel like losers, promising that they don’t plan on taking advantage of them through pump and dump tactics or rug pulls.

On Losercoin’s fan website, a post titled “How to know you are a loser” includes “loving cheap or free items such as LOWB,” and, “Always feel like you are not fitting in; you always lose money when everyone else is making money” (CoinDesk’s translation). LOWB is the ticker for Losercoin.

The hashtags “loser coin” and “LOWB” have been viewed 17 million times on China’s Twitter-like social media platform Weibo as of the time of writing, peaking around May 11. (CoinDesk)

But the losers’ wins were short lived: When the hashtags were trending on Weibo, the coin’s price rose, but has since dropped below its launch price, according to data from CoinMarketCap.

The digital yuan

• The Postal Savings Bank of China, along with two local companies, launched China’s first platform for B2B e-CNY transactions in Dalian, a city in the northeast. China Construction Bank has also set up a digital RMB-enabled shipping platform in the city, which vessel managers can use to pay for fuel, food, and other necessities. (Tianjian.com, in Chinese)
• On May 8, a branch of the Public Security Bureau in Changsha paid employees’ salaries using the digital currency. (Digital Coin Research Society, in Chinese)
• The Hong Kong Monetary Authority told Bloomberg that they are in talks with the Digital Currency Research Institute of the People’s Bank of China to expand joint trials for the digital yuan, including cross-border transactions. (Bloomberg)

READ MORE: Digital yuan trials for Hong Kong, JD.com: Blockheads

The exchanges

Huobi Group, parent company of Huobi crypto exchange, launched a $100 million venture capital fund to invest in blockchain startups, particularly in the fields of decentralized finance (DeFi) and non-fungible tokens (NFTs). (Decrypt)

Did Tencent plug Bitcoin?

A WeChat article by Tencent’s Research Institute called on authorities to explore the inclusion of Bitcoin and other cryptocurrencies in China’s foreign exchange reserves, China blockchain maven Colin Wu reported. The Institute deleted the article in less than 24 hours, Wu wrote on Twitter. (Wu Blockchain Twitter)

Shiba frenzy

A joke cryptocurrency called Shiba Inu caught the attention of Chinese cryptocurrency investors following the meteoric rise of Dogecoin. Shiba, named after the Japanese dog breed, started trading on crypto exchanges preferred by Chinese traders. It began trading on OKEx and Huobi on Saturday, and on Binance on Monday.

Its price rocketed more than tenfold since Saturday, according to data from CoinMarketCap. The hashtag “Shiba rise” exceeded 100 million views on Chinese microblogging platform Weibo as of the time of writing.

The price of Dogecoin, a joke cryptocurrency or memecoin, rose 800% in the last month following repeated plugs by Elon Musk. After the Tesla founder on Saturday called it a “hustle” on the American comedy sketch show Saturday Night Live, the memecoin lost about 30% of its value. The hashtag “Dogecoin” in Chinese was viewed 130 million times on Weibo after Musk’s SNL appearance.

Shiba has surpassed Bitcoin and Ethereum to become the top token in terms of volume traded on Huobi and OKEx, data from CoinGecko showed. (CoinDesk)

The digital yuan

• Alipay will start testing the use of the e-CNY in its app for select users. The option is available through its own licensed bank, MYBank, on the super app. (China Securities Journal, in Chinese)
• The government of Qingdao, a city in eastern Shandong province, in collaboration with the local branch of China Construction Bank, is testing the conversion of government-measured “moral points” into digital RMB to incentivize kindness and create a care feedback mechanism. (Mobile Payments Network, in Chinese)
• The People’s Bank of China Digital Currency Research Institute and the China Academy of Information and Communications Technology passed two standards for blockchain with the UN agency, the ITU. The standards are on function and performance-assessment methods for blockchain platforms. (Shanghai Securities Journal, in Chinese)

Mining updates

• In China, the Dogecoin and Litecoin price rallies have led to a surge of interest in older mining machines geared towards the two cryptocurrencies that were unprofitable until the rallies. (The Block)
• In April, more of the global bitcoin hashrate came from outside China rather than within, signaling that China is losing its dominance in crypto mining. Foundry USA made it to the top five pools globally, a ranking usually dominated by Chinese pools. (CoinTelegraph)

The Chia launch

Trading for Chia, a new crypto token by the inventor of BitTorrent, started on May 4. The token is poised to be a greener alternative to Bitcoin, and has been very popular with Chinese miners. Its popularity has led to hard drive shortages in China and Vietnam.

Just days after its launch, the Amazon Web Services Chinese site started advertising a cloud solution for mining Chia. The page has since been deleted.

Chia’s price dropped by about 29% since May 4, while volume traded has increased six-fold, data from CoinMarketCap showed. (The Block)

READ MORE: Is crypto mining really moving to North America?

OTC trial

Zhao Dong, known as China’s over-the-counter (OTC) king, is scheduled for trial in Zhejiang province on May 12. He faces charges of illegal business operations and assisting in IT-related criminal activities. OTC trading is widely used by Chinese miners who want to convert their crypto assets to fiat currency to pay for ongoing bills, but the government cracked down on the practice last year. (Wu Blockchain, in Chinese)

Crypto funding

Crypto lender Babel Finance raised $40 million in a Series A led by Sequioa China, Dragonfly Capital, and investors from outside Asia’s crypto world including Zoo Capital, Bertelsmann Asian Investments (BAI), and Tiger Global Management. (TechNode)

The trading ban

One of China’s state-owned big banks, CITIC Bank, posted a notice on its website prohibiting account holders from using their accounts to buy cryptocurrencies. The notice was dated April 22, but was only discovered last week. (CITIC Bank notice, in Chinese)

Cryptocurrency financial service provider Babel Finance has raised $40 million in its Series A led by heavyweights within its own industry and beyond.

Why it matters: Babel has been trying to attract investors from the traditional finance world to invest in digital assets. The backing of fiat currency-based venture capital and private equity funds could boost its appeal to traditional investors.

The company: Founded in 2018, Babel’s investment prior to its Series A was $2 million, according to Crunchbase. The company has serviced 500 institutional clients, and the outstanding balance of its cryptocurrency-lending business was $2 billion as of February, according to a statement sent to TechNode.

• Babel started out providing lending services to cryptocurrency miners, but now aims to cash in on increased interest in the digital assets from deep-pocketed traditional finance players.
• The company has applied for one of the coveted asset management licenses in Hong Kong, which would allow it to provide investment services in the city.

“The alliance with our new investors from traditional finance is a critical step for us to offer more innovative products, strengthen compliance controls, and ultimately provide a full suite of reliable services to meet the growing demand from mainstream investors who are keen to allocate crypto assets in their portfolio.”

—Flex Yang, CEO of Babel Finance, in the statement

The investors: Babel’s Series A was led by Sequoia Capital China, Dragonfly Capital, Zoo Capital, Bertelsmann Asian Investments (BAI), and Tiger Global Management.

READ MORE: Huobi subsidiary launches Bitcoin, Ether, crypto mining funds in Hong Kong

• Sequoia China has been active since 2018 in Chinese cryptocurrency startups, and is a strategic partner to Dragonfly, one of China’s most well-known crypto investors.
• It was a first investment in Asia’s crypto industries for Zoo Capital, BAI—the Asian VC of media and education giant Bertelsmann—and New York-based Tiger Global Management.
• Zoo Capital is the early-stage arm of Boyu Capital, a late-stage VC that has invested in Alibaba, Kuaishou, Pinduoduo, and Ant Group.
• BAI’s China portfolio includes fintech firm Lexin, grocery e-commerce firm Dingdong Maicai, and LGBTQ dating app Blued, and bike rental company Mobike.

A year ago, Ant Group was riding high. Since it was founded in 2014, it had become, by its own description, China’s dominant fintech company. It was set to raise $34 billion in blockbuster dual listings in Shanghai and Hong Kong in November 2020.

But it was not to be. Two days before its listing, Chinese regulators shut it down, citing changes to the regulatory environment that Ant hadn’t disclosed in its IPO prospectus. They made it clear, Ant would not be allowed to list in its current form.

The company, supervised by regulators, has since been negotiating its “rectification” behind closed doors.

The tech world has been in suspense for months. How much will Ant change? Will it be allowed to retain its data-driven core business, or forced to change into something much more like an online bank?

The answers depend both on opaque conversations between the business and government, and on an emerging body of fintech regulations.

On April 12, the company met again with regulators. In a readout, it said it had “completed the formulation of our rectification plan.” In another meeting readout on behalf of the regulators, one of the central bank’s deputy governors, Pan Gongsheng, a key figure in the government’s effort to oversee Ant’s revamp, confirmed that a plan was formed and added a little more detail.

So, is Ant Group’s future clear?

READ MORE: UPDATED: Ant Group IPO delay and Jack Ma’s ill-timed speech

Bottom line: Clearer. We know about the plan only from two very brief statements, from Ant Group and Pan. There’s a lot we still don’t know.

With a rectification plan in place, changes should accelerate across the company. It appears that the company will continue providing the same services, but will change how it is organized, accounted for, and regulated. The brief statements don’t tell us much about the key question of managing data flows between digital payments and microlending.

We don’t know much about Ant’s understanding with its regulators. Both statements agreed that there are five points in the rectification plan. But they don’t agree on what the points are. We can make some informed guesses based on areas of overlap, but some big questions are still hanging over the company.

Whatever will happen to Ant, it will set a precedent for the governance of platform companies.

What we learned

The new information: Last week, we got a trickle of new information about these questions.

• Ant wrote a terse press release announcing that it had a rectification plan, in English, on its WeChat account. 183 words summarize the specifics of the plan.
• Pan, a deputy governor at the People’s Bank of China (PBOC), made a one-paragraph comment about the plan during an interview on the plan and fintech regulation more broadly with official media (in Chinese).
• State media quoted the regulators’ readout of the meeting, given by Pan: the PBOC, the China Banking and Insurance Regulatory Commission (CBIRC), China Securities Regulatory Commission (CSR), and the State Administration of Foreign Exchange (SAFE).

The confusion: Ant and Pan both describe a five-point plan, but they do not agree on what exactly those points are, or how to order them.

• It’s hard to separate the five points in Ant’s English statement, but the Chinese version clearly outlines them. We’ve broken them up below according to the Chinese.
• Pan’s five are different. For example, he puts antitrust first in his statement, but Ant places it in sub-point three of point five.
• Adding to this confusion is the fact that many of the regulations they are referring to are still in development, or so brand new that courts haven’t had time to interpret them.
• Both statements also refer to a third set of five demands (in Chinese) by the central bank deputy governor in December 2020, which don’t line up perfectly with either statement.

So, we have three sets of five points that have some overlap but are not the same; a penta-triptych in an impressionist style.

What they said (in the order of appearance in the statements as published):

Financial holding company

This is Ant Group’s first point, but only ranks third in Pan’s list. Ant will set up a financial holding company “in its entirety,” it said. This will affect how the company is regulated. Recently China has been making new regulations for financial holding companies, but we don’t know that much about how they’ll be applied yet.

Does it lend? Ant Group has always said it’s not a bank and it shouldn’t be regulated like one.

• Ant doesn’t make money the same way banks do. Banks lend out money and earn profits from interest.
• Ant Group behaves more like a loan originator, such as Countrywide: it finds people who want financial services—such as loans, investment products, or insurance—and connects them to finance companies. It makes money by charging providers what it calls “technology fees” for helping them find customers.
• Ant owned only 2% of the RMB 2.15 trillion in loans it has created; the rest were underwritten by its partner banks.
• But Ant Group also owns 30% of MyBank, which underwrites loans enabled through Ant’s credittech platforms. MyBank is Ant’s second-largest customer, according to the IPO prospectus, accounting for 6.2% of Ant’s revenue in Q1 2020.

The same goes for investments and insurance: Out of the RMB 4.1 trillion of assets that go through its investmenttech platforms, only 33% of that is directly managed by Tianhong Asset Management, a company that Ant Group has a 51% stake in.

• Ant’s insuretech platforms enabled RMB 52 billion worth of insurance premiums contributions. But its licensed subsidiary only accounted for 9% of those.

But regulators say “same industry, same regulation.” In his interview, Pan said that platform companies “should not make technology a ‘camouflage’ for illegal activities.”

Now what? The company’s operations likely won’t change dramatically, but the way it runs its books will: Rules for financial holding companies will require it to behave a lot more like a bank—which will likely drag on its profitability.

• Financial holding companies “only manage equity investment and do not directly engage in commercial business,” according to trial measures for this type of corporate structure issued by the State Council in September 2020.
• The regulatory framework sets requirements for registered capital and corporate governance rules. It also places these companies under the purview of the People’s Bank of China (PBOC).
• “Ant will have to inject a significant amount of capital to meet the capital adequacy requirement, and also need cash to meet the manage liquidity risk appropriately,” Li Nan, associate professor of finance at Shanghai Jiaotong University’s Antai College of Economics and Management, told TechNode.
• More detailed rules on balance sheet management, leverage ratios, and capital adequacy requirements might be drafted later, Chinese media have reported.
• Ant Group will still be able to “enjoy the benefits of economies of scale,” but with “Chinese walls” separating the different operations, Li said.

Monopolistic behavior

Correcting monopolistic behavior is Pan’s first point. In Ant’s statement, the issue is much less prominent, with only a mention of competition in a sub-points below the fifth point. Pan ties the monopoly issue to the “inappropriate links” we’ll see below.

Market dominance? According to iResearch, Ant Group accounts for more than 55% of the third-party digital payments market. By this measure, Alipay reaches the threshold to be classified as a dominant player in the sector, according to new regulatory definitions issued in January.

• It’s not illegal to be a dominant player. But the regulation calls for a review into the dominant players’ business practices to make sure you play fair.
• Its ubiquitous digital payments app Alipay had 1 billion annual active users as of the 12 months ending August 17, 2020.
• These users transacted a neat RMB 118 trillion in payment volume in the 12 months ending June 30, 2020.

Playing fair: The fintech giant also has to “correct unfair competition in its digital payments business and give consumers more choice in payment methods,” Pan said.

• Ant said that “returning to its origin, our payment business will serve consumers and SMEs by focusing on micro-payments and bringing them convenience.” Micropayments are low-value retail transactions.

Simplifying structure… a bit

Ant Group is hard to supervise, regulators have said. In part because its business cuts across different regulator’s territory, and in part because its operations are spread out across many subsidiaries. Reorganization will clearly define Ant’s different businesses to align with regulatory lines.

Another issue related to corporate reorganization is to bring Ant’s credittech operations under properly licensed subsidiaries. This is not directly addressed as a separate point in either of the statements, but both allude to it. Ant and Pan both mention a promise to set up a licensed personal credit reporting company. Ant also promises to place two major lending platforms in a consumer finance company.

What’s the issue? Ant Group is a very difficult corporate entity to wrap one’s head around, particularly its credittech operations. It does a lot of different things, both tech and finance, and has many corporate entities. It is very difficult to discern which company does what.

• The company’s microlending business is currently divided into a few different subsidiaries, according to its IPO prospectus. Two are “dedicated to technical services”: Ant Zhixin in Hangzhou and Chongqing Wantang. Ant Shangcheng and Ant Small and Micro Loan, both registered in Chongqing, are used to “fund a small portion” of the microloans enabled through Ant’s platforms.
• The two microloan companies that actually fund loans are able to operate nationwide because Chongqing municipality allows fintechs that have set up shop there to offer their services in the rest of China.
• Sesame Credit, a fully owned subsidiary, has been a licensed corporate credit reporting company since 2016.

LISTEN MORE: China Tech Investor: Ant Group is really big, and really confusing

Now what? The plan will set up “clearer boundaries between different regulated entities under the financial holding company,” Jun Wan, a lawyer who specializes in fintech at Han Kun Law Offices in Shanghai, told TechNode.

• Reorganization “does not mean that Ant has to be broken up,” Li said. The plan “implies that Ant will set up different licensed subsidiaries under the same financial holding company,” the Jiaotong University professor said.
• Ant Group started the process to set up a Chongqing subsidiary dedicated to consumer finance in August 2020, and got the green light from the China Banking and Insurance Regulatory Commission in September 2020, its prospectus said, but didn’t give any details as to what happened since.

Data

Pan demanded that Ant “break the data monopoly.” Ant, in its own second point, offered a promise to return Alipay “to its origin… by focusing on micropayments,” which could mean less focus on data. Both referred to regulations on personal credit reporting companies, specifically in regards to data management.

In the pre-rectified Ant Group, data was like the family fridge: Alipay put food in, and other units like Huabei and Jiebei could take it out as needed. It was not clear to outsiders who was using what data for what purposes.

In its prospectus, the company said it limited access to personal data “based on necessity,” and that it maintained “strict control over access to personal data and strict assessment and approval procedures to prohibit invalid or illegitimate uses,” and “records of data access.” “We limit any access based on necessity and maintain records of data access.”

The rectified Ant will manage data more like a cafeteria: If Huabei is going to use Alipay data, it will have to track what it takes and get a receipt. There will be rules—overseen by regulators—about what data it can transfer, for what use, and how, but we don’t know much about what these rules will be.

Data management is a regulatory priority in general, and particularly for the regulators on Ant’s case. “The regulators keep focusing on personal information protection given Ant collects a huge amount of personal information. It may require Ant to follow the strict personal information protection laws and regulations when collecting the personal information,” Wan said.

Data mixing: Ant uses data from Alipay and Alibaba to assess the credit risk of potential borrowers for its microlending businesses. Regulators seem to be concerned both that the company’s monopoly on payments data gives it an unfair advantage over rivals, and that the way it uses the data threatens user privacy.

• Access to user data is crucial to one of the unique aspects of Ant’s credittech business: Unlike banks, Ant can perform risk assessments for consumers and SMEs with little to no credit history.
• The company described its credit risk assessment process in its IPO prospectus: “Based on customer insights and risk rating in terms of spending, assets, liabilities, occupation, and other parameters such as financial stability, we categorize all Alipay users into different risk categories. […] By leveraging our dynamic risk management systems and extensive and real-time customer insights across different consumption scenarios, including those on Alibaba’s platforms, we have constructed comprehensive customer profiles, which feed into our dynamic credit risk assessment system.”
• In a speech at the Bund Summit on Oct. 25, 2020, Jack Ma argued: “We must use today’s technological capabilities to replace pawnshop thinking with a credit system based on big data.”
• Ant also uses its “unparalleled customer insights” to serve investment and insurance products to consumers, its prospectus said.

New rules on data soups: In his interview, Pan said that Ant will have to abide by the “’credit reporting industry management regulation’,” a 2013 regulation on the credit risk assessment industry. The 2013 rules were updated in January.

• In January, while Ant’s rectification plan was being negotiated and drafted, the State Council updated the 2013 regulation on the credit reporting industry. The new administrative measures have yet to be finalized and implemented.
• The measures will guide how the 2013 law is implemented and, according to some legal commentators, clearly extend it over tech companies.
• The rules are still in the pipeline, and much is left up to interpretation (in Chinese).

Data walls? Under most extreme reading of the administrative measures, it could be that Ant will no longer be able to use data from Alipay to perform credit risk assessments for its microlending products.

• Soochow Securities, a Shanghai-listed financial services firm, said in a report that the measures won’t allow internet platforms like Alipay to both attract hordes of borrowers and perform credit risk assessments. As the measures are implemented, the two functions will have to be separated.

Porous walls: It’s more likely that the data flow will continue, with more oversight: This could have serious implications for Ant’s credittech business model: It likely means that it will have to pass through regulatory hurdles to use customer transaction data from Alipay to conduct credit risk assessment, experts told TechNode.

• The rules don’t prohibit credit-reporting agencies from working with other companies, like Alipay, to collect data. But they have to report to the PBOC when they do so, and only work with licensed information providers.
• “Ant may still be able to use relevant data from Alipay,” but it will have to follow rules on how to do that, Wan said.
• Ant might have to limit the amount of data it collects to perform credit risk assessments. The proposed measures require companies to minimize their data collection to what’s necessary.

Some say Ant may have to share data. The 2013 regulation also proposed a nationwide data platform where credit reporting agencies contribute data. But the platform never got traction.

• Data monopolies are the crux of the anti-competitive behavior that big tech companies exhibit, several experts wrote in November 2020.
• Li understood Pan’s data monopoly remark to mean that “Alipay may misuse the market power and data collected from the Alipay platform to discriminate against certain types of consumers or small merchants.”
• The new measures reiterated the need for a platform, but didn’t make it mandatory. Ant could also be asked to share credit assessment data with other platforms.
• The Financial Times, citing anonymous sources, reported Friday that the PBOC is pushing for Ant to give control of its data to an external, state-owned company.
• Legally, it’s not mandatory: Ant will “not be required to share all the credit risk data through a national database,” Wan said.
• The database, under the supervision of the PBOC, didn’t get traction, in part because tech companies refused to share data on it.
• If Ant has to share its data with other companies, its valuation will be significantly lower, wrote Wang Shuai from the Oxford-Hainan Blockchain Research Institute.

Ant Group nests

Under the monopoly issue, Pan also brought up “irregularities such as nesting credit business in the payment link.” Ant didn’t make any direct mention to “nesting” in its statement.

Embedding links: Alipay often advertises Ant’s microlending products on its payment success notices. It also gives users the option to pay using its native products, be it a microloan or a money market fund, as well as the user’s linked debit cards. But Alipay doesn’t give users the option of paying using other tech giant’s options.

• Regulators have been complaining about such practices, which they call “nesting,” since 2019. PBOC deputy governor Fan Yifei said that this “cross-nesting” of microlending and digital payments forms a “closed loop” that spreads risk through the market and is hard to supervise.

No nesting: Pan specified that “nesting credit business in payment links” is an “irregularity” that will be rectified. This will likely stop, reducing Ant’s ability to market loans to Alipay users.

• Ant’s statement gave little in the way of clarification: The company said its two microlending platforms will be under the consumer finance company, and that Alipay will “return to its origin… focusing on micropayments.” This phrase has been used by regulators since at least September 2020.
• Inappropriate links “refers to the operation that Alipay embedded the Huabei as one payment option, instead of setting up a separate credit-card type service,” Li said.
• Soochow Securities expects that this will limit the growth of Ant’s microlending business, because it won’t be able to attract new borrowers from Alipay.
• When asked about whether this means that the Alipay app will have to be broken up, Wan said it’s still unclear. To the best of our knowledge, regulators have never mentioned breaking up the company in public.

Liquidity risk

Finally, Pan called on Ant to manage liquidity risk, particularly in its money market fund (MMF) Yu’ebao. Ant said only that it would“strengthen risk prevention,” and did not mention Yu’ebao.

Does Yu’ebao have a cash problem? Liquidity for money market funds has been a regulatory issue for a while.

• Regulations on money market funds implemented in 2018 set new liquidity ratios. Back then, Yu’ebao was China’s biggest money market fund.
• At the time, Chinese media reported that Tianhong Asset Management, the Ant affiliate that manages Yu’ebao, did not meet the requirements.
• Today, Yu’ebao’s total balance is falling, as are its yields. The total balance of Yu’ebao fell below RMB 1 trillion in Q1 2021, Tianhong’s report said. The money market fund lost its spot as China’s biggest.
• Tianhong said that average residual maturity of its portfolio assets is 57 days, and that it maintains a high ratio of cash to liabilities.

The liquidity plan: The company will “manage and control liquidity risk of its important fund products and reduce the balance of [its money market fund] Yu’ebao,” Pan said. Ant will need to raise liquid assets like cash, Li said, to be able to quickly meet short-term debt obligations.

• The decision to release pressure from Yu’ebao came as a surprise, Soochow Securities said in its report on the April 12 plan.
• Across its operations, Ant also has to “control high leverage and risk contagion” and “improve corporate governance,” Pan said.

What now?

The April 12 statements gave some clarity on what Ant will look like once it has been rectified: It will become a financial holding company with clearly delineated business operations. Alipay and Ant’s microlending platforms will be separated, but we don’t know if that will mean sleeping in separate bedrooms or a full-blown divorce.

Ant’s revamp is far from over. There will likely be more meetings and readouts, as changes to the fintech behemoth are negotiated and rolled out. Even the underlying laws and regulations are still in development. Basic issues are still undetermined, such as how will Ant’s credit risk assessment data practices change.

Whatever happens, it will set a precedent for other platform companies, especially in fintech.

As one banking and insurance regulatory official put it. The issues discussed in Ant’s meetings with regulators are “universal” to internet platforms. Other internet giants should watch closely.

Big Tech’s digital yuan projects

• Tech giants showed off their work on the e-CNY this week during the Digital China Summit: E-commerce giant JD.com said it has started paying some of its staff using the digital currency. The Alibaba competitor has been front and center at e-CNY trials, even funding a $4.6 million trial in Suzhou. (TechCrunch)
• Ant signed a strategic cooperation agreement with the People’s Bank of China Digital Currency Research Institute to develop a software platform for the digital RMB using its database technology, Ocean Base, and its mobile software development platform, mPaas. (Global Times)
• Ant has been working with the PBOC on the digital currency since 2017. (South China Morning Post)
• Huawei showed off e-CNY compatible phones at the Digital China Summit in Fuzhou. (Global Network, in Chinese)
• Tencent also participated in the exhibition, but is reportedly behind other private entities in developing e-CNY applications. The company said it will start trials under PBOC guidance. (Mobile Payments Network, in Chinese)
• The Industrial and Commercial Bank of China revealed 30 new payment tools using the digital currency including an e-CNY ATM where cash can be exchanged for its digital twin and an Asian Games-themed hardware wallet. The state-owned bank is also working on inclusive technology, such as a digital RMB-enabled walking cane and a “large-screen voice broadcast wallet” for the elderly, as well as a digital RMB-compatible “agricultural assistant machine.” (Mobile Payments Network, in Chinese)

The new hot crypto

A new cryptocurrency called Chia Network will begin trading on May 4, and China’s crypto community is getting ready. Chia uses a Proof-of-Space-Time model under which miners, or farmers as they are called in this case, reserve disk space for a certain amount of time to mine blocks and get rewards.

Prices of solid-state hard drives have surged in China online and offline as prospective farmers prepare to mine the cryptocurrency. Farmers favor using SSDs for Chia mining. (South China Morning Post)

Chinese reporter Colin Wu said that Filecoin is being overshadowed by Chia in conversations between miners. (Wu Blockchain, in Chinese)

Chia was founded by BitTorrent creator Bram Cohen as a way to limit the notoriously high electricity consumption required for cryptocurrency mining. It closed a $3.4 million seed round in February, which included US venture capital firm Andreessen Horowitz.

Regulator’s crypto warning

Ahead of the implementation of a new regulation on illegal fundraising on May 1, Guo Shuqing, chairman of China’s Banking and Insurance Regulatory Commission, warned that authorities would be paying close attention to “new risks” for illegal fundraising, such as blockchain and virtual currencies. (China Securities Journal, in Chinese)

Huobi funds

A wholly owned Huobi subsidiary in Hong Kong launched four new cryptocurrency funds to attract institutional investors. (TechNode)

Huobi Asset Management, an affiliate of the crypto exchange, has launched in Hong Kong four virtual asset funds for institutional investors.

Why it matters: Newly licensed Huobi Asset Management is one of several Chinese cryptocurrency companies looking to lure deep-pocketed institutional investors by taking advantage of favorable digital asset laws in Hong Kong and Singapore.

• With the backing of a Hong Kong-listed crypto giant, the company aims to be a leader in digital asset management for traditional investors.

Details: Two of the new investment vehicles are passive funds that mirror the value of Bitcoin and Ethereum, according to a company statement shared with TechNode on Thursday. Another is an actively managed fund that invests in a basket of cryptocurrencies.

• The company also launched a private equity fund that will invest in crypto mining operations, which had not been previously announced.
• Only accredited professional investors such as family offices, high-net worth individuals, and asset managers can invest in the funds.
• Investors have already pledged $50 million across the four funds, and the company is targeting $100 million of total managed assets by the third quarter.
• Huobi Asset Management is a wholly owned subsidiary of Huobi Tech, which is in turn owned by the same shareholders as Huobi Global, the group behind the cryptocurrency exchange.

Context: The Hong Kong Securities and Futures Commission subsidiary granted Huobi Asset management in March a digital asset portfolio management license. Other companies like financial services firm Babel Finance are also looking to acquire asset management licenses in Hong Kong.

• Huobi Global is the world’s second-largest crypto exchange with transaction volume of nearly $12 billion in the last 24 hours as of the time of writing, data from research firm Messari showed.
• Hong Kong is reportedly planning to ban crypto trading for retail investors.
• Chinese high-net-worth individuals are reportedly looking to crypto as a hedge against the US dollar, amid rising crypto prices and geopolitical tensions.

READ MORE: Chinese investors flocked to cryptocurrencies amid techwar

Correction: A previous version of this article misstated that Huobi Tech is owned by Huobi Global.

PBOC on crypto

China’s central bank is “studying” to determine the correct regulatory framework for cryptocurrencies to be used as investment tools, Li Bo, newly appointed (in Chinese) vice president of the People’s Bank of China, said at the Boao Forum on April 18. The vice president said that crypto will be an important alternative investment tool in the future, but shouldn’t be used as currency. Li added that if stablecoins, a type of cryptocurrency pegged to fiat currencies, are to become widely used payment tools, strict regulation is necessary. (Wu Blockchain, in Chinese)

Mining blackout in Xinjiang

Cryptocurrency mines in Xinjiang were shut down on Friday for safety inspections, causing the hashrate of popular mining pools to fall more than 20%. The price of Bitcoin fell by around $3,000 on the day. The inspections follow a spate of accidents at coal plants in Shanxi and Guizhou provinces as well as the Xinjiang autonomous region in late March and early April, which also slowed the global Bitcoin hashrate. (CoinTelegraph, CoinDesk)

The digital yuan

• Southern China’s Hainan province has started its own digital RMB pilot. This weekend, the e-CNY was in use throughout venues related to the Boao Forum, a gathering of international financial experts held in Boao on the eastern coast of the island province. (Hainan Daily)
• Shanghai and Suzhou in eastern China will collaborate on a cross-province digital yuan trial during a shopping festival which starts on May 4. It will be Shanghai’s first large-scale trial compared with earlier pilots which limited transactions to department stores and a single hospital. (Shanghai Securities Journal)

READ MORE: CHINA VOICES | DCEP class is in session, with Zhou Xiaochuan

Bitmain demand

• Bitmain announced that its newest Ethereum ASIC mining machine is coming soon, but didn’t release details on the machine’s specifications. Ethereum mining is booming, and Bitmain’s last Ethereum-specific rig was released in 2018. The firm said the Antminer E9 will be a “game changer.” Digital asset media outlet The Block calculated that the new rig could outperform rivals by three times. (The Block)
• Bitmain said that orders for its Antminer S19j Pro are sold out for the rest of the year. (Wu Blockchain Twitter)
• Taoping Inc, a Shenzhen-based Nasdaq-listed smart display screen company, ordered $24 million worth of Bitmain’s S19j Pro. (Taoping statement)

Filecoin, ‘the trend of future storage’

• Tech consortium IPFSUnion announced plans to build China’s largest Filecoin mining center at an industrial park in eastern China’s Jiangxi province. Microsoft, Alibaba, SAP, Huawei, SNDA, Giant Network, and AMD are members of the consortium. The investment reportedly totals $1.3 billion. (IPFSUnion announcement)

Two weeks after a crackdown on imported console gaming products, it’s still easy to buy them in China. Games remain widely available in offline stores and online, and prices have returned to normal after a brief spike.

The tight supply led to an increase in prices across other online stores, but this was short lived, according to Daniel Ahmad, a senior analyst at Niko Partners, a firm that monitors China’s gaming market. 

Prices for imported consoles and individual games have returned to pre-crackdown levels, which are slightly above international ones, TechNode has found on Taobao. The analyst said that on other online retail platforms such as JD.com, there wasn’t much of an impact.

Physical stores that TechNode visited in Shanghai in the last week seemed unaffected by the crackdown on console gaming. They were still advertising imported consoles and titles banned in China—including a US version of Animal Crossing, which was removed from Taobao last year, reportedly because of its use by protesters in Hong Kong. 

Some particular games are still very hard to find on Taobao. These include Nintendo’s Animal Crossing, and The Last of Us, an intensely violent two-part series developed for PlayStation. Special edition Animal Crossing Switch consoles are still widely available throughout the online marketplace, but don’t come with the game. 

Grey imports

China’s Anti-Smuggling Bureau said on April 2 that authorities in Guangdong had arrested 54 importers and seized RMB 78 million ($12 million) worth of Nintendo, PlayStation, and Xbox gaming consoles.

While such events are “not unusual,” this was the largest anti-smuggling operation in recent memory, Ahmad said. 

“It’s not really part of a wider, larger crakdown, but of course the government always reserves the right to do that, given the grey area,” Ahmad said.

Chinese console gamers usually have to wait several months before international hits are released domestically, if ever, due to stringent censorship of imported gaming titles. Some famous titles never get released domestically due to graphic violence or sexual content. 

This has created a small but active market for consoles and cartridges imported from nearby Hong Kong or Japan.

READ MORE:  INSIGHTS | No country for console gamers

Taobao ghost town 

In response to the crackdown, several shops on Taobao removed listings for the imported console gaming products. Some told customers they would not be delivering for a while. One of the biggest Taobao stores, called TGBus, told customers that deliveries would be halted temporarily because a water leak had damaged some of the goods and had led to power outage in its warehouse, Chinese media reported. 

The hashtag on social media site Weibo about Nintendo Switch being targeted has been seen over 150 million times, peaking at 136 million on March 31. That was when local media reported that popular Taobao stores selling imported consoles were down.   

The shop that had claimed water leak damage remained offline as of April 12, but its affiliates are still live on the e-commerce app. Another popular shop based in Shanghai merely told customers it couldn’t deliver due to “exceptional circumstances.” The shop remains live on Taobao, but is empty of listings.

Some of the shops that removed their listings or disappeared altogether from Taobao said they were directly supplied by the importers who had their products seized. Others were exercising an “abundance of caution. They felt like they may be indirectly implicated in some way if they were to keep these products up,” Ahmad said.

Even in the immediate aftermath of the crackdown, most shops didn’t disappear from Taobao, and the impact on other e-commerce apps was minuscule. Two weeks on, business is back to normal.

The Monster Hunter effect

The Hong Kong release of a new entry in a popular series might have have triggered the crackdown.

The week leading up to the crackdown, the first entry for Nintendo Switch of the long-running series Monster Hunter was released in Hong Kong. Monster Hunter: Rise was developed by Capcom, the Japanese studio behind the Resident Evil series.

The series has met massive success throughout East Asia, as has the Switch console.

Prior to 2014, when sales of console gaming products were completely banned in China, authorities would clamp down on imported products when there was a surge in interest: “If you hit a certain threshold, that would trigger a reaction,” Ahmad said. 

It is likely that “there would be a high number of imports” of Monster Hunter: Rise, which could have triggered a reaction,  Ahmad said. 

Three hashtags related to the Capcom game, #MonsterHunter, #MonsterHunterRise, and #MonsterHunterWorld, have been viewed at least 470 million times on Weibo. The hashtag numbers peaked in the runup to March 26, when Monster Hunter: Rise was released in Hong Kong. 

The Switch has been a big hit in China, driving growth in the mostly niche console market. Nintendo has delivered 1 million units of the console in China since it launched in December 2019, according to Tencent, which has partnered with the Japanese game developer to sell the Switch in China.

This is roughly double what Sony’s PlayStation and Microsoft’s Xbox sold in the same time period, according to data from Niko Partners. 

Catching up 

All major consoles are now sold legally in China in local versions, but few games are available for these outside the grey market. Eager to get their hands on a wider variety of releases, gamers turn to imported goods.

“We are now at a point where every major console manufacturer has launched a product in China,” and once something is released overseas, it will get an official release in China, albeit with a delay, the Niko Partners analyst said. 

Sony has announced plans to launch the PlayStation 5 in China in the second quarter of 2021. The console’s global release was in November 2020. 

For games, “there is still a very strict regulatory environment,” which means the approval process is “long” and “cumbersome,” Ahmad said. Officially, it takes three months, but in reality, it can take a year to get a game approved by China’s National Press and Publication Administration. Rather than wait, online and offline shops respond to strong demand with smuggled products. 

Ahmad points out that despite a recent increase in the speed of the licensing process, a “soft cap” on how many games can get approved means that there is no “material difference” in the number of games Chinese console owners can get their hands on. 

Globally, more than 3,000 titles are available on the Nintendo Switch console. As popular as the Switch has been, gamers in China can only choose from fewer than 20 titles, Ahmad said.

This might sound like a small number, but it’s a massive improvement. During the first three months of the Switch’s launch in China in December 2019, only one game was approved: Super Mario Bros U Deluxe. 

New titles have been slowly added to the list of approved games, notably Ring Fit Adventure in September 2020.

“This is why there is a big smuggled games market in the first place,” Ahmad said.

Correction: A previous version of this article incorrectly described Niko Partners as “London-based.” 

The crypto mining rig makers

• Cryptocurrency rig maker Ebang’s stock lost 20% of its value in four days after a short report from Hindenburg research accused it of fraud. The stock has dropped another 5% since April 12. (TechNode)
• Canaan (finally) reported its fourth quarter and full-year 2020 earnings. The company’s revenues continued to decline though it narrowed its losses. The company’s outlook was more positive: It said that it has laid a “solid foundation” for growth in Q1 2021. (TechNode)
• Bitmain sued relative newcomer MicroBT for intellectual property theft for the second time. MicroBT’s founder was a chip engineer at Bitmain. A previous lawsuit over similar claims was dismissed by a Beijing IP court in 2018. (The Block)

The bell tolls for Filecoin

The Distributed Storage Office of China’s Communications Industry Association warned that Chinese companies are using distributed file storage protocol Filecoin to issue unauthorized wealth management products and conduct illegal financing. A new regulation defining illegal fundraising is set to to come into effect on May 1. (China Police Net, in Chinese)

The exchanges

• Traffic on Chinese crypto exchanges from outside China is growing quickly, indicating a rising interest on Chinese tokens. (Wu Blockchain Twitter)
• Binance launched trading of tokenized stocks, starting with Tesla. The carmaker’s stock on Binance is “backed by a depository portfolio of underlying securities.” (Binance)
• The number of transactions on Binance Smart Chain reached an all-time high on Thursday, nearing 5 million. This is more than four times higher than the 1.3 million conducted on Ethereum on the same day. The exchange’s coin, BNB, also reached a historic high of $416 on the same day, and has climbed to $577 since. (BSCScan)
• Huobi’s charity arm pledged $1 million in Bitcoin and Ethereum for UNICEF’s crypto fund, the UN agency’s crypto-backed venture capital department. (TechNode)

Mining and threats

• Carbon emissions due to crypto mining in China could undermine global sustainability efforts, according to a new research paper by Chinese scientists. Environmental goals set in the central government’s 2021-2025 Five-year plan are a big concern to the industry, which consumes vast amounts of electricity. In March, the province of Inner Mongolia proposed shutting down crypto mines to meet green development goals. (Nature Communications)
• On Wednesday, the Sichuan Power Exchange Center said that electricity used for legal crypto mining will increase 150% to 11.3 billion kWh in 2021, with average electricity prices of $0.02/kWh, up 16% from 2020. (Sichuan Power Exchange Center)
• Silicon Valley investor Peter Thiel said Bitcoin mining is a weapon for China, due to its high concentration in the country. Thiel was speaking at a virtual roundtable discussion hosted by the Richard Nixon Foundation. (South China Morning Post)

Cryptocurrency mining rig maker Canaan Creative reported losses and falling revenues for the fourth quarter of 2020, consistent with its full-year results, but said that it expects better financial performance in the first quarter of this year.

Why it matters: Along with Ebang, Canaan is one of two Chinese crypto mining rig makers listed on US exchanges. Both have been targeted by short sellers.

• Its Q4 results are on trend: The company has reported losses since it listed on the Nasdaq last November, and its revenues have been falling, in part due to increased competition from Bitmain and MicroBT.
• The company filing also gave grounds for hope. Canaan has increased its product prices and has received down payments for product deliveries.
• The news did not reassure investors. Canaan share prices fell 29% to $13.05 per share on Monday.

Losses: Canaan’s net loss for the last quarter of 2020 was RMB 72 million ($11 million), narrowed by 17% from RMB 86.4 million in Q3, according to its earnings report.

• Canaan has reduced its Q4 net loss more than 90%, to RMB 798.2 million, compared to the same period a year earlier.
• For the full year 2020, its net loss of RMB 215.1 million is only one-fifth the 2019 level, when the figure was RMB 1.03 billion.

READ MORE: Rig maker Canaan misses Bitcoin surge, losses top $12 million

Revenues: The company’s Q4 net revenues plunged 76% quarter on quarter and 91% year on year to RMB 38.2 million.

• Canaan’s net revenues for 2020 were RMB 447.7 million, down by 68% compared to 2019, when the company reported net revenues of RMB 1,422.6.
• The decreased revenues are somewhat in line with a fall in computing power sold, a measure of how many crypto mining rigs the company sells.
• In Q4 2020, Canaan sold 0.2 million terahash/second (TH/s), which is around 93% down compared to the same time period in 2019 as well as compared to Q3 2020.
• In 2020, the company sold a total of 6.6 million TH/s, which represents a 37.1% year-on-year decline.

Down payments: The company said it has signed $174 million worth of contracts to deliver its mining rigs, which it said lays a solid foundation for strong revenue growth in Q1 2021.

• Canaan has received $66 million cash in advance for these orders, and has started mass production of its latest mining equipment series, dubbed A12.

Product prices: In Q4 2020, Canaan increased its product prices back up to 2019 levels. In Q3 2020, the company sold equipment at a price of $8.10 per Thash/s, down from $27.5 in 2019, likely in a quest to boost dwindling sales.

• The price, calculated as revenue from products over computing power sold, stood at $29 per Thash/s for the fourth quarter of 2020.
• Canaan’s cost of revenues significantly dropped to RMB 29.2 million in Q4 2020, from RMB 180 million in the previous quarter and RMB 1,136.7 in Q4 2019.
• The company also continued to increase its spending on research and development. In Q4 2020, it spent RMB 40 million on R&D, up from RMB 32 million the previous quarter. The short report had accused the company of inferior products due to low spending on R&D.

Context: Amid soaring Bitcoin prices, crypto mining rig makers have their pre-orders booked for the next few months. Canaan largely missed the boat in 2020, but could be rebounding in 2021.

• Competition is heated, especially with the addition of MicroBT to the ranks of Chinese mining equipment makers.

READ MORE: Mining rigmaker MicroBT is planning a US IPO: report

Ebang share prices on the Nasdaq have fallen 9% since Tuesday, when short seller Hindenburg Research released a report accusing the company of a number of misdeeds including inflating its mining rig sales and cryptocurrency trading volumes.

Why it matters: Ebang is one of two Chinese cryptocurrency mining rig makers that is publicly traded on US stock markets along with peer, Canaan Creative.

The timeline: On Tuesday, the day the short report was released, Ebang shares opened at $5.23, falling 17% from market close on Monday.

• On Monday, Ebang announced the launch of a crypto exchange, dubbed Ebonex.
• The stock lost an additional 4.6% in the half hour after market open on Tuesday, then rose modestly to close at $5.53.
• The stock rebounded to $5.58 on Wednesday afternoon, but has been dropping since.
• Ebang stock has lost 20% of its value since market close on Monday, closing at $5.03 on Thursday.

Missing earnings: Ebang’s stock began to fall on March 17 after reaching a high of $11.85 per share that day. As of Friday, it has not yet announced a date for the release of its 2020 earnings.

• Ebang has only disclosed earnings once since listing on the Nasdaq in June, when it released its half-year 2020 results on Sept. 25.
• The company raised $150.4 million in two follow-on share offerings, which closed on Feb. 17 and April 6.

The short report: Hindenburg research said Ebang is “simply the latest chapter in the ‘China Hustle’ disguised as a Bitcoin mining play,” referring to a documentary exposing Chinese companies that conduct stock market fraud on US exchanges.

• The company failed to list twice on the Hong Kong Stock Exchange in 2018, before listing on the Nasdaq in 2020.
• Ebang’s equipment is inferior to its competitors’, its sales have dwindled, and the company has tried to shift investor attention to its new crypto exchange, which reports “fictitious volumes,” Hindenburg said.
• The rig maker has inflated sales through third-party transactions and funneled cash to “opaque deals with insiders and questionable counterparties,” the short seller said.
• In a statement on Wednesday, Ebang stopped short of denying the allegations, saying the report “contains many errors, unsupported speculations and inaccurate interpretations of events,” and that it will review the accusations and take “whatever action necessary” to protect investors.

Rig sales: Bitcoin and Ethereum prices have soared in the last few months, and so have mining rig sales. Industry leader Bitmain’s deliveries are booked for months.

• Several companies have pivoted to crypto mining, but none have announced purchases from Ebang. The company’s rigs are not popular, according to several miners TechNode has spoken with.
• The most popular mining rigs globally are Bitmain’s AntMiner, MicroBT’s Whatsminer, and Canaan’s Avalon Miners, according to Flex Yang, CEO of Babel Finance, which provides financial services to crypto miners.
• Embattled Canaan Creative, which has lost its competitive edge and was similarly the target of a short report, has seen its pre-sales rise since mid-February on the back of surging cryptocurrency prices.
• Ebang said on March 17 that it had completed the design of its first 6-nanometer chip, while Bitmain has been selling rigs with 5nm chips since September.
• Hindenburg said that Ebang’s sales are now “near-zero,” and that previous reported deliveries were largely fabricated and or were made up of defective units, citing Chinese media reports.

The crypto exchange: Ebang first announced that it is building a crypto exchange in August, entering an already crowded market.

• The exchange was five days late to launch. Ebang shares prices rose on news related to the crypto exchange.
• Ebonex reported $243 million traded between Ethereum and Bitcoin during its first 24 hours, Hindenburg said, compared with $60 million on Huobi Global—the world’s second-largest exchange by volume traded—on the same day.
• The short seller said that it would have been impossible for Ebonex to trade this volume “given its limited web and social media footprint,” citing relatively low numbers of social media followers and Google searches.
• The 24-hour trading volume on Ebonex for ETH/BTC has fallen to $1.1 million as of the time of writing.
• The company has also announced plans for digital asset management firms in Canada, New Zealand, and Australia, as well as plans to enter the mining business.

Sales inflation scheme: The reason for the failed listings, Hindenburg said, was a sales inflation scheme involving Yindou, a peer-to-peer lending scheme. P2P lending in China was an industry rife with fraud, with many companies simply Ponzi schemes masquerading as tech firms.

• Cui Hongwei, the spouse of the Yindou CFO, transferred RMB 250 million ($38 million) to Ebang between December 2017 and February 2018. Ebang then transferred RMB 380 million to Cui between March and April 2018, the report said, citing local media.
• Hindenburg said that this was essentially a sales inflation scheme. Yindou defaulted on RMB 4.4 billion of debt in July 2018.

Shady underwriter: Ebang’s IPO underwriter, Hong Kong-based AMDT Global Markets Limited, has a “history of fraud and self-dealing allegations (including from one of China’s largest private equity firms), as well as a track record of US IPO flops,” Hindenburg said.

• Ebang directed $103 million in bond purchases linked to AMDT following its successful IPO on Nasdaq, according to the report, an amount $11 million more than its IPO proceeds.

Huobi Charity, the philanthropic arm of one of China’s most popular cryptocurrency exchanges, pledged $1 million worth of Bitcoin and fiat currency to UNICEF’s CryptoFund, the agency’s crypto venture arm.

Why it matters: This is the first institutional Bitcoin pledge to the agency. The news could attract more donations to UNICEF’s crypto fund, which is not widely known.

• Huobi’s major competitors Binance and Coinbase started charity funds in 2018, more than two years before Huobi registered its own charity. The pledge could put Huobi on the map of charitable crypto companies.

READ MORE: Huobi subsidiary nabs Hong Kong asset management license

Details: Huobi Charity has already donated BTC 7 ($350,000 at the time of the donation) to the fund, the company said in a press release sent to TechNode.

• The funds will be distributed to early-stage companies without being converted to fiat.
• Prior to Huobi Charity’s pledge, the agency has raised ETH 2,267 ($4.78 million) and BTC 1 ($58,500) a UNICEF spokesperson told TechNode.
• Davin pointed out that the two-year-old Cryptofund is often met with disbelief. Potential partners often ask “Really, you guys really do that?” Thomas Davin, director of UNICEF’s office of innovation, told TechNode.
• The regulatory framework around crypto, such as the lack of tax rebates, is a lot less “incentivizing” for companies to donate to charity, compared to the framework around fiat currencies.
• But the digital ledger powering Bitcoin and Ethereum can enhance transparency and accountability of beneficiaries: “We know exactly how the money is used,” Davin said.
• “Hopefully after Huobi, we will find more partners,” Davin said.

Context: UNICEF’s older Innovation Fund works like a tech venture capital fund in that it invests in early-stage ventures with potential to support the agency’s goals as well as being commercially viable, Davin said.

• The Innovation Fund was started in 2008, and the CryptoFund in 2019. Donations to the digital currency fund were mainly from private individuals and companies, Davin said.
• Davin said it was not easy to start the fund due to cryptocurrencies’ notorious volatility: “The UN is a huge bureaucracy. Bringing very volatile assets into our organization was a difficult conversation” with finance teams, he said.
• To manage this risk, the fund carries through its investments in crypto, which enables UNICEF to look at crypto “as an asset and not as a financial instrument,” Davin said.
• The CryptoFund has so far invested in 12 blockchain-powered solutions from around the world. “We believe there’s so many things we could do with crypto,” Davin said.
• Binance also runs a charity foundation, which has raised BTC 1,879 from 1,045 donators. It has distributed the funds to 106,643 beneficiaries, according to its website.
• Huobi registered a charity arm in the UK in January.

Updated: This article has been updated to clarify that the pledge came from Huobi Charity.

The digital yuan arrives in Hong Kong

• The People’s Bank of China (PBOC) completed the first cross-border transaction with Hong Kong using the e-CNY in collaboration with the Hong Kong Monetary Authority, Wang Xin, the head of the PBOC’s research department said in a press conference on April 1. (Sina Finance, in Chinese)
• The next day, Hong Kong media reported that the PBOC opened e-CNY trials for residents of Hong Kong. The project is a collaboration between the Shenzhen city government, the central bank’s Shenzhen branch, and Bank of China. (The Asset)
• The rhetoric over China having a lead over the US by issuing a central bank-backed digital currency first is “overblown,” said Agustín Carstens, the general manager for the Bank of International Settlements. (CoinDesk)
• Soaring Bitcoin prices could be driving up interest in the digital yuan, said Xin. (CNBC)

The digital yuan at home

• Renmin Univeristy in Beijing launched a trial of the digital yuan. Students and teachers can sign up to be whitelisted for the trial through the e-CNY wallet app. If selected, they can use it to pay for items in the university canteen, laundry, and other on-campus facilities. QR codes and facial recognition can be used for payment, local media reported. (Payments Encyclopedia, in Chinese)
• Three Chinese companies were added on the digital RMB app: logistics company SF Express, state-owned petrol giant Sinopec, and EV-charging station provider Star Charge. Users can now pay for their services on the app. Meituan, Bilibili, JD.com, and Didi were already listed on the e-CNY app. (Mobile Payments Network)

READ MORE: UPDATED: We got some digital yuan!

The NFTs

• Fine art auction house Yongle is joining the NFT market, Xu Zhao, founder and CEO of the company said in an interview. Xu said he wants Yongle to keep up with new financial models, and not be left behind Christie’s and Sotheby’s, which have already famously sold NFTs. (Artron)
• TechNode reviewed the world’s first major crypto art exhibition in Beijing: “It’s an art gallery as a carnival, complete with a claw game for souvenirs, rather than gallery-as-high-culture-church.” (TechNode)

The BSN

Red Date Technology, the company behind the Blockchain Services Network, has acquired the rights to sell Corda, an enterprise blockchain used by global financial firms, to Chinese businesses. This is the first time Red Date has acquired the rights to sell blockchain domestically, as the company is increasingly angling to become a major domestic blockchain player. (TechNode)

The pivots to crypto

• New York-based software firm FutureFinTech bought Chinese crypto mining farm Nanjing Ribensi Electronic Technology for $9 million. (CoinDesk)
• The9, a Nasdaq-listed gaming company based in Shanghai, has agreed to sell $125 million worth of American Depositary Shares to Maxim Group, a New York-based investment bank. In the last year, The9 is pivoting from gaming to crypto mining. (The9 press release)
• 500.com, a Shenzhen online lottery company that has ventured into crypto mining, acquired Bee Computing, a small mining hardware manufacturer. (500.com press release)

The smuggled mining equipment

The Hong Kong Coast Guard seized 300 graphics processing units specialized for mining cryptocurrencies in an anti-smuggling operation. This is the first time local authorities have caught smugglers in the act of transporting crypto mining equipment. (IT House, in Chinese)

Red Date Technology, the firm behind government-backed blockchain platform Blockchain Services Network, has licensed American distributed ledger company R3’s enterprise blockchain to resell in China.

Why it matters: This is the first time Red Date has acquired the rights to resell enterprise blockchain from an overseas provider. Primarily known for its role with the BSN, Red Date is diversifying to become a heavyweight in China’s blockchain industry.

• Backed by Bank of America, Merill Lynch, HSBC, and Singapore’s Temasek, the Corda consortium blockchain is a big name overseas but has yet to land in China.
• The partnership will allow Corda to tap into China’s banking industry as well as the e-CNY. R3 is also eyeing central bank-backed digital currencies.
• The move is likely to attract big Chinese firms to build decentralized applications using Corda.

READ MORE: EXCLUSIVE | Chinese state banks accepting applications for enterprise e-CNY accounts

Details: Corda’s enterprise nodes will connect to notary nodes hosted on China UnionPay’s cloud, forming a single China Corda Network, Yifan He, CEO of Red Date told TechNode. Chinese firms will be able to participate in Corda’s enterprise blockchain through Red Date.

• Notary nodes prevent double spending by attesting that a transaction has not already occurred.
• China UnionPay is considering an active role in managing the China Corda Network, He said.
• Corda’s main clients overseas are banks, so He expects adoption within China’s financial services industry.
• Red Date will also roll out an open permissioned version of Corda on the BSN available to developers.
• He expects the paid version to be available in the next four months.

We’re aware of R3’s huge success outside China… Red Date will also help to drive Corda and CorDapps’ [Corda decentralized application] adoption among all Chinese banks.

—Yifan He, CEO of Red Date Technology

Context: Following the rollout of the BSN, Beijing-based Red Date has been breaking out its other products.

• In December, the company told TechNode that it is working on two projects aimed at capitalizing on central bank-backed digital currencies and stablecoins.
• Launched in 2015, R3 was one of the first companies to move into enterprise blockchain adoption.
• Corda is used by financial firms around the world; the Nasdaq stock exchange uses it to build market infrastructure and Italian banks use it for interbank payments.
• China’s central government is keen on deploying blockchain as infrastructure for data integration.
• State Grid announced Tuesday that it is working with Beijing-based Wanglu Tech to integrate blockchain in its data management. Wanglu’s VP of operations told TechNode that Chinese banks are preparing for blockchain adoption.

READ MORE: State Grid to deploy Wanglu Tech’s blockchain for data integration

Blockchain Services Network (BSN)
What: A platform for blockchain development, bringing together cloud services and different chain protocols on city nodes.
Why: To reduce the cost of blockchain application design and deployment while powering communication between chains. It will be made available around the world through local cloud providers, ultimately creating a global internet of blockchains.
Who: It is part of the government’s Global Blockchain Strategy unveiled by Chinese President Xi Jinping in November 2019, spearheaded by the China State Information Center, China Mobile, China Union Pay, and Red Date Technology.

Digital yuan everywhere

• The first B2B transaction using China’s digital currency took place between two companies in Dalian, a city in northeast Liaoning province. Two local companies completed a transaction for fuel using a settlement platform for B2B transactions using the e-CNY. (Grand View News, in Chinese)
• Mu Changcun, head of the central bank’s Digital Currency Research Institute, proposed a set of rules for sovereign digital currencies at a seminar at the Bank of International Settlements. (Reuters)
• A group of 28 Chinese regulators including the People’s Bank of China, the Ministry of Commerce, and the Cyberspace Administration of China called for accelerating digital yuan pilots, prioritizing cities active in new forms of consumption for pilots, and improving operating efficiency and transaction costs. (Office of the central government statement, in Chinese)
• Six state-owned banks have started competing for digital yuan wallet users, and have set user acquisition targets for their staff. The banks are Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, Bank of Communications, and Postal Savings Bank. (Payments Encyclopedia, in Chinese)
• Changsha in central Hunan province joined the pilot programs—more than 3,000 local businesses accept the central bank-backed digital currency. (Changsha Evening Post, in Chinese)

SOE chain

China’s State Grid will use Wanglu Tech’s consortium chain to integrate data in a city in eastern China. The state-owned company likely won’t be the last to adopt blockchain: The central government recently named blockchain a strategically important technology. (TechNode)

Blockchain bonds

DBS Bank worked with Shanghai Pudong Development Bank and China Central Depository and Clearing to issue RMB 2 billion ($304 million) of tier-two capital bonds using a consortium blockchain. (China Banking News)

Network upgrade

Neo is launching N3, the third version of its network, which promises faster transaction speeds and low transaction costs, oracles, distributed file storage, and a new governance mechanism. (TechNode)

The investments

• Shanghai-based venture capital investor Fenbushi Capital closed a $23 million round for a Filecoin ecosystem fund. The VC said it will not invest in projects related to Filecoin mining. (Fenbushi Capital official Medium account)
• Gaming company The9 agreed to purchase 482 MicroBT M31S+ Whatsminer crypto mining rigs. The9 is partnering with MicroBT competitor Canaan Creative to launch a mining business. (The9 statement)

Cryptocurrency heists

• Police in Jiangsu province busted an operation that was selling plug-ins used to hack mobile games. The global network of cheat code sellers was using Bitcoin for transactions and had a turnover of hundreds of millions of US dollars. (CCTV, in Chinese)
• Six suspects were arrested in Jiangxi province for stealing RMB 14.5 million worth of cryptocurrencies by hacking phones. (Beijing Youth Daily, in Chinese)

The mining

• According to the National Development and Reform Commission, the Inner Mongolia autonomous region has been slow to implement energy consumption rules. The province had proposed shutting down cryptocurrency mines in the region, and analysts expect the latest government reprimand to lead to further restrictions. (Wu Blockchain, in Chinese)
• Deputy mayor of Ya’an, a city in Sichuan province in China’s southwest, voiced support for the local mining industry. (Wu Blockchain)

The State Grid Corporation of China will trial the use of blockchain and smart contracts using Beijing-based Wanglu Tech’s cross-chain consortium chain, the company told TechNode.

Why it matters: The collaboration is the first concrete step taken by a Chinese state-owned enterprise (SOE) to adopt blockchain technology. 

• The announcement follows just two weeks after blockchain was named for the first time a strategically important technology in China’s Five-Year Plan.
• The news bodes well for Wanglu: State Grid is the world’s largest utility provider and third-largest company by revenue. 

Blockchain for privacy: The company will deploy a blockchain-based data-sharing and management platform for State Grid in a city in eastern China, Li Ni, Wanglu’s VP of operations told TechNode.

• The company aims to seamlessly integrate massive amounts of data that is currently spread through different departments while preserving consumer privacy. 
• “Managing and utilizing data is a priority for State Grid,” said an employee of the company who spoke to TechNode on the condition of anonymity.
• Using blockchain, State Grid hopes to break through data silos to conduct—often using artificial intelligence—analysis without endangering consumer privacy as it works to modernize its services and capabilities. 
• Using a privacy-focused field of cryptography called secure multi-party computation and zero knowledge proofs, Wanglu’s chain promises to allow different departments to access specific data without revealing customers’ personal information. 
• Li explained the problem: “Say I am from the marketing department. I want to know your electricity bill because I’m doing customer analysis. But the bill data is maintained by the sales department, which says personal information like names and addresses cannot be shared with another department,” Li said. 
• Wanglu’s blockchain will make relevant data available while concealing personal information. 
• The company declined to publicly disclose the RMB value of its contract with State Grid.

Testbed: State Grid is positive but conservative about using new technology, the SOE employee said.

• Li expects the blockchain to be deployed in September. After it is operational for about three months, State Grid will evaluate the blockchain and decide whether it should be deployed to other places, Li said. 
• “The whole system costs billions or trillions of RMB, they cannot give you the whole system to implement your idea,” Li said. “We need to pick a place or scenario.” 

Connecting islands: Several SOEs such as banks and mobile network operators are preparing similar feasibility studies for blockchain, according to Li. “This will be an example for others to follow,” he said. Connecting all the blockchains such that different companies can share data is important for the technology to work.   

• “All the different chains are considered isolated islands,” Li said. 
• Wanglu’s interoperability solution will solve this problem, and it was key to landing the contract with State Grid, according to Li. 

Long process: The procurement process started in the second quarter last year, when State Grid invited about a dozen companies to submit proposals for data management. In July, they selected Wanglu to proceed with a full feasibility study. After submitting in August, they had to make many changes because the SOE “asked a lot of questions,” Li said. 

• The feasibility study was submitted and accepted in October, after which Wanglu had to conduct field trips to State Grid and a technical evaluation before the final go-ahead to deploy in other locations. 

Wanglu: Founded in 2016 and based in Beijing, Wanglu Tech focuses on government and enterprise blockchain applications. It also runs a public chain called Wanchain. 

• Wanglu was the first Chinese company to launch a cross-chain solution in 2018.
• Unlike other blockchain companies, Wanglu is targeting SOEs because “they have the power, resources to do blockchain innovation,” according to Li. 

Context: State Grid is piloting the use of 5G, AI, big data, and internet-of-things solutions to modernize its infrastructure. 

• Chinese government-affiliated entities are all-in on blockchain for data management, but progress has been lacking. The Beijing municipal government last year announced an ambitious plan to use blockchain in 12 areas of governance. 
• Hangzhou is using Ant Group’s chain to manage company seals.
• State Grid is involved in Chang’an Chain, a “hardware and software” blockchain. 

READ MORE:  Enterprise blockchain to integrate China’s digital yuan

Update: The headline and first paragraph of this article have been revised to add detail about the services State Grid is testing.

Non-fungible tokens (NFT) are everywhere. In the last few weeks, everyone I’ve spoken to in China blockchain is either already working on, starting a new project, or just won’t shut up about the blockchain-powered digital collectibles. 

China isn’t making a lot of NFTs or much of the underlying technology, for now. But on March 26, it will spearhead NFT exhibiting in the physical world: The world’s first “major” exhibition of blockchain-based art is due to open in Beijing this Friday. 

The exhibition is sponsored and curated by Beijing-based BlockCreateArt (BCA), supported by auction heavyweight Christie’s, and partially funded by crypto mining rig maker Bitmain and blockchain investment firm Digital Finance Group. It will take place at UCCA Lab, a project and art space created by Belgian-founded Beijing art museum UCCA to explore interdisciplinary approaches to art.

Titled “Virtual Niche — Have you ever seen memes in the mirror?”, it will feature works from over 30 artists, including deadmau5, Robert Alice, and reigning NFT king Beeple. 

NFTs have been shown in exhibitions before, but this will be the first time the walls of a physical gallery will be completely taken over by crypto art. 

Ahead of the exhibition, I reached out via e-mail to Wang Qinwen, who co-produced the exhibition with BCA founder Sun Bohan. Wang is the Web 3.0 Foundation’s China community manager and a member of the council at Polkadot network, one of the leading cross-chain interoperability protocols in the world, developed by Web 3.0 Foundation. 

The following interview has been edited for length and clarity. 

TechNode: Tell us the story of the crypto art exhibition at UCCA Lab in Beijing, how did it come to be and what was your role in it?

Wang Qinwen: We are proud it’s a community-driven initiative and how the Chinese community has played a vital role in making this exhibition. 

The exhibition aims to showcase artists using blockchain technology as a medium for creating dialogue and connection between the institutional art world and the crypto community. In addition to works by well-known names on the digital art scene such as Robert Alice and Beeple. 

My role is to bring together the crypto art community, particularly the Polkadot community and the art world. I have been a continuous supporter and contributor to Christie’s Art & Tech Summit Initiative since Christie’s first obtained a license to auction in China in 2013.

TN: Will all the works exhibited be NFTs? What’s the difference between exhibiting a digital photo and an NFT?

WQ: All the works exhibited will have an NFT version. 

Exhibiting a digital photo and exhibiting a NFT artwork looks no different in a physical museum, both deploy a screen as medium. All you need to do is to download a picture that is clear enough and find a proper screen.

NFTs, or non-fungible tokens are more about ownership and less about ways of exhibiting. NFT are essentially a cryptographic contract. It is like a certificate of authenticity for an object, and the object can be either physical or virtual.

TN: Can you explain to us how all the different parties are involved (Polkadot, UCCA Lab, BlockCreateArt, etc.)? What is UCCA Lab’s role?

WQ: UCCA Lab is the ideal venue for our exhibition. It has been supporting emerging Chinese artists and top-level exhibitions since its founding. We are proud to be able to host our exhibition here. UCCA Lab has contributed to the public attention on our exhibition as well.

BCA (BlockCreatArt) is the main organizer of this exhibition. Since its founding in 2017, it has been actively researching and promoting crypto art and artists in China and around the world. It has put incredible efforts to place this grand exhibition to the public. 

TN: Why is the exhibition taking place in China and what do you think it means for China’s NFT ecosystem?

WQ: We are proud that this exhibition happens in China, thanks to Polkadot’s Chinese community, BCA and all our partners in China and around the world. Polkadot has a huge community in China, but we never view ourselves as merely a Chinese community, we work in a more globalized way. I think it’s the same for all the contributing parties, including Christie’s. They are all well-connected to the global resources that together makes this exhibition happen. 

We are open to carry on our endeavors and bring the exhibition to other places in the world. Now we see vaccines promoted around the world and look forward to the world recovering from the Covid-19 situation. I think that’s when we will see more exciting possibilities unveiled.

TN: How popular are NFTs in China? Are people buying, creating them, or building NFT technology?

WQ: NFT are as popular in China as in the world. BCA, for example, has been supporting crypto artists who are actively creating art with NFT projects. As far as I know, some young artists in the Central Academy of Fine Arts [in Beijing] are also active in NFT art. In the blockchain industry, I know a great number of projects that are at the forefront of NFT technology. 

READ MORE: China Voices | What China thinks of NFTs

TN: How has the Polkadot China community taken the news of the exhibition? Have you noticed any changes to how they view crypto collectibles?

WQ: We are extremely proud of the exhibition. If you are in the blockchain industry in China, you will see friends sharing the news everywhere. It was like exciting news that proves their faith, knowledge and technology have unlimited potential, and people are happy that it will be seen by the public this time. 

People have been more enthusiastic about crypto collectibles recently, amidst all the NFT hype that is happening now. I think Christie’s Beeple sale is a vital propeller, which caught headlines in all traditional, crypto, and art media.   

TN: Do Chinese culture consumers think about intellectual property differently to other major markets? Will this affect the popularity of NFTs?

WQ: When discussing IP generally, everyone thinks of [licensed toy store chain] Pop Mart or celebrity pop stars. These companies have been very successful in hunting for, incubating, and commercializing IP. They have proved that there is a large fan base of IP consumption in China. 

I think Chinese cultural consumers are open to new and great IPs, as long as they find creativity, great culture, and emotional connection to those IPs. So I think it will impact NFTs consumption in a positive way. NFTs are an important asset to the metaverse [a complete virtual world powered by technologies like AR, VR, and blockchain], where you can find boundless creations propelled by human imagination and technology advancement.

TN: What do you think will be the main uses of NFTs in China in the medium-term?

WQ: NFT is a way of storing and transmitting data, and gives ownership of the data to its creator. In the long term, the use cases can go beyond our current imagination. In the medium term, NFTs can be applied to more industries, such as gaming, entertainment ticketing, intellectual property, etc. It is definitely not restricted to art and collectibles.

Update: The story has been updated to include Digital Finance Group as one of the exhibition’s funders.

Neo, an Ethereum alternative and one of China’s oldest blockchain protocols, is starting to roll out a third version of its public blockchain infrastructure, dubbed N3. 

Why it matters: N3 is a make-it-or-break-it moment for one of China’s most promising and globally recognized blockchain projects. The team has been working on the update for years. On paper, N3 hits all the right notes for becoming a widely used blockchain protocol. But it will need to stand out from an increasingly competitive crowd. 

• The upgrade comes at an opportune time: The Ethereum network is facing critical capacity challenges, meanwhile the Chinese government highlighted blockchain as a strategically important technology in the latest Five-Year Plan. 
• Founded in 2013, Neo is one of many Ethereum alternatives looking to attract developers to build decentralized applications on its blockchain. 

READ MORE:  Blockchain, fintech get name checks in 14th Five-Year Plan

Details: The original planned launch date for Neo’s third iteration was in 2020, but it was pushed back to Q1 2021 because the system wasn’t ready, Da Hongfei, co-founder of Neo, told TechNode. It is difficult to predict a specific time for a community-driven project, Da said. Like most public blockchains, the code was developed by a small team of core developers and a wider global developer community. 

• Neo’s focus is digital assets, so the co-founder said the community is “encouraged” to build fundamental infrastructure for decentralized finance, such as landing and swap protocols. 
• Oracles are key to DeFi because they connect the real world to blockchains. Da also sees N3 as a good place to build non-fungible tokens (NFTs), due to the decentralized file storage feature. 
• Da said that because developers were waiting for the network upgrade, they hadn’t been building many dapps on Neo. 

Migration: The migration of Neo tokens to the new network will take place using a consortium interoperability protocol Poly Network developed by the team behind Neo. 

• Exchanges and wallets take care of token migration, the process by which old tokens are converted into new tokens on the new chain, using smart contracts. 
• Radical changes to the blockchain protocol such as the ones N3 will implement usually take place through a so-called hardfork: The chain splits in two parts, and the change is implemented in one.  
• Instead of a hardfork, Neo will use an interoperability protocol, a type of chain that enables the transfer of information from one blockchain to another, to create a completely new chain. 
• “We will be the first blockchain in the world to do a completely new chain through an interoperability protocol,” Da said.
• These protocols are at the frontier of blockchain development and crucial for mass adoption: They promise to connect chains that currently exist as islands to create an internet of blockchains. 
• The N3 migration will test whether Poly Network can be used to create a blockchain from scratch and correctly transfer all the data from the existing chain. 

The Ethereum challenges: The Ethereum network has been facing significant challenges in the last few months, and developers are scrambling to find alternatives for their dapps. Gas fees have been hitting record highs as the network becomes congested. 

• Ethereum “has reached its maximum capacity,” Da said. Transactions per day have plateaued at around 1.2 million to 1.3 million since August, while alternatives like Binance Smart Chain are reaching record-high transaction volumes. 
• The update to Ethereum 2.0 would likely solve some of these problems, but has been continuously put off. Da thinks we won’t be seeing it for a few years: “It’s difficult to deal with different interest groups,” particularly miners, he said. The upgrade will hurt their bottom line by drastically changing how they are rewarded. 

• “At the end of the day, Ethereum is one blockhain but everyone needs to maintain a ledger. The capacity growth of the Ethereum ledger will not outpace the growth of demand,” so there is room for many different protocols to grow, Da said. 

Government tailwinds: Blockchain’s inclusion in the 2021-2025 Five-Year Plan will “definitely” bring more investment to the technology, Da said. 

• Authorities are looking for projects that can develop blockchain fundamentals like smart contracts, consensus algorithms, and encryption, the plan said. 
• “It is in China’s national interest to have our own [intellectual property] in those areas,” Da said, adding that it is “dangerous” for China’s blockchain industry to rely on US-made technology, particularly in encryption. 
• Neo is not exactly what they are looking for. It is a public chain, which doesn’t impose any checks on the flow of information or network participants. 
• The company is also working on permissioned blockchains, including a permissioned version of interoperability protocol Poly Network which has been integrated in the state-backed Blockchain Services Network. 
• Da is “not concerned that [Neo] will conflict with regulations in China,” because it doesn’t “live in one jurisdiction: If everyone in this office in China disappeared tomorrow, Neo will live and it will overcome this setback and it will grow again.”

The digital yuan

• Bank of China in Beijing has started accepting applications for enterprise digital yuan accounts, while China Construction Bank in Suzhou is opening merchant accounts using China’s state-backed digital currency. Enterprise accounts will significantly widen the e-CNY’s use cases. (TechNode)
• The director of the central bank’s digital currency research institute, Mu Changchun, gave details about controllable anonymity in the e-CNY, a term officials have used to explain the digital currency’s privacy features. The digital yuan wallet will open an encrypted sub-wallet that will connect to e-commerce platforms when shopping online, such that the user’s bank card information and other personal data cannot be accessed by the platform. (STCN, in Chinese)

Filecoin accounting problem

Binance processed a $4.6 million double deposit of Filecoin, the token of the InterPlanetary File System (IPFS) decentralized file storage system. The initiator of the transaction tried to speed up a transaction by issuing a call for a replace-by-fee transaction, essentially asking a miner to confirm the transaction for a higher fee. The system would have normally ignored the first transaction, but it didn’t. This led to the initiators’ money doubling, from 61,000 Filecoin to 120,000. (CoinDesk)

Binance blamed a bug in Filecoin’s code. Filecoin said that the exchange was not using its API correctly. (Filecoin official blog)

Crypto crimes

• China’s Supreme Court and the People’s Bank of China jointly wrote about six examples of money laundering, including one that involved Bitcoin. Chen Moubo and his ex-wife Chen Mouzhi used the cryptocurrency in 2019 to launder RMB 900,000 ($138,233). Chen Mouzhi was jailed for two years and fined RMB 200,000. The government is reportedly working to update money laundering laws. (Southeast Network, in Chinese)
• Police in Turkey raided a crypto scam operation run by Chinese nationals who held 101 employees captive on the site. (TechNode)

The exchanges

• Huobi and Binance, two of China’s top exchanges, quietly increased transaction fees for a version of stablecoin Tether, one of China’s most popular cryptocurrencies, issued on the TRON network. (Wu Blockchain, in Chinese)
• Huobi reportedly consolidated all of its operations under the leadership of Du Jun, who was at the exchange’s helm while the CEO Leon Li was missing in action as he was cooperating with Chinese authorities in an investigation. Li only returned to work earlier in March. (Wu Blockchain)

A second Binance heist

Another decentralized finance project on Binance Smart Chain, the cryptocurrency exchange’s DeFi oriented blockchain, disappeared with an estimated 9,000 BNB coins ($2.34 million at the time of writing). The project, dubbed TurtleDex, claimed to be a decentralized file storage solution. (Binance Smart Chain announcement)

READ MORE: Holiday Bitcoin sell-off, $3 million Binance Smart Chain heists

Another Meitu crypto purchase

Meitu announced it will buy close to $50 million in Bitcoin and Ether, just weeks after it announced a $40 million purchase. (Meitu filing)

Some of these [Bitcoin’s] features potentially even render Bitcoin as a superior form to other alternative stores of value such as gold, precious stone and real estate.

—Meitu in its filing about its second cryptocurrency purchase

Blockchain labor

The number of posted jobs in China for blockchain developers decreased 45% year on year in November, an analysis of job postings by blockchain market research firm Zero One found. Average salaries in the country have dropped 1.5% to RMB 22,300 ($3,400) although they remain significantly higher than China’s average monthly pay. Small companies with staff numbering between 50 and 149 people made up the biggest slice of China’s blockchain companies, accounting for 35.3% of the sector, followed by giants with 500 to 4,999 employees, which made up 22.9%. (Zero One, in Chinese)

6nm chips

Cryptocurrency rig maker Ebang announced it completed the design of its first 6-nanometer ASIC chips for Bitcoin mining. Ebang stock rose 4.5% on the back of the announcement.(Ebang press release)

The NFTs

• Bart Baker, an American social media influencer with millions of fans on Douyin, will release a series of non-fungible tokens (NFT), a type of crypto collectible, on DefineArt, a new NFT exchange that is targeting Asian investors. (CoinTelegraph)

READ MORE: CHINA VOICES | What China thinks of NFTs

Two major Chinese state banks in Beijing and Suzhou have started opening up e-CNY merchant and enterprise accounts for businesses, bank employees told TechNode. 

Why it matters: Chinese banks had only been known to set up personal e-CNY accounts for individuals. Merchant accounts are a step toward widespread retail use of the new currency. Enterprise accounts will significantly widen the scope of use cases to include larger business transactions.

READ MORE: UPDATED: We got some digital yuan!

Details: TechNode contacted two bank branches Wednesday. At the Bank of China in Beijing, staff said they are accepting applications for enterprise e-CNY accounts. Bank staff said that the bank had already started granting applications to businesses, but the accounts were not yet operational. 

• Enterprise accounts are normally used for financial operations like payroll and taxes rather than retail transactions, although the employee did not specify what the digital RMB accounts will be used for. 
• All domestically registered businesses are eligible to apply, the employee said. 
• China Construction Bank in Suzhou has started opening digital yuan accounts for local merchants, an employee told TechNode over the phone on Wednesday. These accounts are typically used for retail transactions with customers. 
• The Suzhou bank employee said that the accounts cannot currently be used for management operations like payroll and taxes, and did not say whether they will be in the future. 
• Digital RMB accounts are required to hold the new currency.

Context: Trials for the digital yuan have accelerated in the last few months, and China is likely to be the first major economy to issue a state-backed digital currency. 

• Closed-door pilots for the digital yuan began in April 2020 in four cities: Chengdu, Shenzhen, Suzhou, and Xiong’an. In November, Shenzhen held the first e-CNY lottery, which made the digital currency available to lucky members of the public. Suzhou and Chengdu followed with their own lotteries. 
• The digital RMB will soon get to step onto the international stage—China is working with Hong Kong, Thailand, and the United Arab Emirates to test cross-border transactions using state-backed digital currencies. 
• A Beijing-based enterprise blockchain announced plans earlier this month to integrate the digital yuan. 

READ MORE:  CHINA VOICES | DCEP class is in session, with Zhou Xiaochuan

Turkish police busted a Chinese-run crypto scam ring that held 101 people captive as they worked for the illicit operation.

Why it matters: A three-year-long crackdown on cryptocurrency-related fraud in China has made it difficult for scams to run domestically. It seems scammers are still targeting Chinese consumers from abroad.

Indentured scamitude: Police forces raided the gang’s villas, where they found $200,000 in fiat currency, 712 mobile phones, 677 SIM cards, and 112 computers, according to a Google translation of a March 13 Turkish-language report from news agency Demirörenon.

• Police that that the organization was run by 18 ringleaders, six of whom were detained after the raid.
• The leaders brought 101 people, including an unspecified number of Chinese nationals, to Turkey on tourist visas to work for the operation. They then took their passports and prevented them from leaving the site. The captive employees earned a monthly salary of RMB 7,000 ($1,000).
• The scam was run out of nine villas in Silivri, a coastal city near Istanbul, Turkey’s capital.
• The raid happened after two captives sneaked out at night and alerted authorities.
• The 101 captives were taken to provincial authorities for “appropriate action,” according to the report.

Crypto pyramid: The operation was advertising a consultancy to help Chinese consumers who were looking to manage their crypto assets. “Hand over your virtual money to us, we will double it and give it back to you,” their online ads wrote, according to the Demirören report. The report does not specify whether the organization in fact doubled users’ money and gave it back to them.

Context: Crypto scams in China were abundant before 2017, when the government started cracking down severely on the industry. Known instances of Chinese nationals running crypto gangs from overseas are few and far between.

• In December 2020, police in Jiangsu province seized $4 billion in various cryptocurrencies when they busted an international crypto Ponzi scheme.
• In late January, Croatian authorities exposed scammers claiming they are selling China’s digital currency on Facebook. The digital RMB is currently in closed trials in the mainland.
• Days after the incident in Silvrisi, a senior Turkish minister said that the country is laying the foundations for a regulated cryptocurrency industry.

Taiwan vs. Bitmain

Taiwan’s Ministry of Justice is investigating cryptocurrency rig maker Bitmain for allegedly poaching engineers from its top semiconductor manufacturer, TSMC. A prosecutor in Taipei accused Bitmain of “severely threatening the development of our semiconductor industry.” (Apple Daily, in traditional Chinese)

Social media blocks

China’s Twitter-like Weibo social media platform blocked the accounts of major exchanges Huobi, Binance, and OKEx beginning on March 12, when Bitcoin’s market cap hit the $1 trillion mark, again. The news reached a ranking of tenth most-popular topics trending on Weibo. As of early Tuesday afternoon, Binance’s account had been restored, while Huobi and OKEx had new accounts. (CoinDesk)

Exchanges vs. regulators

• Binance is reportedly being investigated by the US Commodity Futures Trading Commission (CFTC) for helping American citizens make trades that breach local laws. (Bloomberg)
• The day before the Bloomberg report, Binance announced it had hired a former US Senator and ambassador to China under President Barack Obama as government liaison. (Binance press release)
• The Seychelles Financial Services Authority posted a statement on March 8 saying that Huobi is neither registered nor regulated by Seychelles authorities. Huobi has long claimed that it is registered in the offshore haven. The statement has since been deleted. (CoinTelegraph)
• The CEO of Huobi, Leon Li, has reportedly returned to work as normal as a Chinese investigation he was assisting came to an end. (Wu Blockchain, in Chinese)

READ MORE: Reports of Huobi COO arrest spurs whale transactions as token sinks

The mining

• Embattled cryptocurrency mining rig maker Canaan Creative has seen presales rise by 17% since mid-February amid soaring Bitcoin prices. (Global Times)
• Rigmaker Ebang launched the beta phase of its crypto exchange on an invite-only basis on March 15. (Ebang filing)
• A Sichuan Communist Party official, Zhu Jiade, Director of the Provincial Department of Economics and Information Technology, said the southwestern province will continue to develop its local blockchain industry, the majority of which is cryptocurrency mining. The province of Inner Mongolia is considering shutting down its own industry. (Sichuan, in Chinese)

READ MORE: Inner Mongolia may ban crypto mining: Blockheads

China’s blockchain patents

Ant Group filed the most blockchain-related patents of any company in the world, research from IP management news source International Asset Management said, while Chinese companies led the pack overall. (International Asset Management)

Will blockchain-powered digital collectibles revolutionize the art world, or are they just another bubble waiting to burst? Collectors have dropped millions of dollars on crypto keepsakes, known as Non-Fungible Tokens (NFTs), in the last two weeks, and Chinese social media is buzzing.

As the novel assets start to sell for millions in the West in forms ranging from fine art to trading cards, Chinese tech and art influencers have been asking whether they’re a real investment, and what they mean for the art industry. So far, art and blockchain outlets have been mostly positive, while social media users have been more mixed.

As far as we can tell, China is not a big consumer of tokenized art yet, although there is no hard data on the regional spread of NFT transactions. A Chinese-developed chain Binance Smart Chain, is powering some NFTs, although most use Ethereum.

Welcome change

Many in the art world have rushed to welcome NFTs as a breath of fresh air in what they see as a dinosaur industry with a strict hierarchy.

Traditional art trading is a rather conservative industry. It is highly hierarchical, highly opaque, and often slow to accept new things. All attempts to challenge its structure are questioned for a long time.

Sonia Xie, Vogue China, March 11

Crypto collectibles could bring tech-savvy, or tech-hungry, millennials into auction houses.

The entry of NFT encrypted art works into the auction market marks a possible trend: that auctions need to attract a new generation of customers who are not in the field of traditional art collection.

Yu Yi Collection Auction Magazine, March 4

Or it could get really metaphysical.

Art investment will be able to transcend material forms.

Yu Yi Collection Auction Magazine

Power to the people

Others don’t see auction houses and collectors as the benefactors of tokenized art. Instead, they see technology fueling a revolution in art markets. This techno-optimistic argument is that NFTs will change the relationship between artists, sellers, and buyers, to the benefit of artists and small-time art investors.

It is not only a change in artistic form, but also a change in production relations.

Yuan Yan, Art Business, Feb. 25

Digital art creators will be able to wrangle some power over their works from the collectors by maintaining ultimate ownership of their own creations even after it is sold, the magazine wrote.

In the traditional art industry, after a buyer purchases a work, the buyer holds its ownership, exhibition rights, sales rights, and even copyright. […] Digital art collectors who own the NFT may only have the reputation rights and trading rights as the supporters of the artist, while other rights need to be determined by the artist, the collector, and the market.

Yuan Yan, Art Business

The most techno-utopian of the takes imagined a world in which NFTs provide financial tools that could allow artists to capitalize on their art in new ways, and the general public to invest in artwork as stocks.

In the traditional art market, artists usually only get a share when their works are sold for the first time. After that, the profits generated by each resale of their works all belong to the seller. In the field of encrypted art, artists can hold “shares” of works through customized smart contracts, and a portion of the premium generated by each exchange in the future will be distributed to artists in proportion.

Sonia Xie, Vogue China

Tulip mania?

But not everyone was into the hype, especially on Weibo. Some voices warned that NFT art might be the next bubble.

Often due to lack of artistic professionalism or financial risk management capabilities, it has become a fundraising test ground for speculators…

The value of NFTs is often more dependent on market behavior than the value of the underlying assets. […] When we look to the beautiful picture of a decentralized, free, and open encrypted art ecosystem, where everyone is an artist, and everyone can set a price for the art they like, please also remember that no matter what platform is used, the exposure of the work is also directly affected by the platform and its popularity, and people’s attention is often directly linked to the economic value of the work.

The Art Newspaper, March 4

A report by HashKey Capital, one of China’s biggest blockchain venture capital firms, said that art is the “most suitable application” of NFT technology, but that regulation is lagging.

NFT development is in the stage of unregulated “barbaric growth”. According to the characteristics of NFT non-homogeneous tokens against physical objects, criminals may use NFT to launder money and in criminal activities such as trading prohibited items. In addition, as the value of NFT assets continues to increase and the ecosystem gradually expands, it may become a new target for hackers.

Fan Xiaoqi, HashKey Capital Research, March 3

Weibo users saw the recent NFT headlines as a gimmick to inflate the value of the tokenized art.

“The burned Mona Lisa seems to be more valuable than the Mona Lisa,” said the top voted comment on a Weibo news post about the burning of the Banksy artwork, with over 18,000 likes.

“Isn’t it just hype? They do a gimmick so that they can sell at a high price,” said the second most-liked comment on the same post, with 4,000 likes .

“Burn the person and sell their photo,” said a popular comment on another post.

FOMO

Awareness of the risks didn’t stop some blockchain publications from offering NFT investment advice. One article said that eager investors don’t want to be left out of the next big crypto market.

The NFT market is gradually gaining traction, art creators are actively exploring the production of NFT works, and investors are looking for new investment opportunities because they feel FOMO (fear of missing out).

Li Xiaoping, 8BTC.com, March 8

Instead of worrying about fine art, the article recommends investing in crypto basketball trading cards in the virtual collectors game NBA Topshot.

The NFT product that the author invests the most is NBA Top Shot, which is a blockchain-based NBA digital collection card launched by DapperLabs in cooperation with the NBA. Most of the people who play the NBA TopShot card game are born in the 90s. They have a deep affection for basketball and the NBA in their student days.

Li Xiaoping, 8BTC.com

The author describes WeChat groups in which people are discussing how to best capitalize on the NFT hype, concluding that even if the market is a bubble, it is a good opportunity to make money.

Innovation and hype, value and bubbles, are never contradictory. NFT is on the ascent.

Li Xiaoping, 8BTC.com

If prices keep rising, Chinese investors are likely to jump on the bandwagon.

This article is not currently available as an NFT, but if you have a few million dollars lying around, make us an offer!

Blockchain name check

Blockchain and the digital yuan were directly mentioned in a draft of the 14th Five-Year Plan for the first time in history, signaling a turning point in the government’s support for the technologies. The draft plan is unlikely to change substantially, analysts said. (TechNode)

Meitu purchase

Meitu, the company behind one of China’s most popular photo editing apps, bought $22.1 million worth of Ether and $17.9 million of Bitcoin. The company is China’s first major non-cryptocurrency firm to invest in virtual money. Meitu shares rose 14% immediately after the announcement. (Meitu filing)

Digital yuan

• A Beijing government-backed hardware and software enterprise blockchain, Chang’an Chain, will integrate the digital RMB. It is the first known domestic application of blockchain on the digital yuan. (TechNode)
• The head of the People’s Bank of China in Guangzhou, Bai Hexiang, called for cross-border payments using China’s central bank-backed digital currency in the Greater Bay Area in order to accelerate the region’s financial development. China’s Greater Bay Area includes Guangdong province, Hong Kong, and Macau. (Mobile Payment Network, in Chinese)

The exchanges

• Huobi secured a coveted license to manage digital asset portfolios from the Hong Kong Securities and Futures Commission, giving hope to other Chinese cryptocurrency companies which have applied for similar license in Hong Kong. (TechNode)
• In 2020, Coinbase CEO Brian Armstrong surpassed Zhao Changpeng, CEO and founder of Binance, as the world’s richest blockchain entrepreneur. (Hurun List)

China blockchain paranoia

The founder and president of Chamber of Digital Commerce, Perianne Boring, told Fox Business that China is “years ahead” of the US in blockchain technology and that it will be used to monitor US citizens. “I cannot stress enough how much is at stake for the US right now,” Boring said. (Fox Business)

Blockchain and fintech are to be mentioned by name in a draft of China’s 14th Five-Year Plan, marking increased focus on these technologies.

Why it matters: The Five-Year Plan is China’s most senior economic planning document. This is the first time for either technology to earn a mention by name.

• But the draft plan also calls for more regulatory scrutiny of fintech.

READ MORE: INSIGHTS | Tech in the Five-Year plan

Details: China’s National Legislature opened its annual meeting in Beijing today. It is expected to approve the draft plan during the week-long session.

• “Drafts are often tweaked during the Lianghui (Two Sessions), but are rarely substantively changed,” Kendra Schaefer, head of tech policy research at Beijing-based strategic advisory firm Trivium told TechNode.

All aboard the China chain: The plan declares blockchain a key technology, along with cloud computing, the Internet of Things, big data, AI, and virtual reality.

• Specifically, the draft plan calls for work on smart contracts, multiple consensus algorithms, asymmetric encryption, and distributed fault tolerance mechanisms.
• Distributed ledger technology is to be applied in fintech, supply chain management, and e-governance, the draft plan said.
• Blockchain emerged as a priority in late 2019, when President Xi Jinping publicly endorsed the technology.
• Just yesterday, a Beijing-based hardware and software solution announced that it will integrate the digital RMB, China’s central bank-backed digital currency. This is the first known domestic application of blockchain to the digital yuan project.

READ MORE: Enterprise blockchain to integrate China’s digital yuan

Fintech: The phrase “fintech” (jinrong keji) got three direct mentions; under blockchain development, in a section on regulating tech, and financial reforms. This is the first time a reference by name to fintech has made it in the plan.

• The 13th Five-Year plan made one reference to “internet finance,” and several to fintech-related themes such as “microfinance” and “inclusive finance,” as well as, once, as “internet finance.” Similar language is present in the new draft plan.
• The plan also called for continued R&D in the digital RMB and China’s participation in the creation of global standards for digital currencies.

READ MORE: DCEP class is in session, with Zhou Xiaochuan

More rules: The draft plan calls for enhanced antitrust rules and licensing regimes for tech platforms, and the establishment of new regulatory frameworks for fintech, telemedicine, autonomous driving, and smart logistics.

• The plan also called for increased oversight of financial holding companies, a type of corporate structure that is likely (in Chinese) to come to dominate the fintech industry. After months of negotiations with authorities, Ant Group will reportedly reorganize itself as a financial holding company.
• It also calls for strengthening the use of regtech and risk assessments on financial innovation products, including potentially suspending some products.
• Today, China’s legislators also called on commercial banks to increase lending to individuals and small and medium enterprises by 30% in the rest of the year. This will potentially substitute for fintech companies. Facilitating small loans is Ant’s single largest revenue stream.

As China’s legislature prepares to meet tomorrow, we’re bringing you a special edition of our Insights column: a preview of tech in the 14th Five-Year Plan. We’ve looked through the last plan, and the documents describing priorities for the new one, to give you our baseline expectations for key tech areas in the new plan.

Greetings from Beijing, where the weather is just turning to spring, the air this week feels like taking a bath in an ashtray, and, across town, about 3,000 people are getting together Friday to kick off the annual meeting of China’s national legislature.

This is one of the big meetings: This year, the National People’s Congress will approve China’s 14th Five-Year Plan, which will set out the government’s economic priorities for the next half-decade. The meeting lasts from March 5 to March 11, and in previous years the plan has come toward the end of the session.

Technology and innovation are sure to play a leading role. “Innovation-driven development” was one of the first topics addressed in the 13th Five-Year Plan, issued in 2016, and the phrase is equally prominent in previews of the new plan.

What is (likely) new is emphasis on another key phrase: “self-sufficiency.” As the US has used its control of key technologies as a weapon, China’s efforts to produce its own have a new urgency.

For people with tech projects, the start of a new plan period means opportunity. The “money spigot” for homegrown tech and innovation is likely to get even more generous, said Uny Cao, vice president at the Zhejiang University Intellectual Property Exchange Center and friend of TechNode.

What are we looking for when the new plan is published next week? What’s likely to get the most attention—and which will get less? Below, you’ll find TechNode’s roundup of key mentions of technologies we expect to see highlighted in the 14th Five-Year Plan.

Data

A new approach to data management will reverberate across tech industries. The next stage of China’s tech policy will shift from an emphasis on developing cybersecurity and big data, to building up the data economy.

Mentions in the 13th Five-Year Plan: The last five-year development plan focused on building up cybersecurity and control over data. But it also set goals to get government offices to share data with each other and industry.

• The 13th plan promised crackdowns on black markets for personal data, and strengthened privacy protection for big datasets, including government credit information systems. The government also aimed at opening up government big data to the public through a digital platform.
• The 2017 Cybersecurity Law was the first big step for reform of China’s information security. Implementation of the Multi-Level Protection Scheme, a key part of the CSL, picked up in the summer of 2020, Carly Ramsey, who leads regulatory and political risk consulting at Control Risks in Shanghai, told TechNode. 

READ MORE: Dust has yet to settle two years after China’s landmark cybersecurity law

Expectations in the 14th Five-Year Plan: In the Fifth Plenum guidelines, data has joined an impressive new crowd: “[We will] advance the marketization and reform of the economic factors of land, labor, capital, technology, and data.” When a Communist Party puts you on the same level as labor and capital, you know you’ve made it big.

The Fifth Plenum guidelines call for the development of a rules-based data economy. Or as they put it: Establish basic systems and standards for data property rights, transactions and circulation, cross-border transmission, and security protection to promote the development and utilization of data resources.

“Ensuring the fluid circulation of data is now an economic imperative,” said Kendra Schaefer, head of tech policy research at Beijing-based strategic advisory firm Trivium. “In practical terms, that means that the overarching theme of China’s data policy over the next five years will focus on allowing data to be shared, transferred, bought, sold, and utilized,” Schaefer said. The plenum’s recommendations called for “systems and standards” in data property rights, market mechanisms for data, as well as cross-border data transfers.

READ MORE: China sets the rules for its new data economy

So what? “The 14th Five-Year Plan will mark the beginning of a new era in China’s approach to data policy,” Schaefer said. China is stepping up from the securitization of data resources to developing a system in which data can be exploited as a resource. In the upcoming plan period, we can expect more support for trade in data alongside a continued crackdown on bad cybersecurity practices and insufficient privacy protections.

Environment

One of the biggest components of the 14th five-year plan deals with action to combat the environmental damage that followed years of rapid industrialization and economic growth. In the wake of a vow to set China on a path to carbon neutrality by 2060, economic planners will be under pressure to come up with big changes. China’s tech sector stands to benefit: To reach the country’s emissions goals, investment in clean technology could reach $16 trillion in the next 40 years.

In the 13th Five-Year Plan: The 2016 plan laid out targets to reduce carbon emissions by cutting the country’s carbon intensity—the amount of carbon dioxide produced for every unit of GDP. Through subsidies, state planners pushed prices in the solar industry so low that it effectively went from being a high-tech sector to a commodity business.

• The document laid out action plans to combat air, water, and soil pollution. By last year, Chinese cities were expected to meet “good” air quality standards for more than 80% of the year. 
• The plan sought to reduce the country’s reliance on coal-fired power plants, and promote environmentally friendly construction and mining. 
• Also included were “improvements in supportive policies” for renewable energy sources.

Expectations: The new plan will likely clarify how China will reach peak carbon emissions by 2030 and carbon net zero by 2060, goals laid out to the UN General Assembly by President Xi Jinping in September.

• The thrust of Xi’s speech has been factored into energy and environmental planning in the new five-year plan.
• The new plan will likely outline ambitious capacity and consumption targets for wind and solar energy production, while placing further caps on coal-fired power plants. 
• Energy storage is also expected to play an important role in the new plan, as China seeks to improve grid and power security. 
• It is unlikely that there will be a move away from carbon intensity caps to hard carbon caps, as the country attempts to balance economic growth and cutting emissions, analysts said. 
• While the last five-year plan placed emphasis on reducing emissions from energy production, the new plan will place increased focus on minimizing pollution from industry, including steel and transportation. 
• Further integration between China tech and energy industries is expected, a goal laid out in the 13th five-year plan. 

So what? The world is waiting to see how China plans to reach its emissions targets by 2060. We expect the plan to create more targets and pressure on local governments to improve carbon emissions, but details on how these will be implemented—and how cleantech investment will be affected—will likely be spelled out in lower-level plans.

Autos

A pillar of China’s economic growth, the automotive sector has long been dominated by well-established foreign brands, which hold more than 60% of the market share, while domestic automakers are concentrated in the low-end segment. But that is changing as China’s strength in electric vehicles is boosting its position on the global industry value chain, thanks to strong policy support over the past five years.

In the 13th Five-Year Plan: When China’s cabinet in 2010 initiated a development plan (in Chinese) for seven strategic emerging industries, new energy vehicles (NEVs) was one of them. In 2016, Beijing set an ambitious target of 5 million sales of NEVs in the coming five years, a number which would mark the beginning of mass adoption. This initiative became part of Beijing’s larger goal of becoming the world’s next innovation powerhouse.

• The central government carried out a series of stimuli to foster a new source of economic growth—by offering subsidies for NEV purchases, especially for all-electrics and plug-in hybrids—in both public and private transport sectors.
• China’s top policymakers also vowed to achieve major breakthroughs in battery technologies, such as a higher energy-density level, which enables a longer driving range as well as better resistance to extreme temperatures.

Expectations: NEVs were briefly mentioned as one of the strategic emerging industries in the fifth plenum guidelines, but with no detail about the growth outlook.

• However, according to a policy paper released by the State Council in November, NEV sales were projected to account for 20% of total new car sales by 2025, up from the 2020 level of just 5.4%.
• Beijing also expected “significant improvement in the competitiveness” of its homegrown players in the fields of battery safety and in-car operating systems, among others, while promoting highly autonomous vehicles for commercial use cases in pilot programs. 

So what? China’s electric vehicle market staged a strong rebound after disruptions caused by the Covid-19 pandemic last year and has remained the world’s biggest market since 2014. However, there have been bumps on the road, including electric car fires and the ongoing auto chip shortages.

China also lags the US in the vehicle autonomy competition, raising calls for more effort put toward core technology advancement. Pledging for quality growth amid rising superpower tensions in the next five years, Beijing would have to stay the course in boosting the sector, while realizing little near-term profit.

Semiconductors

Chinese leaders have long vowed to achieve “self-reliance” in strategic technologies, and semiconductors are one of the priorities. The sector is expected to get major attention as China issues its development blueprint for the next five years.

In the 13th Five-Year Plan: The five-year plan ending in 2020 saw semiconductors, along with other high-tech sectors like robotics, smart transportation, and virtual reality, as “new areas of growth” for the nation’s economy, but didn’t make production of semiconductors a strategic priority.

• Priorities certainly have changed over the past five years as Chinese leaders realized how troublesome it is to rely on foreign imports of semiconductors. Huawei is a brutal example.

Expectations: In 2015, China set a goal to make 70% of the chips it uses by 2025 as part of its “Made in China 2025” initiative. Now the question is how China will achieve that goal. The country only produced 6% of the semiconductors it consumed in 2020.

• The fifth plenum vowed to implement a series of “foresightful and strategic” technology research projects including integrated circuits, quantum information, AI, and neural science.
• Despite the industry’s importance, the National Development and Reform Commission didn’t include semiconductors on a list published last September of “strategic emerging industries.” Electric vehicles and artificial intelligence were on the list.
• The central government will increase investment in the domestic semiconductors industry through vehicles like the National Integrated Circuit Industry Investment Fund.
• More favorable policies towards domestic chip companies are likely such as tax breaks and heavier tariffs on imported electronic components.
• Bloomberg cited sources as saying that Beijing has added in a draft of the 14th five-year plan “a suite of measures to bolster research, education, and financing” for the semiconductors industry. 

E-commerce

E-commerce falls under the broader concept of the digital economy, a major theme in the plan that also covers 5G, artificial intelligence, and big data. E-commerce is expected to play a greater role in driving China’s economic growth in the next plan period.

In the 13th Five-Year Plan: The development plan that ended in 2020 set out to expand the e-commerce sector by facilitating its deep integration with traditional industries and prioritizing its governance. China sought to integrate e-commerce into various areas including education, healthcare, culture, and tourism to drive innovation.

• The 13th five-year plan set out expectations for China’s e-commerce transactions to exceed RMB 40 trillion ($6.19 trillion) in 2020, the last year of the plan—double the transaction value in 2015. The figure includes RMB 10 trillion from online retail businesses. The sector was projected to employ more than 50 million people by the end of 2020.
• The period of the 13th plan showed mixed results for e-commerce. The country missed the plan’s goal of RMB 37.21 trillion in e-commerce transactions in 2020. Online retail sales hit their target, however, totaling RMB 11.76 trillion in 2020, data from the National Bureau of Statistics showed.

Expectations: China expects online commerce to continue supporting its macro strategies, notably poverty alleviation and the One Belt One Road initiative. E-commerce has become an important means for China’s rural dwellers to sell their agricultural products. With more free trade zones on the horizon, China looks to expand its cross-border e-commerce market in the next five years.

• As a booster for both domestic and international commerce, the industry plays a central role in goals set for the “dual circulation” concept, which refers to spurring domestic as well as global demand, creating circumstances where the two boost each other’s growth. The idea featured predominantly in recent policy statements, although the term has been a policy meme for several years.
• Chinese regulators are stepping up monitoring for unfair competition and monopolistic practices.
• Consulting agency Jiuhou Zongheng has forecast that China’s e-commerce transactions will reach RMB 50 trillion by 2024.

Blockchain

Blockchain could be a new item in the 14th plan. It’s had plenty of attention at top levels in the past year.

In the 13th Five-Year Plan: Zilch. Blockchain was not on top policymakers’ agenda back in 2016.

Push from the top: The technology had its breakout moment in Chinese policy in October 2019, when President Xi Jinping praised the technology at a Politburo study session.

• Since then, local governments have embraced blockchain governance projects and tried to spur innovation in the field.
• The National Development and Reform Commission is supporting the development of the Blockchain Services Network, an “internet of blockchains.”

No crypto: Chinese regulators are not big fans of one of the technology’s most popular applications: cryptocurrencies. The past year’s clampdown on unregulated cryptocurrencies “is meant to clear a path to regulated forms of digital assets, starting first with DCEP [the central bank’s R&D project that includes the digital RMB],” said Michael Sung, co-director of the Fintech Research Center at the Fanhai International School of Finance at Fudan University, told TechNode.

Expectations: The technology was not mentioned in the 14th plan guidelines issued after the Fifth Plenum.

• The cryptocurrency mining industry might be negatively affected by financial de-risking campaigns and sustainability goals. The industry consumes vast amounts of electricity and is dependent on volatile crypto assets. 

READ MORE: Inner Mongolia may ban crypto mining: Blockheads

So what? China is already very interested in blockchain, but has not given the technology the same level of support as, say, electric vehicles. A name-check in the 14th plan would seal its status as a key technology and could pave the way for a national blockchain roadmap.

Antitrust

China has recently tightened antitrust regulations on tech companies. Regulators started at the end of last year to look at tech giants’ market dominance and to use anti-monopoly tools to limit them. The country also changed antitrust laws and rules to better rein in big tech. As top leaders of China repeatedly vow to “strengthen anti-monopoly” and “rein in disorderly capital expansion,” what has affected tech companies so far seems to be just the start of severer crackdowns.

In the 13th Five-Year Plan: The 13th development plan mentioned breaking industry monopolies and rooting out market barriers. It also intended to establish an “efficient antitrust law enforcement system,” deepen international antitrust law enforcement cooperation, and check administrative monopolies.

• In 2018, China created the State Administration for Market Regulation (SAMR), a  trustbuster that centralized antitrust power previously dispersed among  four market regulators.

Expectations: China is already on the move to rein in big tech with anti-monopoly tools. If the new plan pushes government agencies to impose stricter antitrust regulations and break monopolies, tech giants like Tencent, Alibaba, and Bytedance may feel a lot more pain.

• China’s antitrust regulator drafted an amendment to the Anti-Monopoly Law in January 2020; China may push to finalize the law during the period of the 14th five-year plan.
• The fifth plenum also called for the establishment of an “efficient antitrust law enforcement system” and to “break industry monopoly.”
• SAMR has said tightening antitrust regulations leads the 2021 agenda for the agency.
• While companies like Tencent and Alibaba are already under the spotlight, SAMR may launch more antitrust investigations into big tech companies. 
• A few antitrust lawsuits between tech companies are set for court hearings this year. Among them are the Douyin vs. WeChat, and JD.com vs. Alibaba cases. The results of cases will provide precedents for how the antitrust rules that took effect in February will be interpreted by the courts.

Rural areas and agriculture

Agriculture, the foundation for feeding China’s 1.4 billion population, is facing a new round of restructuring and modernization. The countryside is a growing focus for tech companies because it is home to a group of maturing consumers as well as being a lower-cost manufacturing hub. That makes aligning with rural developments a big goal for these internet firms.

In the 13th Five-Year Plan: The last plan placed a high priority on continuous modernization of rural areas and the agricultural sector. The plan promoted integration of agriculture and e-commerce and encouraged the application of big data and internet of things tech in agriculture.

• President Xi Jinping announced China’s “complete victory” in eliminating “absolute poverty” at a grand gathering held February 25 in Beijing. In the past eight years, nearly 100 million rural residents were lifted from poverty, Xi says.
• Tech giants including Alibaba, Pinduoduo, and Didi Chuxing were rewarded for contributions in the poverty alleviation initiative.

Expectations: China is expected to continue to focus on improving the quality, safety, and profitability of the sector, goals that require technological assistance.

• The focus of China’s agricultural development will shift from increasing production to improving quality, according to The China Agriculture Outlook (2020-2019) released this past April.

Policymakers are counting on tech in a plan to improve both farmers’ output and their incomes, said Even Pay, an associate director at Trivium:

“Policymakers are preparing for a future where there are fewer farmers. Some of them may be older, and in need of equipment to make their jobs easier. They also hope to attract some young people back into farming by making the work easier and more interesting—like operating ag machinery or flying drones.”

“Another big reason the government is supporting agtech is the “dual circulation strategy”—which looks to make domestic consumption the main driver of China’s macroeconomic growth. Right now China’s rural areas have the greatest growth potential of anywhere in the country—provided farmers’ incomes go up.”

Fintech + digital yuan

Fintech and the digital yuan might get a direct mention in the 14th plan.

In the 13th Five-Year Plan: Fintech was directly mentioned only once in the last plan. That plan called for a risk monitoring and crisis management system for all financial activity, including “internet finance.”

• “Microfinance,” “inclusive finance,” and “green finance” were included in the plan, but these categories also refer to traditional financial tools, said Jonas Short, head of the Beijing office at Everbright Sun Hung Kai.
• The plan called for microfinance to be made more “transparent” and regulated, while “Internet+inclusive finance” was to be promoted, and a green finance system was to be set up.
• The 13th plan also mentioned the development of “multilayered” and “non-cash” “payment systems,” although it didn’t mention digital payments specifically.

Fintech development: Since the release of the 2016-2020 plan, the use of fintech has skyrocketed, and an overwhelming majority of Chinese citizens now make use of some sort of digital finance, whether that’s for lending, investment, or insurance.

• The Ministry of Commerce released a fintech development plan in 2017, focused on cybersecurity, digital payments, and risk prevention.  
• As big tech came to play an increasingly important role in China’s finance, especially with regards to consumers and SMEs, authorities started laying down the rules: In 2020, Chinese regulators ramped up their efforts to regulate fintech companies, especially after Ant Group’s IPO was suspended in November 2020. Rules for microlending, antitrust, and digital payments have been released since.

Digital yuan: China’s central bank has been working on a digital form of cash, the digital yuan, since 2014. If implemented, it will be the first state-backed digital currency by a major economy. The central bank appears to have accelerated the development of the currency in 2019 after Facebook announced its Libra project. Trials for the e-CNY started in late 2020 in four Chinese cities: Chengdu, Shenzhen, Suzhou, and Xiong’an.

Expectations: The guidelines directly called for the improvement of “the level of financial technology.” They also included language similar to the previous plan’s regarding inclusive and green finance, as well as on financial risk prevention and monitoring.

• The guidelines called for continuing R&D on digital currency.

So what? China’s fintech industry will continue to grow, especially given a lift in the 14th plan. But incumbents will face more competition as a result of antitrust regulations and the opening up of payments systems that DCEP will bring. Tech companies dabbling in finance will also be increasingly brought under the fold of financial regulation.

Hong Kong authorities granted a digital asset portfolio management license to a subsidiary of cryptocurrency exchange Huobi Technology, the company said on Thursday.

Why it matters: The news bodes well for a number of Chinese cryptocurrency companies which face regulatory pressures at home and are looking to set up shop elsewhere. Hong Kong and Singapore are among the primary destinations.

Details: The Hong Kong Securities and Futures Commission (SFC) granted Huobi Asset Management a license to manage virtual asset portfolios, according to a company announcement on Thursday.

• Huobi Asset Management is a wholly-owned subsidiary of Huobi Technology Holdings, the Hong Kong-listed company behind Huobi Global, the world’s fourth-largest cryptocurrency exchange by volume, according to CoinMarketCap data as of the time of writing.
• The subsidiary plans to start three virtual asset funds, Chinese media reported.
• Huobi Tech’s success “reflects a larger trend of regulators taking a positive approach toward the crypto finance industry,” Flex Yang, CEO of Babel Finance, a Hong Kong cryptocurrency company that has applied for the Type 9 license in the territory, told TechNode. The new regulation will “help prepare Hong Kong’s leadership role in the increasingly competitive global regulatory environment,” he said.

Context: Huobi Asset Management received two licenses for cryptocurrency asset management in July 2020; Type 4, for advising in securities, and Type 9, for asset management.

• Chinese authorities chased crypto exchanges out of China in 2017 and cracked down on initial coin offerings, the crypto equivalent to IPOs, in an attempt to banish investment in the highly volatile assets.
• Many companies offering crypto financial services have continued to operate in the shadows, serving China’s investors and large population of cryptocurrency miners.
• In 2020, regulators started a renewed crackdown on the digital assets, targeting over-the-counter exchanges. The founder of crypto exchange OKEx was missing for weeks while he assisted the police in an investigation.

READ MORE: Digital yuan rush and OTC crackdown: Blockheads

Chang’an Chain, an enterprise blockchain developed by a state-backed Beijing consortium, will integrate China’s digital yuan, as the capital city readies the e-CNY for testing during the 2022 Winter Olympics.

Why it matters: This is the first known domestic application of blockchain technology using the digital yuan, China’s state-backed digital currency. It creates a path for enterprise applications of the e-CNY, which have so far taken a backseat in the development of the digital currency.

READ MORE: CHINA VOICES | DCEP class is in session, with Zhou Xiaochuan

Details: The Beijing Academy of Blockchain and Edge Computing (BABEC)—the research institute behind Chang’an Chain—and the People’s Bank of China (PBOC) Digital Currency Research Institute signed a strategic partnership on Monday, state-owned newspaper Beijing Daily reported on Thursday.

• The digital RMB could be the first central bank-backed digital currency to be issued by a major economy. Trials have been ongoing since April, but have so far been focused on retail transactions.
• China, Hong Kong, Thailand, and the United Arab Emirates are experimenting with blockchain to enable cross-border transactions using state-backed digital currencies, the group announced last week.

The China Chain: Chang’An Chain, known as Chain Maker, is a hardware and blockchain project with major government support. BABEC, backed by the municipal governments of Beijing and the city’s Haidian district, aims to help China achieve blockchain independence, according to its founder, Dong Jin.

• BABEC released Chang’an Chain on Jan. 27, and launched the Chang’an Chain Ecosystem Alliance.
• The Alliance is a 27 member-strong consortium that will integrate Chang’an Chain across government departments. It includes the State Power Grid operator, China Construction Bank, the PBOC’s Digital Currency Research Institute, Tencent, and Tsinghua University, as well as semiconductor companies.
• The Alliance is supervised by the National Development and Reform Commission, the Ministry of Science and Technology, the PBOC’s Digital Currency Research Institute, the Ministry of Industry and Information Technology, the State Administration of Taxation, the State Administration of Market Supervision, and the State Council’s Asset Supervision Commission.
• Chang’an Chain debuted in late January and is meant to unify Beijing’s disparate information systems across ministries and enterprises. The city aims to build a “digital economy” based on the chain, Beijing News reported.

Context: The project and its linkage to the digital RMB show that the Chinese government increasingly sees blockchain as a key technology, and is willing to invest accordingly.

• The city of Beijing has been a frontrunner among municipalities, with a plan to integrate blockchain in several areas of governance.
• After the integration of the digital RMB into Chang’an Chain, the city will speed up its preparations for the Beijing Winter Olympics trial.

Crypto mining in danger

The municipal government of Inner Mongolia autonomous region proposed shutting down all cryptocurrency mining facilities in the region in pursuit of carbon neutrality, a major policy goal for the central government. Inner Mongolia is one of the areas in China that contributes significantly to the global Bitcoin hashrate, along with Sichuan and Xinjiang. (CoinDesk)

The digital yuan bridge

China, Hong Kong, Thailand, and the United Arab Emirates announced a joint experimental project to test cross-border transactions using central bank-backed digital currencies. The program aims to develop a proof-of-concept prototype using blockchain technology. (TechNode)

READ MORE: CHINA VOICES | DCEP class is in session, with Zhou Xiaochuan

Government-led blockchain

• Chinese government agencies more than doubled the number of tenders to procure blockchain technology to 72 in 2020 compared with 28 in 2019, and only 9 in 2018. Beijing, Guangdong, Fujian, and Shanghai were the largest investors in blockchain technology. (Blockchain Stronghold, in Chinese)
• The Blockchain Services Network is integrating the public chain initially developed by TON Labs, an offshoot of messaging network Telegram, in its Chinese version. (Cointelegraph)

The return of crypto trading

In a bull market last seen in 2017, Chinese investors are back at it: They are investing in cryptocurrencies, despite a domestic ban of cryptocurrency exchanges. (Reuters)

ZT investment

A press release from Sunday stated that Japanese fund SoftBank’s UK subsidiary had invested “millions of dollars” in Chinese crypto exchange ZT. Some industry insiders are skeptical about the investment, in part because ZT has reportedly had trouble with the police, and is not a well-known company. (Wu Blockchain)

A recently published speech by Zhou Xiaochuan, who spearheaded China’s foray into digital currencies when he was chairman of the People’s Bank of China (PBOC), has shaken some basic assumptions about the digital yuan, or e-CNY.

China has been working on a digital currency for years, much anticipated by fans of virtual payments and opponents of leather wallets. It’s likely to be the first major economy to adopt a digital currency. Details were scarce until April 2020, when a series of four pilot programs gave us our first look at e-CNY payments. 

Just in time for the annual meeting of China’s legislature, its most famous monetary policy authority has released the text of a talk on the central bank’s digital currency plans. Zhou said that these plans are a lot broader than the launch of a new form of currency.

We recommend reading the whole Chinese Caixin text, even if it means using Google Translate—it’s a lot easier to follow than the translation. We’re relying on Caixin’s English where available, and our own translation where not.

DCEP vs. digital yuan

First off, Zhou’s first point: “DCEP”—short for “digital currency/electronic payments” is not the same as the digital RMB. Many writers—us very much included—have understood them to be near identical.

According to Zhou, this is a misunderstanding. The currency is called the digital yuan, or e-CNY. DCEP is the central bank’s broader research project into digital currencies and electronic payments. 

I’d like to make it clear that DCEP is a two-tier research and development (R&D) and pilot program, rather than a payment product. In other words, the DCEP program may involve several payment products that can be trialed and rolled out.

Our translation

The central bank’s job is to provide underlying infrastructure and oversight, not build payments products, he wrote. 

The bank shouldn’t pick one technology roadmap at all, Zhou wrote.

It’s best if the central bank doesn’t pre-determine, or endorse, a certain technological route, because technology is constantly evolving, and it is not easy to judge which technology is better or worse when the technology is advancing very fast.

Our trans.

Two tiers

Zhou’s next key theme is the “two-tier” approach to managing DCEP.

On the first tier sits the PBOC. The central bank’s job, Zhou said, is providing infrastructure and oversight.

The second tier is where you’ll find digital currency and payments. It comprises everyone else; commercial banks, telecom operators, and third-party payment platforms like Alipay and WeChat Pay. 

According to Zhou, tier-two institutions will be tasked with developing payments products, which includes e-CNY.  This means, Zhou wrote, that the digital yuan isn’t a mainstream central bank digital currency (CBDC).

Zhou likened the two-tier approach to Hong Kong’s semi-private banknotes. Most money in Hong Kong is printed by private banks, backed by deposits of American dollars with the city’s equivalent of a central bank.

To some extent, this design draws lessons from Hong Kong’s three note-issuing banks. The three banks need to give $1 [ed: US dollar] to the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, as a reserve for every HK$7.80 they issue. The HKMA then hand outs certificates of indebtedness to the issuing banks. On the banks’ balance sheets, the notes they issue are entered as liabilities. And for the HKMA, the certificates of indebtedness are its liabilities. In this sense, DCEP is different from the typical CBDC, which is owned and indebted by a central bank.

Caixin translation

On the Hong Kong model, banks would have to deposit one yuan RMB at the central bank to issue a digital RMB. But Zhou doesn’t seem to say that DCEP will adopt this exact approach.

Secondly, the PBOC can ensure the stability of the digital yuan’s value through multiple approaches, including requiring banks to set aside money as reserves and then issuing them certificates of indebtedness or letters of comfort. Therefore, the composition of the two-tier system of DCEP can be different.

Caixin trans.

“I believe that he is suggesting that DCEP can be either in CBDC form (direct claims on PBOC) or in narrow bank form. The latter is a claim on a bank which is based on segregated claims on PBOC. He is a little unclear on that, going one way in part of the essay and the other way in a different part. ” Darrell Duffie, Professor of Finance at the Stanford Graduate School of Business, told TechNode.

But at one point, Zhou seems to have it both ways on whether the PBOC should get involved in designing the system:

Theoretically speaking, under the two-tier system, the central bank’s own R&D focus may not be on the digital currency product itself (of course, it has the foundation, so there are also many people inside who are enthusiastic to do research in this area, which is not unreasonable), the central bank should focus more on building reliable settlement and clearing infrastructure…

Our trans.

So what? 

Zhou wrote that China is not really working on a CBDC—at least, not a “mainstream” one.

He advised the reader to focus on a long-term R&D program, rather than current digital yuan experiments, which he seems to see as one model among many.

Pilots for the e-CNY launched in 2020 in four cities: Chengdu, Shenzhen, Suzhou, and Xiong’an. Six public trials have taken place in the four cities in the form of lotteries, starting in Shenzhen in October 2020. It appears that these have all tested the same system—all use the same app.

There are some differences between banks visible in this app. The e-CNY displayed on the pilot digital wallets currently tested in Suzhou comes in different colors, depending on the bank card connected to the account. Users were also able to spend the money in different places depending on which bank card they connected, suggesting that the major Chinese banks may in fact be implementing the system at least somewhat independently.

READ MORE: UPDATED: We got some digital yuan!

During the latest Chengdu lottery, winners could also use the JD.com app as an e-wallet.

Other products built by second-tier institutions under DCEP could include “smart contracts, like programmed payments, delayed payments, contingent payments, and so on. This could also mean API service provision, super Apps for cross applications, and so on,” Duffie said. 

Zhou also commented on a few other key issues:

No disintermediation 

The PBOC should be careful to avoid cutting banks out of the equation, Zhou wrote—something known as “disintermediation.” Many early digital currencies have encouraged users to do without bank accounts, often advertising it as a feature.

Chinese DCEP architects want to keep traditional financial institutions in the loop. “Commercial banks serve a critical function in implementing monetary policy. So, in considering digital currencies strategies, central banks specifically focus on implementations that would not disintermediate these banks,” Michael Sung, founding co-director of the Fudan Fanhai Fintech Research Center and chairman of CarbonBlue Innovations.  

All about Ant?

Some observers have seen DCEP as a rebuke to Alipay and WeChat Pay, the privately-developed electronics payments platforms that dominate transactions in contemporary China. 

Zhou seems to say that DCEP will not replace Alipay and WeChat Pay, but it will bring more competitors. Zhou describeed the two companies behind China’s most popular payment solutions as fundamental to the project, including them in a list of eight major two tier institutions.

Tier-two institutions are already quite motivated to come up with payment solutions, to acquire more users, Zhou wrote. But they will shirk responsibility without oversight, he writes.

In the digital yuan system, the second tier institutions will “own” the digital yuan, and thus will be forced to have enough reserves to back it up, but will also be responsible for know-your-customer requirements and protecting privacy, Zhou said. 

For that matter, Zhou thinks that QR codes may be replaced: 

QR codes are not very high-tech, so some people say that they might disappear sooner or later, and it may not be so long.

Our trans.

Zhou lists near-field communication and subway-style prepaid cards as other possible ways  to make payments happen. Both of these QR code alternatives are being tested in digital yuan trials. 

Blockchain

The former central banker said blockchain is not ready to be part of DCEP, but he didn’t shut the door completely. 

In the field of payment, due to the huge transaction throughput, distributed ledger technology is not yet able to play a core role in the retail payment system, but it can wait for the development of technology.

Our trans.

Zhou highlighted the difficulty of unwinding transactions made in error as a downside to blockchain.

RMB internationalization

Several observers have taken DCEP as a challenge to  the US dollar’s global status. But Zhou played down the international side of digital currency.

Just this week, the PBOC joined a project called “m-CBDC bridge,” to test cross-border transactions using digital currencies with Thailand, the United Arab Emirates, and Hong Kong. 

But Zhou argues that new technology won’t fundamentally change cross-border transactions. The real issues, he says, are financial obstacles like exchange rates.

The difficulties linked to cross-border payments don’t really involve technical systems, but risks related to currency exchange and management of capital inflow and outflow. For example, if Mexican migrants in the US want to transfer money back home using Libra, they have to exchange it for pesos if Libra is not widely accepted in Mexico. Therefore, it’s necessary to focus more on the retail application rather than on cross-border money transfer.

Caixin trans.

However, Zhou does see opportunities for digitalization to help with some retail transactions, naming e-commerce, remittances, and tourism, which will “fit with” RMB internationalization. 

He cautioned against getting a reputation for “dollarization,” referring to countries in which the dollar has partly or wholly replaced local currency.

China and other East Asian countries, can steadily advance cross-border payments using new payment solutions. This requires countries to build on the solid development of domestic retail payment systems, and then focus on solving current account payments such as cross-border travel, while respecting the needs of some countries to prevent dollarization. Of course, this process may be accompanied by the internationalization of the RMB, but this should not be forced. It is more important to avoid being accused of promoting “yuanization.”

Our trans.

China, Hong Kong, Thailand, and the United Arab Emirates announced they will be testing central bank digital currencies in cross-border payments.

Why it matters: The collaboration between the four economies is a milestone in the digital yuan’s development. Nailing down cross-border payments is a key step in achieving a long-term strategic goal of using the digital RMB to internationalize China’s currency.

• All four governments are exploring digital currencies. The digital yuan is the closest of the four to launch, making it likely to take center stage in the trials.

Details: The project, dubbed m-CBDC Bridge, will explore the potential of blockchain in international CBDC transactions. It aims to develop a proof-of-concept prototype that uses the distributed ledger technology to process in real time cross-border transactions that involve multiple currencies, a joint press release said.

• The Bridge will also explore possible use cases in cross-border payments using domestic and foreign currencies.
• The four central banks want to “foster a conducive environment” for more countries to join the project, helping to determine the feasibility of using blockchain in international trade settlements and capital market transactions.
• China is participating through the Digital Currency Institute at the People’s Bank of China (PBOC).

Context: The Bank of Thailand and Hong Kong’s Monetary Authority completed a similar test in Q4 2019, called Project Inthanon-LionRock.

• Hong Kong’s Monetary Authority said in December that it was discussing testing cross-border CBDC transactions with the PBOC.
• The RMB has been slowly gaining ground in international payments; its share of global payments in January was 2.42%, compared with 2.15% in the same time period last year, data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) said.
• The PBOC has been conducting closed-door trials of the digital RMB since April, and has completed six public trials in Shenzhen, Suzhou, Beijing, and Chengdu since October.

READ MORE: UPDATED: We got some digital yuan!

CLARIFICATION: This article was revised Feb. 25, 2021, to add context on the trial participants.

Digital yuan progress

• Tencent’s WeBank and Ant Group’s MyBank will be the first Chinese private banks to join the six state-owned banks currently conducting digital RMB trials, Chinese media reported citing anonymous sources. (TechNode)
• The Postal Savings Bank of China is developing a biometric hardware wallet for China’s central bank digital currency. The hardware wallets will allow people to use the digital yuan without smartphones, and will be particularly useful to the elderly, the bank said. (Xinhua)

Blockchain and crypto pivots

• Zhejiang-based automaker Geely and Switzerland-based Concordium Foundation are setting up a joint venture to provide blockchain services in China. Geely, one of China’s biggest automakers, will hold 80% of the venture, which will be operational by the end of the year, pending regulatory approvals. (Joint statement)
• US-listed online sports lottery operator 500.com continues its pivot towards cryptocurrency mining with the acquisition of BTC.com, a mining pool chaired by Wu Jihan, the Bitmain founder who left the rig maker after a year-long struggle with his co-founder, Zhan Ketuan. 500.com recently announced it is investing millions of dollars to buy crypto mining rigs. (500.com statement)
• Nasdaq-listed tea brand Urban Tea hired two new executives as it prepares to expand into blockchain and cryptocurrency mining. (Urban Tea)

Connection problems for exchanges

• An Amazon Web Services node failure in Tokyo caused connectivity problems for Chinese cryptocurrency exchanges on Friday. Some Huobi users were unable to log in or trade. Binance and KuCoin activity was slowed. Huobi users reported problems again on Monday. (Wu Blockchain, in Chinese)
• Binance paused withdrawals of Ethereum-based tokens for an hour on Friday, which it attributed to network congestion. The next day, crypto derivatives exchange FTX said that the crypto exchange is trying to push users to its own ecosystem. Binance’s Ethereum rival Binance Smart Chain is gaining in popularity. (CoinTelegraph)

Mining rig maker moves

• Hangzhou rig maker Ebang closed its follow-up public offering to raise $70 million, amid soaring Bitcoin prices. The company plans to use the funds to expand its mining operations, as well as further developing its application-specific integrated circuit (ASIC) chips. (Ebang statement)
• Bitmain announced a partnership with BitFuFu, a Hong Kong company that aims to standardize cryptocurrency mining. (BitFuFu)

Chinese mixed reality glasses maker Nreal is preparing to launch its products in the US and Europe, less than a year after a California court dismissed a lawsuit brought against the company by Google’s Magic Leap.

Why it matters: Nreal is one of China’s most promising MR startups; it is backed by major Chinese tech venture capital (VC) firms and has set up partnerships with global heavyweights, including Qualcomm and Korea’s LG.

• In the US and EU, it will be competing primarily with Microsoft, Magic Leap, and perhaps Apple in the augmented and mixed reality fields, but also with Facebook and HTC in the entertainment-focused virtual reality market.

Details: In partnership with Vodafone and Deutsche Telekom, Europe’s most prominent telecom carriers, the company will launch its Nreal Light MR glasses in the EU in the spring, according to a statement sent to TechNode on Tuesday.

• The glasses will also be available in the US by April 2021, in collaboration with an undisclosed local telecommunications provider.
• Nreal is also launching an enterprise edition of its MR glasses, which users can wear over an existing pair of glasses. The enterprise edition is shaped like a halo, circling the user’s head. Both Microsoft and Magic Leap have already launched their own enterprise-oriented smart glasses.
• The startup is working with automakers, universities, and tourism organizations who want to use the enterprise MR glasses in the workplace, or to offer them to end users.
• Several new apps designed for the smart glasses were revealed at the Mobile World Conference held in Shanghai on Tuesday, including a weather app, games, and a 3D live soccer experience app.

With the initial success we’ve seen with our carrier partners, we’re scaling this strategy and excited to get Nreal Light into the hands of American consumers by April of this year.

—Nreal CEO and founder Xu Chi, in the statement

Context: In fall 2020, Nreal launched its Light MR glasses in Japan in partnership with KDDI, and in Korea with LG.

• Nreal closed a $41 million Series B in September led by TikTok competitor Kuaishou, bringing its total funding to $70 million.
• Other Nreal investors include Sequoia Capital China, video-streaming platform iQiyi—which operates its own VR venture—as well as Shunwei Capital, a VC firm founded and chaired by Xiaomi’s co-founder Lei Jun, and state-backed GP Capital and CCEIF fund.
• The company was accused of stealing technology from Magic Leap in June 2019.

READ MORE: US court rejects IP theft claims against Chinese mixed reality firm

Tencent’s WeBank and Ant Group’s MyBank will be the first two privately owned banks to participate in digital yuan trials, Chinese media reported.

Why it matters: The two online banks will be the first fintech companies to participate in the tests, possibly gaining an edge over their competitors despite widespread speculation that developing the currency was in part to curb their influence.

• The report comes just weeks after Ant Group reportedly reached a deal with Chinese regulators to restructure its operations amid a crackdown on fintech and big tech.

Details: Under the supervision of the People’s Bank of China (PBOC), the two banks are preparing to join trials such as those already underway, which are run by six state-owned banks, China Securities Journal reported citing anonymous sources.

• WeBank and MyBank accounts will soon become available on the digital yuan wallet app, the report said. Much like Ant’s and Tencent’s respective digital payment apps, the e-CNY app works by connecting to different bank accounts and transferring money to the wallet.
• Zhou Xiaochuan, former PBOC governor who spearheaded China’s digital currency efforts during his tenure, stated that Ant and Tencent were involved in digital yuan trials in an op-ed published in Caixin earlier in February, based on a speech he gave in late November.

READ MORE: UPDATED: We got some digital yuan!

Context: Ant Group’s Alipay and Tencent’s WeChat Pay digital payment platforms account for a respective 56% and 38.8% of China’s digital payment market, according to a report from market research firm iResearch. Holding such portions of the market fulfill criteria for the pair to be considered a duopoly, according to draft antitrust rules released by the PBOC in January.

• The digital RMB will enable other players, including traditional banks, to compete with the two fintech giants.
• Ant Group and Tencent each hold around 30% share of their respective licensed digital banks.
• E-commerce giant and Alibaba rival JD.com has been a high-profile participant in the digital RMB trials, even funding a $4.6 million lottery to distribute the currency in Suzhou.
• Some Ant employees in Shanghai have reportedly been participating in digital yuan trials.

Updated: added detail about Zhou Xiaochuan’s statements.

Huawei is seeking approval from authorities to acquire licensed digital payment provider Xunlian Zhifu, Chinese media reported.

Why it matters: The telecommunications giant is the latest of China’s big tech firms to expand into the digital payment industry, just as regulators are trying to break Ant Group and Tencent’s duopoly in the market with new antitrust laws.

Staffing: In addition to acquiring the Shenzhen-based licensed payment provider, Huawei is recruiting a “large number” of digital payment-related positions, such as deposit management, clearance, and bank cooperation, Chinese media reported on Sunday citing anonymous sources.

The acquisition: Founded in 2013 by Huawei’s competitor ZTE, Xunlian Zhifu was issued a nationwide online payment license in 2014. ZTE sold 90% of its stake in the payment provider to a Shanghai-based holding company in 2016.

• Huawei has operated Huawei Pay, a payment service that uses Near Field Communication and has been built into its smartphones since 2016. But bank card provider China UnionPay is responsible for transaction processing.

Antitrust: Regulators have ramped up anti-monopoly regulation in the last few months, following the suspension in November of Ant Group’s mega dual listing.

• Ant Group accounted for 55.6% of China’s digital payment market and Tencent for 38.8% as of June 30, 2020, according to market research firm iResearch.
• The two companies fulfill the criteria of a duopoly in the third-party payment sector, according to a a draft regulatory definition released in late January.

READ MORE: New digital payment rules likely to hit Ant Group, Tencent

New entrants: Several internet companies bought licensed digital payment operators in 2020, including Pinduoduo in January, and Bytedance and Trip.com in September.

• Bytedance launched an in-app payment tool in domestic short video app Douyin in January. The TikTok operator also launched a lending app in 2019.

READ MORE: Bytedance unveils Douyin mobile payment tool to rival Alipay, WeChat

BSN powers on

• Big Four accounting and consulting firm Ernst & Young will provide compliance and audit solutions to developers on the BSN, a state-backed “internet of blockchains” platform. Two of the firm’s blockchain products, OpsChain and Blockchain Analyzer, will be available to developers using Ethereum or FISCO BCOS to build their applications on the BSN. (EY press release)
• The BSN will add a permissioned version of inter-chain protocol Cosmos to Chinese network. (Ledger Insights)
• The network’s international version is adding three public chains.

READ MORE: EXCLUSIVE: International BSN to add Casper, NEAR, Findora

Digital yuan

• Beijing announced its first lottery to distribute RMB 10 million ($1.5 million) of the digital yuan. The lottery is one of a number of ongoing trials preceding the digital currency’s launch. (Beijing News official Weibo, in Chinese)
• Suzhou announced a second lottery to distribute $4.6 million in digital RMB red envelopes. The funds will be provided by e-commerce giant JD.com. (TechNode)

The mining

• Authorities in Sichuan visited cryptocurrency mines between Jan. 15 to 30. The local government is cracking down on mines operating in legal gray areas, and encouraging larger compliant mines to tap into the region’s abundant cheap hydroelectric power. (Wu Blockchain Twitter)
• Chinese mining pool Poolin acquired North American pool NovaBlock, increasing its total hashrate to 23 exahash per second (EH/s) and solidifying its position in the top three Bitcoin mining pools. (NovaBlock press release)
• Chinese US-listed sports lottery provider 500.com will buy an additional 5,900 cryptocurrency mining machines for RMB 55.2 million. The online lottery provider announced in January the purchase of $14.5 million worth of Bitmain and MicroBT rigs. (500.com statement)

Top 6 Chinese blockchain firms

Six Chinese companies were among a list of 50 top blockchain companies in the world according to Forbes: Ant Group, Baidu, China Construction Bank, Industrial Commercial Bank of China, Ping An insurance, and Tencent. (Forbes)

The unlikely commentator

Gene Simmons, the bassist for world-famous rock band KISS, said that he believes China is behind the US Securities and Exchange Commission lawsuit against Ripple, in an appearance on a podcast hosted by news site Bitcoin.com. In December 2020, the US SEC sued the cryptocurrency for selling $1.3 billion in unregistered securities. (Bitcoin.com)

The Blockchain Services Network announced plans to integrate three public blockchains into its international network, the BSN architect told TechNode on Monday.

Why it matters: The Chinese government-affiliated project pushes ahead with its ambition to connect all of the world’s blockchain ecosystems and provide blockchain infrastructure internationally.

Details: Once the three chains—Casper, NEAR, and Findora—are integrated into the BSN, developers will be able to access them through public city nodes and build decentralized applications (dapps).

• The integration process usually takes a couple of weeks. However, Casper and Findora’s mainnets will be launched later in the quarter, so it is likely they won’t be available to BSN developers until then.
• “Through the BSN, developers now can access nodes of 15 public chains through one gateway and play around at ultralow cost,” He Yifan, CEO of Red Date Technology, the firm building the BSN, said in a statement to TechNode.
• The new protocols will not be available to Chinese developers. The BSN operates two separate networks, one domestic and one international, to ensure compliance in China.

Blockchain Services Network (BSN)
What: A platform for blockchain development, bringing together cloud services and different chain protocols on city nodes.
Why: To reduce the cost of blockchain application design and deployment while powering communication between chains. It will be made available around the world through local cloud providers, ultimately creating a global internet of blockchains.
Who: It is part of the government’s Global Blockchain Strategy unveiled by Chinese President Xi Jinping in November 2019, spearheaded by the China State Information Center, China Mobile, China Union Pay, and Red Date Technology.

Context: Casper and NEAR are Ethereum alternatives and layer-one proof-of-stake blockchains. Findora is a network for decentralized finance (DeFi) with an emphasis on privacy-preserving architecture.

• Developments in the China version of the BSN are going in a different direction: Last week, Big Four consulting firm Ernst & Young announced it will integrate blockchain compliance and audit tools on the BSN.
• Red Date is working on its two projects aimed at riding the wave of central bank digital currencies, TechNode previously reported.

E-commerce giant JD.com is stuffing virtual red envelopes of digital yuan to be distributed in Suzhou’s second public lottery, which opened for registration on Friday.

Why it matters: This is China’s fifth digital currency trial open to the public, and the fourth one within the last two months. The acceleration of public tests this year compared with 2020 signals that a rollout could be close.

• JD.com’s involvement in the trial is the first known instance of a private company providing funds to test China’s digital currency.

READ MORE: EXCLUSIVE: We got some digital yuan!

Details: The Suzhou government will distribute to lucky lottery winners red envelopes containing a total of RMB 30 million ($4.6 million) paid for by JD.com, an official WeChat announcement said.

• Suzhou residents can register for the lottery through the JD.com or Suzhou city apps on Friday and Saturday. Previously, potential winners could only register via city government apps.
• But to receive and use their funds, the winners have to download the digital RMB app through the JD.com or Suzhou government app, depending which one they used for registration.
• The winners will be announced starting Feb. 10 and the red envelopes can be used for shopping from Feb. 18 to 26.
• The Suzhou government has also added a query function to its app, allowing citizens to search for offline stores that accept the digital currency.

Context: The first trial of the digital money in Chengdu, the capital of China’s southwestern Sichuan province, is underway. The Chengdu trial will distribute RMB 50 million, nearly double the amount other cities are distributing through public lotteries.

• The southern city of Shenzhen has already held two lotteries in October and January.
• Suzhou, Shenzhen, Xiong’an, and Chengdu are also running closed trials involving only whitelisted individuals.
• China will likely be the first major world economy to roll out a digital currency, giving Beijing a first-mover advantage in the technology. Only the Bahamas and Cambodia have launched their own digital currencies.

Ant Group has reportedly reached a deal with Chinese authorities to become a financial holding company, making it subject to bank-like capital requirements.

Why it matters: The restructuring is likely to ease regulatory pressure for the fintech giant, but could also drastically alter its operations and curb its rapid pace of growth.

Details: Ant Group will be putting all of its business into a financial holding company, including all of its non-financial technology operations, such as its blockchain platform AntChain, Bloomberg reported.

• Previous reports said that Ant initially tried to only relegate business units that fall under the purview of financial regulators to the holding company, including consumer and small- to medium-sized business lending, wealth and asset management, insurance, digital payments, and MYBank, its licensed bank.
• An official announcement could come before the Spring Festival holiday, which starts on Feb. 11.
• Regulators are still ironing out the exact requirements for financial holding companies, after announcing the corporate framework in September.
• An Ant Group representative declined to comment.
• Share prices in New York for its e-commerce affiliate Alibaba on Wednesday rose 3.5% on the news.

Context: Since the suspension of Ant Group’s highly anticipated blockbuster dual public listings, it has been facing intense regulatory headwinds as Chinese authorities move to rein in fintech giants.

• Just last week, Ant Group removed all bank deposit products from its platform to appease authorities which deemed them too risky.
• On Jan. 21, China’s central bank released new antitrust rules for third-party digital payments providers that will likely hit Ant, among other fintech companies.
• JD.com’s fintech arm JD Digits also restructured in January, but took a different approach: It joined the finance unit with its artificial intelligence and cloud businesses into a new company called JD Technology.

READ MORE: CHINA VOICES | The unsigned op-eds that foreshadowed Ant Group IPO suspension

Savvy Chinese netizens are looking to capitalize on the booming success of US-based Clubhouse by selling invitations to the invite-only live audio app, just a day after Tesla CEO Elon Musk broke audience records with an appearance on the platform.

Details: TechNode counted dozens of listings for Clubhouse invites on Idle Fish, Alibaba’s secondhand marketplace.

• Prices range from RMB 180 ($28) to RMB 500 per invitation. Sellers are from a number of different locations in China. On eBay, Clubhouse invites are selling for around $50 at the time of writing.
• The overwhelming majority of the Idle Fish listings were posted in the last 24 hours. TechNode has not been able to verify the authenticity of the listings.
• The homonymous hashtag had been viewed 6.65 million times on Weibo, China’s Twitter-like social media platform, in the 24 hours preceding Tuesday afternoon, Feb. 2. It peaked around 5 p.m. China Standard Time on Monday.
• “What is this? Am I out of touch with the times?” (our translation) one flabbergasted Weibo user wrote around 5 p.m., posting screenshots of chatter on the social media platform. The post had been liked 6,700 times.
• At 5:43 p.m., a Weibo user with 2 million followers noted that Clubhouse invites were sold on eBay for $97. The post attracted 4,000 likes.

Context: The Clubhouse app lets users join in rooms and listen to conversations between hosts and guests. It has been buzzing in Silicon Valley the last month or so, but reached new heights of popularity after tech superstar Elon Musk’s appearance on Monday.

• The Tesla executive debuted on the audio app, giving news writers around the world plentiful headlines: He broke the app’s audience limit, said he is a “supporter of Bitcoin,” and grilled the CEO of Robinhood about the app’s decision to stop investors from trading GameStop.

Pre-holiday sell-off

Bitcoin prices will continue to face selling pressure over the next two weeks as Chinese miners sell their tokens in the run up to the Spring Festival holiday, according to a report published Thursday from Singapore-based Stack Funds, a cryptocurrency investment management company.

In the last four years, Bitcoin prices have consistently fallen during China’s week-long holiday. In 2018, they fell by 50%. The weeklong holiday, which this year will falls on Feb. 11 to 17, calls for increased spending on gifts and traveling, which has the world’s largest cryptocurrency mining community selling their tokens for fiat currency, industry observers have said. (Cointelegraph)

Binance Smart Chain thefts

Several projects have reportedly raised money on Binance Smart Chain, the cryptocurrency exchange’s developer platform which focuses on decentralized finance (DeFi). Organizers behind some of these projects have raised funds from users wanting to participate in the project, and then disappeared, taking the funds with them.

Three of the five projects that have fled the Binance developer platform took BNB 59,000, the platforms’ native token, worth close to $3 million. (Wu Blockchain, in Chinese)

Interoperability news

• The Blockchain Services Network (BSN), an “internet of blockchains” spearheaded by the Chinese government, launched the Open Permissioned Project, an attempt to integrate public chains into the network while making them compliant with Chinese regulations. The development team behind IRISNet developed Bianjie, the first blockchain launched under the project. (BSN official Medium account)
• Poly Network launched interoperability between its member chains and Zilliqa, an enterprise-oriented chain developed by a team in Singapore. (Poly Network official Medium account)

Mining updates

• Canaan Creative signed a contract to sell 6,000 of its latest cryptocurrency mining machines to US-based Core Scientific, just weeks after it agreed to sell 6,400 of the same model, the Avalonminer 1246, to Canadian mine operator Hive Blockchain. Canaan’s losses in the third quarter of 2020 increased by a factor of four to $12 million, after it lowered its price for computing power by almost 70% year on year in a bid to boost sales. The effort appeared to have backfired—revenue during the quarter fell 76% compared with the same quarter a year ago, while computing power sales for the period dropped 21% year on year. (Canaan Creative website, in Chinese)
• Bitmain’s Wu Jihan started the handover to Zhan Ketuan on Jan. 26, ending a year-long battle for control between the two co-founders of the world’s largest cryptocurrency mining equipment manufacturer. The official WeChat account for Antminer, its flagship product, posted a notice saying product deliveries won’t be affected by the changes in management. (Antminer official WeChat)
• On Jan. 31, one of five directors at Bitmain quit for unknown reasons. (Wu Blockchain Twitter)
• Ebang’s executive director Wang Hongyong said at a roundtable meeting that he expects 500,000 to 800,000 total shipments of cryptocurrency mining machines in 2021. (Wu Blockchain Twitter)

The US take on DCEP

China’s digital yuan “poses serious risks to US national security interests,” according to a report by the Center for New American Security. The digital currency is an attempt to enhance and export Beijing’s “digital authoritarianism” through the collection of financial data and the application of AI and big data on these databases.

The digital yuan could also risk US citizens’ privacy and internationalize the renmimbi yuan at the US dollar’s expense, the report said.

(Center for New American Security)

READ MORE: INSIGHTS | China’s digital currency has a long way to go

Staff change

• 100x, the group behind Seychelles-based crypto derivatives exchange BitMEX appointed the former Bank of China chief credit officer, Wai Kin Chim, to its board of directors. (BitMEX press release)

As the Biden administration takes office in the US, there’s a bipartisan, arguably multilateral, appetite to mess with China tech. 

The new president has promised to make a U-turn on many of Trump’s policies, but China isn’t on this list. Cabinet picks have said that they support an aggressive stance on China and have made it clear that technology is a key aspect of their foreign policy, but haven’t revealed details as to how they will be tough on tech. 

“The view that the two countries are competitors is now firmly held in both Beijing and Washington. In turn, there is little prospect for a meaningful improvement in US-China relations under the Biden administration,” Agathe Demarais, global forecasting director of The Economist Intelligence Unit, told TechNode.

“Biden will need to appease China hawks in both political parties in order to get support for his more ambitious domestic programs, such as building new infrastructure and healthcare,” Alex Capri, visiting senior fellow at the National University of Singapore, told TechNode. 

Bottom line: China’s tech companies have seen big changes in their relationship with the US during the past four years, and a new US administration probably won’t undo many of those changes. The Biden administration is likely to put a pause on surprise moves like app bans, and be less unpredictable, but there’s almost certainly no going back to 2015.

Trump era policies

‘Buy American’ initiative: Trump tried to encourage US federal agencies to buy homegrown products from the very beginning of his presidency. The American federal government is likely not a big client for Chinese companies, with some exceptions.

• An LA Times investigation found that from 2016 to 2019, direct federal procurement of foreign-made goods increased by 0.1%: from 3.5% of total federal spending to 3.6%. 
• Several federal agencies stopped buying drones from Shenzhen-based DJI between 2017 and 2020. 
• The initiative turned into a “Don’t Buy Chinese” policy in August 2020, when a law barred federal agencies from buying goods or services from companies that use equipment from Huawei, Hikvision, and Dahua Technology. While the US federal government is not a big direct client for these companies, contractors like Amazon are. 

The Entity List: More serious threats to China tech began in 2016 with the short-lived addition of telecoms manufacturer ZTE to a list that limits exports of US technology, a move that temporarily cut it off from crucial supplies of semiconductors. In 2019, ZTE peer Huawei was added to this list in a move called a potential “death blow.”

• ZTE was added after accusations that the firm sold equipment to North Korea. The telecoms equipment vendor paid a $1.19 billion fine the next year and pleaded guilty to violating US sanctions, and was removed from the list. 
• Surveillance equipment manufacturers Hikvision, Dahua Technologies, and AI companies Megvii and iFlytek were added to the list in October 2019. SMIC and drone maker DJI were added in December 2020. 
• In Aug 2020, the Commerce Department expanded the scope of export restrictions on trading with Huawei. In an explicit attempt to target Huawei’s semiconductor supply, the department effectively banned any chips that include US tech to be sold to the Chinese telecoms company. 

Transaction bans: Perhaps Trump’s most confusing tech policy, if anyone is keeping score. On Aug. 6, 2020, Trump signed an executive order to bar US companies from making transactions with TikTok and WeChat over alleged privacy violations. Both bans were suspended by courts before coming into effect.

• On Jan. 5, 2021, Trump banned transactions with another eight Chinese companies: Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office. 
• The new Commerce Secretary will have to decide which transactions fall under the ban. 

Investment bans: Trump banned investments in companies designated as affiliated with the Chinese military by the Department of Defense (DoD) including China Mobile, China Telecom, and China Unicom, starting Jan. 11, 2021. Shares of the three telcos in Hong Kong fell sharply on the announcement. The list also includes Huawei and Hikvision.

• Trump later added that US investors must divest from Chinese companies by Nov. 11, 2021. 
• On Dec. 3, 2020 the DoD added chipmaker SMIC to this list, and on Jan.14, Xiaomi. 

Delisting: Not a Trump policy per se, but a potentially major hassle for US-listed Chinese tech companies. US lawmakers voted unanimously to pass the Holding Foreign Companies Accountable Act, which threatens to force Chinese companies off US stock markets within three years.

CFIUS: The Committee on Foreign Investment in the US blocked Chinese investments on several occasions, and expanded its jurisdiction in 2018. 

• The committee blocked Ant Group’s acquisition of MoneyGram in 2018. 
• In 2019, CFIUS forced Chinese gaming company Beijing Kunlun Tech to sell gay dating app Grindr, which is popular in the US, citing privacy concerns. The sale finally went through in March 2020. 

Clean Network: First launched on April 29, 2020 as “Clean Path,” and later expanded in August 2020, the initiative seeks to rid US allies’ tech networks and infrastructure from Chinese technology. 

• Various countries have reportedly signed on, although it is unclear what commitments they had to make to be part of it. 

Tariffs: Trump slapped tariffs on several Chinese tech products, starting with solar panels in January 2018, and later on electronics, including laptops and phones. 

• Apple dodged tariffs on its China-made products at the last minute, when the US and China agreed on the phase one trade deal. 
• Tariffs have not severely affected China tech companies, with US firms bearing the brunt of the duties. 

I could go on, but these are the most important. 

How China tech responded

Funding: Chinese VC activity in the US fell dramatically in 2019 and 2020, as Chris Udemans documented, when the techwar heated up. 

• Many market factors affected Chinese VC investments in US startups, but the drop is partly attributable to the changes to CFIUS rules in late 2018. 

By contrast, US funding is still flowing into China. Beijing-based VC Qiming Venture Partners closed a $1.2 billion round of financing in September, mainly led by US university endowments and pension funds. 

Semiconductors: Export controls have also inspired big efforts in China to achieve semiconductor independence, or at least limit reliance on US chipmaking technology. This is a very long road and several US companies guard key chokepoints, but there is probably no going back. 

• Stewart Randall has written about how the open-source RISC-V chip architecture is a promising avenue for Chinese chipmakers to free themselves from reliance on American companies, and is reportedly being used more frequently. 

Grand strategy

The Trump administration aimed to decouple the US and China in the tech sphere, Scott Kennedy, senior adviser at the Center for Strategic and International Studies in Washington, told TechNode.

Biden will be using similar policy tools, but his goal will likely be risk mitigation rather than complete separation, Kennedy said.

Biden’s team has begun to describe an approach that could lower the temperature without changing the basic fact of rivalry.

Kurt Campbell, Biden’s Indo-Pacific Advisor, and Jake Sullivan, Biden’s National Security Advisor, summarized an alternative approach in a 2019 Foreign Affairs article: 

Washington, for its part, will have to invest in the core sources of American economic strength, build a united front of like-minded partners to help establish reciprocity, and safeguard its technological leadership while avoiding self-inflicted wounds.

-Kurt Campbell and Jake Sullivan, “Competition Without Catastrophe,” Foreign Affairs

 Competition: Biden’s early appointees have said that his administration will continue competing with China on technology issues. However, Biden-style competition could mean more efforts to boost US innovation and fewer surprise app bans.

• Antony Blinken, Biden’s Secretary of State, said he approves of the direction of Trump’s tough China policy, but disagrees with the former president’s tactics, during his confirmation hearing. 
• Even the relatively cautious Campbell and Sullivan say the US should get comfortable with “considerable friction.”
• Biden is looking to strengthen the US’ domestically, boosting innovation and production capacity. Campbell and Sullivan wrote that this “domestic foundation” is what Washington needs to build on to deal with the China challenge. 
• Biden has promised to call up US allies trying to mend relations, so that they can exert united pressure on China at international institutions. 

Cooperation: The new administration doesn’t only want to ramp up competition with China. Cabinet picks including Antony Blinken have said they want to find ways to work with Beijing on global issues such as climate change. Biden’s Secretary of State said in September that a full decoupling is “unrealistic and ultimately counter-productive.”

• In Foreign Affairs, Campbell and Sullivan wrote that Washington should adopt a compete first, cooperate second approach. 

• Sullivan cautioned against making China an “existential threat” in the minds of American people and policymakers in a ChinaTalk podcast episode recorded in 2019.
• Other than the environment, one area of cooperation could be regulation to rein in big tech, Xue Lei, research fellow of the Institute for World Economic Studies at the Shanghai Institute of International Studies, said in an event on Jan. 20. 

Biden’s China team 

Biden’s cabinet picks have almost unanimously expressed a desire to be tough on China on issues ranging from trade to human rights. They have also stressed the rising importance of technology on geopolitics. 

President Biden and his incoming team have not detailed how they will deal with the US-China tech war. “I have not heard them whisper a word,” Kennedy said. 

Biden’s top cabinet picks have often dodged making specific comments on technology issues. Here’s some exceptions on what they have said on China tech:

• Laura Rosenberg, China senior director
  • Rosenberg is the head of the Alliance for Securing Democracy in Washington DC. She is expected to bring attention to China’s censorship and allegations of surveillance technology. 
  • In a Dec. 31, 2020 report, the advocacy group argued for an alliance of democratic countries to counter China’s influence over global internet governance. 
• Tarun Chhabra, senior director for Technology and National Security
  • Chhabra argues that American progressives should use rivalry to get Republicans to agree policies including increases in federal spending for R&D and education, as well as immigration policy changes to counter China’s Thousand Talents Program that attracts top tech talent from abroad. 
• Jessica Rosenworcel, chairwoman of the Federal Communications Committee 
  • Rosenworcel supported December 2020 decisions to revoke China Telecom’s US license and to reject an application from Huawei to review its designation as a national security threat. 
• Ely Ratner, top China advisor to the Pentagon chief 
  • A report co-authored by Ratner made several specific recommendations to the incoming administration on China tech, including expanding export controls based on end use of tech equipment, diversifying rare earth supply chains away from China, and coordinating with US allies on semiconductor export controls. 

Tactics

“Democracies must employ scalpels rather than sledgehammers,” Rosenberg said. CSIS analyst Kennedy said he expects the administration to “carry out a top-bottom review of China policy and the entire foreign policy of their tactics and strategy.”

There’s some policy areas where experts expect to see movement from the new administration, albeit further down the line. 

Made in America: Biden signed an executive order on Jan. 25 that will narrow the definition of American-made products and make it harder for federal agencies to justify buying foreign-made goods. 

Backseat for tariffs: Experts expect tariffs on imported goods to take a backseat in Biden’s administration, giving way to strategic tools that confront China’s tech companies in different ways, like sanctions. “Rather than tariffs, the Biden administration will increasingly shift to sanctions and export controls to confront China’s rise in the technological sector and to try to re-assert the US global dominance in this area,” Demarais told TechNode. 

Export controls: Campbell expressed support for “enhanced restrictions on the flow of technology investment and trade in both directions,” but not in a wholesale manner to avoid the Balkanization of the internet. 

• In the same op-ed, he identified the Huawei ban as a “cautionary tale” and called for creative policymaking, such as “establishing a multilateral lending initiative to subsidize the purchase of alternatives to Huawei’s equipment.”
• China is “too big” to be steered with “traditional” financial sanctions, said Demarais. The new White House is likely to rely more heavily on export controls, and “this trend is likely to be a long-term one that will outlive the Biden administration,” she said. 
• “Biden is not likely to walk away from chip restrictions that are fueling China’s technology ambitions. Nor is Biden likely to walk away from blacklisting Chinese tech companies that have ties with the” People’s Liberation Army, Abishur Prakash, futurist at the Center for Innovating the Future in Toronto, told TechNode.
• At the same time, Biden could finally give US firms “an audience,” a chance to “air their grievances regarding the suffering of collateral damage from Huawei restrictions,” Capri said. 
• A US semiconductor industry group wrote to the Commerce Department asking a review of the export restrictions to Huawei, Reuters reported on Jan. 26. 

Standards setting: Some Biden advisors have said that they want the US to play a stronger role in international standard settings institutions to curb China’s influence in global tech standards. 

• At her Senate Confirmation hearing, Commerce Secretary nominee Gina Raimondo said Washington should “play offense” when it comes to standards setting. 
• In a Dec. 22, 2020 op-ed Laura Rosenberg, China senior director for the Biden administration, said Huawei’s “New IP” standard proposed at the International Telecommunication Union and the company’s 6G proposals are an attempt to “redesign the underlying architecture of the Internet to allow nation-states to exert greater control over Internet traffic and access.” Democracies have been “too passive” in international institutions, and they should work together to counter states like China, she wrote. 

China tech in suspense

At this point, the broad strokes of the Biden team’s China approach are fairly clear. But tech companies and investors have a lot riding on the specifics. US policy won’t be going back to the rosier times of 2015, but China tech companies will have to wait to see how their access to US markets and stock exchanges will shape up in the next four years. 

Kennedy said that US presidents usually don’t make decisions on foreign policy until the summer after they take office. 

In the meantime, several of Trump’s policies will remain intact, chiefly entity lists. If you are Huawei or Hikvision, you will have to continue living with US export controls for the foreseeable future. If you are WeChat or Alipay, you can take a breather and expect to hear an update on whether you can operate in the US in a few months’ time.

Unfinished business: Analysts don’t expect any new moves any time soon, but the new administration has some homework due within the next two months. 

• The new Commerce Secretary has to define the scope of the Jan. 5 transaction ban on eight Chinese bans, including Alipay and WeChat Pay, by Feb. 19. 
• CFIUS has put its review of the TikTok deal on hold. Oracle and Walmart are reportedly still committed to buying the short video app, as they said four months ago.
•  “I fully expect CFIUS to continue blocking tech acquisitions in the US and to keep lobbying its allies to choose firms from America,” Capri said. 
• According to one of Trump’s last executive orders, by November 2021, US companies must have divested from 35 Chinese companies considered to have ties to the Chinese army, including chipmaker SMIC. 

Stalling: Kennedy says Biden might try to hit the pause button on these actions until he has finished his policy review. 

• On Jan. 27, the Treasury Department extended the deadline by which US investors would be barred from investing in Chinese military companies by five months.

“In terms of the larger arc in figuring out how to manage the relationship with China, I am fairly optimistic,” Kennedy said. “The Trump administration highlighted the concerns of a Xi Jinping-led China. I think Biden will show more care in the tools to get effective action,” he said.

Update: This article has been updated to include the full name and title of Abishur Prakash, futurist at the Center for Innovating the Future, Toronto.

Alipay, JD Digits, and Didi Finance have completely removed all interest-bearing time deposit products from their apps, just days after authorities released relevant regulations. TechNode has independently confirmed that bank deposit products have been banished from Alipay.

Why it matters: The move is the culmination of a month-long crackdown on time deposits sold through third-party fintech platforms, which is part of a wider regulatory clampdown on fintech as regulators try to rein in China’s Big Tech.

• China’s Banking and Insurance Regulatory Commission (CBIRC) said on Jan. 27 that it will further scrutinize the cooperation of banks and insurers with fintech companies.

Full measures: As of Dec. 27, Alipay, JD Digits, and Didi Finance closed the app portals through which users could increase their existing deposits with banks, Chinese media reported. The outstanding balances will be returned to their accounts once the deposits have matured.

Half measures: On Dec. 15, Sun Tianqi, head of the central bank’s financial stability department, likened the partnership between banks and fintech platforms on deposit products to “driving without a license” and warned that regulatory supervision would intensify.

• On Dec. 18, Ant Group was the first of China’s biggest internet platforms to stop selling bank deposit products on the Alipay financial marketplace. The company said it was following regulator demands.
• Tencent, JD Digits, and Baidu’s Du Xiaoman followed three days later.
• The relevant portals could still be accessed by app users who had purchased the time deposits in the past.
• The CBIRC completely banned on Jan. 15 the sale of bank deposit products, including fixed-time deposits, on third-party internet platforms.

The risk: Small regional banks had been advertising time deposits with interest rates as high as 7% through fintech platforms.

• Regulators have said that these banks are high-risk and use online platforms to pump liquidity on their balance sheets and release pressure from their liabilities, without going through the more stringent process of interbank lending.
• After the Jan. 15 rules were implemented, small regional banks are still allowed to sell time deposits, but they must use their own channels to advertise and sell. Xin’an Bank, Blue Ocean Bank, and Wuxi Xishang Bank announced that they are moving their time deposits to their own apps, the Global Times reported.

READ MORE: CHINA VOICES | The unsigned op-eds that foreshadowed Ant Group IPO suspension

Chengdu’s first digital yuan lottery

Chengdu, a city in China’s southwestern Sichuan province, will launch its first digital yuan lottery to distribute RMB 50 million ($7.7 million) of the currency via red envelopes. The lottery is the fourth public digital currency trial to take place in China.

READ MORE: Chengdu to distribute $7.7 million in its first digital yuan lottery: report

Bitcoin for private data

Chinese authorities arrested 30 people in connection with selling 600 million pieces of personal information collected across 10 Chinese provinces, and accepting RMB 8 million in cryptocurrencies as payment. The suspects were using the encrypted messaging app Telegram to sell the data. (Jiangsu Internet Police official WeChat, in Chinese)

The chip shortage

The global chip shortage has hit cryptocurrency mining rig manufacturers. As Bitcoin prices have risen, so has the demand for mining rigs. Chipmakers have been unable to keep up with demand. (Reuters)

READ MORE: Digital yuan goes physical, mining rig prices rise: Blockheads

The BSN update

The Blockchain Services Network, a government initiative to build an internet of blockchains, announced that it is partnering with ConsenSys. The New York company’s Ethereum-based enterprise blockchain solution Quorum will be available in over 80 nodes of the BSN in China. (CoinDesk)

Rural finance

Eastern Jiangsu province launched a blockchain-based platform for rural finance in collaboration with Ant Chain and Jinhu Rural Commercial Bank. The platform will support the management of land mortgage loans, using smart contracts to automate deposits and verification. (Letter Chain Finance, in Chinese)

The staff news

Huobi’s Chief Investment Officer Sharlyn Wu is reportedly preparing to resign from the cryptocurrency exchange. The CIO drove Huobi’s investments in decentralized finance over the last six months. (Wu Blockchain)

Chengdu will distribute $7.7 million to winners of its first digital yuan lottery on Jan. 27, on the heels of similar trials for the currency in Shenzhen and Suzhou.

Why it matters: The lottery is the third digital currency trial open to the public, signaling that rollout is underway. It is also the biggest: Chengdu is giving out more than double the amount of funds distributed in each of the previous lotteries.

• China’s digital yuan is likely to be the first digital currency issued by the central bank of a major economy.

READ MORE: EXCLUSIVE: We got some digital yuan!

Details: The trial will start on Jan. 27 and will last until Feb. 26, Chinese media reported. Residents of Chengdu, the capital of southwestern Sichuan province, can enter the lucky draw via a local government application. The RMB 50 million ($7.7 million) in funds will be distributed in red envelopes.

• Unlike other lotteries, the Chengdu red envelopes will be earmarked for use online or offline. RMB 30 million can be used in offline stores, and the remaining RMB 20 million can be spent on e-commerce site JD.com.

Context: The lotteries distribute the digital currency and usually set a time limit for when it can be used so that the relevant authorities can gather and study data from the trial.

• Shenzhen has held two lotteries, one in October and the second in January, while another took place in Suzhou in December. Prior to the public lotteries, the digital currency was only available to whitelisted individuals who were selected to take part in the trials held in Chengdu, Suzhou, Shenzhen, and Xiong’an.
• In 2021, the digital currency started popping up in other places, including a cafe in Beijing and a hospital in Shanghai.
• Chinese authorities have said that the digital yuan, also known as the Digital Currency/Electronic Payments (DCEP) project, will be tested during the Beijing 2022 Winter Olympics.

READ MORE: INSIGHTS | China’s digital currency has a long way to go

Based on more than 10 interviews with industry insiders and regulators, TechNode tells the story of how Huawei established itself in the Greek market—and how the tables have turned for the Chinese telecom giant.

In the first part of this three-part series, we explored how Huawei entrenched itself in Greek networks. This installment expands beyond Greece to the European Union, examining how the bloc’s and consequently Greece’s policy on telecommunications security changed over the years, thanks to espionage and a global anti-Huawei campaign from the US.

A wiretapping scandal involving the 2004 Olympics, the US National Security Agency (NSA), and the mysterious death of a Vodafone employee erupted in Greece in 2005. As the mystery unraveled, the Greek government, telecommunications industry, as well as the public at large found out the hard way that Washington would not hesitate to spy on Athens’ top leadership. US security agencies had taken advantage of the 2004 Olympics to eavesdrop on the Prime Minister.

In 2018, when the US began imploring its allies to avoid Huawei, it was essentially asking Greek telecoms firms to end their relationship with a reliable partner—one that had stood by them in hard times—in favor of a government that offered them military and political support, but had spied on Greeks for months.

Greece wasn’t the only European country to be shocked by American espionage activities that decade. Starting in 2013, the bloc found out through Edward Snowden’s whistleblowing just how extensively the NSA was snooping on member-states, including heads of state. 

The diplomatic fallout with the US was quickly patched up, but Snowden’s revelations contributed to the European Union’s growing concern over cybersecurity. 

Decisions made in Brussels would affect Huawei’s prospects in Greece as much as those made in Athens. Over the next few years, the EU Commission rolled out key cybersecurity legislation. 

In interviews with TechNode, industry and regulatory insiders stressed that Greece abides by EU rules when it comes to cybersecurity. As the bloc responded to the Snowden revelations and later, Washington’s warnings about Huawei, the effects trickled down from Brussels to Athens.

As the EU prioritized cybersecurity and made new rules, Greek governments gradually implemented them.

Our man in Athens

In the wake of the financial crisis, Huawei earned trust in Athens as it “stood by” Greece during its moment of need, as described in part one of this series.

At the same time, Huawei’s European rivals and US security agencies were caught engaging in clumsy episodes of corruption and espionage. Between 2005 and 2015, a major scandal shook Athens’ trust in its long-standing alliance with the US. 

In January 2005, Vodafone found a glitch in its text-messaging service and notified Stockholm-based Ericsson, which had supplied the equipment. Two months later, Ericsson told the telecoms operator that it had found a complex piece of malware—6,500 lines of unidentified wiretapping code in the text-messaging function. 

Ericsson gave Vodafone a list of over 100 tapped phone numbers, including those belonging to then-Prime Minister Kostas Karamanlis, Minister of Justice Anastasios Papaligouras, Minister of Public Order George Voulgarakis, and Minister of the Interior Theodoros Roussopoulos. 

Two days later, a network planning manager at Vodafone by the name of Kostas Tsalikidis was found hanged in his Athens apartment. Two days after Tsalikidis’s death, Vodafone informed the Greek prime minister’s office of the wiretapping. 

The Greek government proceeded with an 11-month preliminary investigation before breaking the news to the public. 

On Feb. 2, 2006, the three ministers whose phones had been tapped called a press conference (in Greek) to inform the public of the wiretapping. By March, the government was accused of covering up the scandal in parliament. These accusations largely overshadowed the actual wiretapping in public and parliamentary discourse over the next few years. 

At that point, Greek prosecutors, telcos, and the government knew that they had stumbled onto a massive security breach, but they couldn’t find hard evidence to prove who was behind the wiretapping. The highest levels of the Greek administration understood that the US had its hands dirty, but they did not discuss this publicly.  

This “major scandal” made the industry and government uneasy in the years to come. The culprit of the “unprecedented data breach,” as 30-year telco veteran Andreas Polycarpou called it, was still out there. Instead of resolution and convictions, the incident left a trail of whispers and suspicions in its wake. 

In 2008, the Greek Parliament passed two bills, in part to respond to the Vodafone wiretapping: In February, they voted to increase the powers but also checks and balances of the country’s intelligence service, which is responsible for counter-espionage activities. In June, they changed the legal framework on violating telecoms privacy, launching a new strategy for cybersecurity. The Greek anti-corruption watchdog disapproved of the new strategy, claiming that it would put politicians with little technical expertise at the helm of a rapidly changing technological environment. 

The Vodafone case was still a mystery in September 2011, when the telco operator informed prosecutors that one of the mobile phones used for the wiretapping had made frequent calls to the US Embassy in Athens. 

The Greek public had largely forgotten the Vodafone scandal, but behind the scenes the anti-corruption prosecutor was still working to hold the culprits accountable. In 2015 then-Greek prosecutor Dimitris Foukas issued a warrant for the arrest of William Basil, a US Embassy employee who was suspected to be an undercover CIA agent key in the wiretapping. The prosecutors were also investigating Basil’s connection to a plot to assassinate the former prime minister, Kostas Karamanlis. 

Foukas was not reachable by phone. His staff told TechNode that the only way to speak to him would be to meet him in person at the Athens first instance court, which he now presides over. 

When Edward Snowden blew the whistle on NSA surveillance, the Vodafone mystery was cracked open. Unveiled documents showed that the NSA had never removed its wiretapping system installed during the 2004 Olympics in Athens. 

While giving the NSA access to Greek telephone networks was not unusual during such a high-profile event, the US intelligence agency turned it around to spy on top Greek officials. Neither the CIA’s operation in Greece, the US Embassy, nor the Greek government had any knowledge of the operation until Vodafone discovered it, the Intercept and Greek newspaper Kathimerini reported in 2015.

In 2018, the death of Kostas Tsalikidis was ruled a premeditated murder, and prosecutors pressed charges against unknown suspects. His family claimed he was murdered because he knew too much about the NSA’s abuse of Vodafone networks. Subsequent Greek governments and prosecutors refuse to officially comment on this theory.

The US was caught red-handed peeking into Vodafone’s telecoms networks to spy on Greece, its ally, without the knowledge or permission of local authorities.

Yet the Vodafone scandal didn’t make a big difference on Greece-US relations, according to Nikos Moumouris, a journalist who covered the story for newspaper Eleftherotypia at the time. It was like throwing a “pebble in the sea,” he told TechNode. “Maybe it wasn’t a pebble, maybe it was a rock. But once the story died down, it was back to business as usual [with the US].”

“Those were different times” when Greece’s capacity to investigate the breach was limited, Moumouris said.

The Snowden files 

Back in the 2000s, Greece wasn’t the only country glossing over telecommunications security. “Historically, operators simply didn’t pay a lot of attention to IT security. Other operators simply didn’t care,” said Jan-Peter Kleinhans, Project Director of Security in the Internet of Things at Berlin-based think tank Stiftung Neue Verantwortung.

The 2013 Snowden leaks were a big shock to the EU. The NSA’s privacy abuses cut deep among politicians and the public. It was a “very loud wakeup call as regards to potential threats to our fundamental rights, data protection and privacy,” an EU Commission spokesperson said.

The EU’s most powerful countries were among the biggest targets of US surveillance: France, Germany, Italy, and the Netherlands. 

Greece was the target of so-called Blarney, an NSA program designed to get access to fiber optic cables, switches, and routers, wrote journalist Glenn Greenwald, who worked closely with Snowden to publish the NSA documents, in his book No Place to Hide. 

But TechNode hasn’t found any records of the Snowden revelations being discussed extensively in the Greek parliament. 

One prominent member of the Greek parliament, Theodoros Pangkalos, said he wasn’t surprised by the revelations: The Greek intelligence service had also spied on the US embassy decades ago, he said. 

Given its history with the Stasi, East Germany’s massive secret police and intelligence agency, Germany is extremely touchy about surveillance. Relations between Washington and Berlin plunged. German Chancellor Angela Merkel, whose phone was allegedly tapped for 10 years, expelled the CIA chief from the country. 

The diplomatic fallout from the NSA revelations was quickly patched up. In February 2014, French President Francois Hollande said “mutual trust has been restored” between the two countries, less than a year after he found out the NSA had collected data for 70 million phone calls in France in a single month. 

But the EU had woken up to the importance of cybersecurity—and started tightening cybersecurity legislation for member-states. 

Baby steps

In July 2016 the EU began to take steps that would push Greece to act on cybersecurity: the “first EU-wide legislation on cybersecurity,” as the EU Commission called it, came into force. The same year, the EU Commission published the EU Directive on Security of Network and Information Systems (known as the NIS Directive), an “action plan” for the bloc’s transition to 5G networks, outlining key considerations. The document didn’t mention security of 5G networks. 

Huawei was not the controversial company that it is today, so it wasn’t a prominent part of the conversation as implementation took place. The original NIS Directive didn’t spell any trouble for Huawei: It was relaxed compared to later iterations. 

As an EU member, Greece had to follow the Commission guidelines. But Greece had consistently lagged other EU countries when it came to digital policy, including cybersecurity. 

The 2016 NIS Directive was geared more broadly toward digital service providers; the word “telecommunications” is mentioned only once in the law, in an article about security in the shipping industry. 

Greek Prime Minister Alexis Tsipras set up a dedicated cybersecurity agency (in Greek) in 2017 by presidential decree—four years after Spain, itself seen as a late mover. The Ministry of Digital Policy under Nikos Pappas published an 18-page National Cybersecurity Strategy in March 2018—five years after Italy, another member-state viewed as late to the party.

In July 2018, the EU Commission told Greece to hurry up and adopt the NIS Directive into its national law. In November, the parliament conferred on the legislation. The debate transcript is 130 pages long, but not because the merits of the bill were hotly contested. 

Members of parliament took the November debate on the cybersecurity legislation as an opportunity to hash out unrelated grievances: farmers’ strikes, taxes on broadcast operators, austerity measures, protests, the reputation of Kostas Simitis, who served as prime minister from 1996 to 2004, and so on. Huawei was not mentioned. 

The only parties that voted against the cybersecurity law and managed to stay relatively on the matter at hand during the debate were members of the far-right Golden Dawn, which was recently ruled a criminal organization, and the Greek Communist Party. Golden Dawn brought up surveillance by US security agencies and big tech to argue that digital policy is used against nationalist and conservative groups. The communists argued that the cybersecurity legislation will trample the right to privacy to serve US and NATO interests. 

After the marathon meandering debate, the law was passed and came into force a few weeks later. 

Over the next few years, the proliferation of cyberattacks, privacy scandals, increasing digitalization, and US pressure brought telecommunications security to the center of the bloc’s digital policy. The conversation was slow to take off, but quickly ramped up in 2018 and 2019. 

“The issue of security is moving up in the EU agenda,” and so Greek governments and companies are increasingly prioritizing it, George Tsaprounis, head of corporate affairs at Greek network operator Wind Hellas, told TechNode. 

The squeeze on the EU

Because Athens faithfully follows EU rules on digital infrastructure, Washington’s anti-Huawei pressure on the EU trickled down to Greece. 

With the EU and member-states already on edge over cybersecurity, the Trump administration started its global campaign against Huawei in 2018. By December of that year, it started to bear fruit: The EU Commission’s then-Vice President for the Digital Single Market Andrus Ansip said that the bloc should be “worried” about Chinese companies like Huawei because they might install “mandatory backdoors […] It is not a good sign when companies have to open their systems to this kind of secret services,” he said. 

In 2019, the US ramped up its anti-Huawei lobbying in Europe. In a visit to Germany in May 2019, US Secretary of State Mike Pompeo threatened that European countries which use Huawei equipment could be cut off from US intelligence. 

That wasn’t enough for Pompeo, who continued to argue for more restrictions on the company. Ahead of a key meeting between EU leaders to discuss security measures for 5G, Pompeo published an anti-Huawei op-ed on Politico EU. 

Pompeo asserted that “it’s critical that European countries not give control of their critical infrastructure to Chinese tech giants like Huawei, or ZTE.”

Brussels conceded to the US argument that the country of origin of an equipment vendor can pose a security risk, but has not been willing to go all the way and ban Huawei. 

But Washington wanted more assurances. It launched a renewed campaign to rid telecom networks from Chinese technology in August 2020. Under the banner of the so-called Clean Network, the US started collecting pledges from countries to preclude “untrustworthy vendors,” like Huawei, from their networks. 

Trust no one 

Some within the EU and Greece disagreed with Pompeo’s campaign. They argued there was no evidence that Huawei was doing anything the US wasn’t already doing, using gear from Huawei competitors. 

According to many cybersecurity experts, no vendor is completely trustworthy or infallible. The only solution is to diversify and mitigate risks. The more vendors you buy from, the less you are exposed to any one, and you set up security checks and balances; one supplier might catch the others’ mistakes. 

“As German industry, you’re between two camps. You can choose which backdoor you want: A Chinese backdoor or a US backdoor,” Steffen Zimmermann, the lead expert on industrial security at German industrial lobby organization VDMA, said in March 2018. VDMA members include heavyweights like Bosch and Siemens. 

While Pompeo was making the rounds in European capitals, Greek officials kept quiet on Huawei. Greek President Prokopis Pavlopoulos visited Huawei’s Beijing office in May 2019 during a five-day official visit to China. He commended the company’s work in Greece and the two sides promised to continue their cooperation. Back in 2008, the same politician had proposed the bill to revamp the Greek intelligence service after the Vodafone wiretapping scandal.

To Greek insiders, the debate felt somewhat moot. From a technical perspective, the risk of espionage or compromised communications is not affected by the country of origin or the equipment, they told TechNode. 

“There are countries that do not rely on Huawei’s infrastructure. That doesn’t mean that they don’t have cybersecurity issues to solve,” Antonia Petrovits, a spokesperson for Huawei Greece, told TechNode.

Whichever company builds a network will have some capacity to use the infrastructure for its own purposes, the Greek telecom technical experts TechNode spoke with agreed.

Europe’s large telcos have recognized this risk for years. To avoid becoming dependent on any single supplier, and the backdoors or vulnerabilities in their equipment, many of Europe’s carriers have diversified their supply chains, procuring equipment from different vendors. 

In January 2020, the EU Commission officially included procurement diversification in the bloc’s guideline for developing 5G networks. ”Dependency of one or several networks also significantly affects national and EU-wide resilience and creates single points of failure,” the Commission said. 

Greece’s latest cybersecurity strategy, released on Dec. 3, made the same recommendation. 

Delegating the Huawei decision

In January 2020, Brussels again tried to resolve the Huawei issue—by passing the buck to member states. In its official guidance on 5G adoption, the EU Commission asked national regulators to consider elaborate technical issues—in addition to equipment suppliers’ country of origin.

The EU has limited jurisdiction over member-states and, at least on paper, didn’t want to single out China. Directives “do not target or single out individual countries or suppliers,” the EU Commission spokesperson said. 

The EU’s directive on 5G  handed the decision on Huawei back to member-states. Every company which complies with EU rules can access the market, but individual countries reserve the right to exclude companies for national security reasons, the spokesperson said.

The January 2020 EU’s 5G cybersecurity “toolbox” places a lot of responsibility on member-states’ regulators and network operators, Kleinhans said. It’s up to them to decide whether Huawei will be excluded from 5G networks. 

The 5G toolbox asks countries to consider the “risk of interference by a non-EU country” when evaluating equipment—in other words, deeming Chinese-made equipment a risk simply because it’s Chinese.

The Greek network regulator did not respond to TechNode’s multiple requests for comment. 

The Commission’s delegation of the choice on Huawei has led to a patchwork of responses reflecting the bloc’s political diversity, from Sweden’s hard ban, to Estonia’s “Huawei law,” to Ireland’s continued relationship with the Chinese company. Some telecom operators like Vodafone have taken matters into their own hands and are replacing Huawei gear with alternatives. 

It is hard to assess how much ground Huawei has lost, given the patchwork of responses and lack of public information.

Playing politics

Greek policy-makers face a diplomatic dilemma with Huawei. The company has a good track record of helping the market and offers competitive products. Security is a concern, but from a technical perspective Huawei’s gear is not more risky than its competitors, industry insiders said. 

All equipment manufacturers, regardless of their country of origin, can open a backdoor to spy on communications. “There might be access points to the equipment, but these are for service purposes. Anyone can open a backdoor that is intended for service,” Polycarpou said. 

Many operators told TechNode that they don’t see Huawei as a threat to their security—at least, not a bigger threat than the US. To them, security is a technical question that has been politicized. From a purely technical perspective, Huawei is at least on par with its Western counterparts. 

But the diplomatic balance around Huawei is delicate. Greece needs its friendships with both the US and China. 

Keep buying Huawei, and the US threatens to cut off military ties. To Athens, Washington’s support in defense issues is key to keeping Turkey, a country with four times Greece’s GDP, at bay: The two neighbours have a long history of military confrontation which flared up in August when Turkey threatened to go to war over a maritime dispute. 

But giving Huawei up could be an affront to China. The EU is well aware of the political nature of an anti-Huawei decision. Considering the threats posed by state or state-backed actors is a “non-technical” issue, it said in its October 2019 5G security assessment. 

When Sweden banned Huawei in October, the local telecommunications regulator said it was following the advice of military intelligence, which had found China to be “one of the biggest threats against Sweden.” 

An outright Huawei ban would inevitably call China out as a threat to Greece’s security when the two countries remain, at least on paper, allies. In Greece, such a statement would incur a high political cost. Despite its longstanding alliance with the US, Athens has been courting China to invest in Greece. 

In a landmark privatization deal in 2016, Chinese state-owned shipping giant Cosco acquired a 51% stake in Piraeus port, adjacent to Athens, for €280 million ($343 million), and is due to gain another 16% should it spend an additional €400 million on the port by the end of 2021.  

Five days after Turkish president Recep Tayyip Erdoğan threatened military action against Greece, the US ambassador to Athens Geoffrey Pyatt tweeted that Greece had joined the Clean Network, which is widely regarded as an anti-Huawei initiative. 

The next month, Pompeo visited Mitsotakis’ hometown on Crete island to talk about defense issues for which Greece is looking to the US for support, and vice versa; Mitsotakis’ focus was Greece’s dispute with Turkey, and Pompeo’s was Russia’s involvement in the Mediterrenean, particularly in Libya. 

The secretary of state also visited a naval base on the island that offers support to US war and logistics ships. He announced the “US Navy’s newest expeditionary sea base,” a $498 million ship, would be moved to the Greek port. 

At a joint press conference with the Greek Prime Minister during this visit, the two politicians announced enhanced cooperation on military issues—and Pompeo welcomed Greece to the Clean Network. However, Mitsotakis didn’t mention “clean” telecoms, during the press conference or anywhere else. 

Pompeo claims Clean Network members will make “efforts” to rid their networks of untrusted vendors, including Huawei. So do international media outlets. 

The Greek government has never confirmed whether it will make such efforts—or that it has joined the Clean Network. 

It’s not clear what this means. The current Greek administration has long kept a “no comment” policy on the Huawei controversy, and in 2020 its alliance with the US has deepened, so it could be that it has joined the Clean Network and is merely letting Pompeo do all the talking. 

If Greece has entered into an agreement on 5G networks with Washington, it could face retaliation from Beijing. 

It’s not clear whether the small Mediterrenean nation will embrace the Clean Network and if so, how it will interpret it. 

The next installment of this series explores what the Clean Network means in the Greek context, if anything, and Huawei’s position in the Greek market. 

The People’s Bank of China has proposed new antitrust rules for non-bank digital payment companies, which are likely to pressure the duopoly held by Ant Group and Tencent over the market.

Why it matters: The rules set the standard for monopolistic behavior in China’s third party digital payment market. If implemented, they are likely to trigger regulatory scrutiny of Ant Group and Tencent.

• The move is part of a wider regulatory antitrust clampdown on tech companies and particularly on fintech, but it is the first to target the digital payment sector.
• Sources have told TechNode that Ant Group and Tencent’s online payment duopoly does not sit well with banks and authorities, but there had been little to no regulatory movement to curb their power.

READ MORE: CHINA VOICES | The unsigned op-eds that foreshadowed Ant Group IPO suspension

Details: The new rules set market share thresholds for the “confirmation of market dominant position,” which might trigger a regulatory review. If non-bank online payment companies exceed these thresholds, the central bank will consult with the antitrust watchdog to determine whether the company or companies have engaged in monopolistic behaviors.

• For a single third-party payments provider, the market share threshold is half of the market; two-thirds of the market for two providers’ combined share; for three providers’ combined market share, the limit is 75% of the market.
• If one of the multiple-party payment providers accounts for less than 10% of the market, it will not be included in the anti-monopoly review.
• Ant Group individually and in combination with Tencent exceeds these thresholds. Ant Group holds 55.6% of China’s market for digital payments, and Tencent accounts for 38.8%, a June 30 report from market intelligence firm iResearch said.
• The rules also set early warning thresholds, which are lower than the “confirmation” thresholds, and might mean key personnel is called in for interviews.
• The draft rules are open for comment until Feb. 19.

Context: Regulators have been trying to rein in big tech in the last few years. Regulatory efforts have intensified, however, since Ant Group’s initial public offering in Shanghai was abruptly halted in November.

• Sweeping antitrust rules were released in the days following the Ant Group listing fiasco. Soon after, Alibaba, an SF Express subsidiary, and a Tencent-backed platform were fined for failing to report acquisition deals for antitrust reviews.
• The central bank released a technical document to standardize the use of AI and big data in payment risk prevention on Jan. 4.

Jack Ma made his first public appearance after months of avoiding the spotlight, following rampant speculation attributing his disappearance to a regulatory crackdown on his businesses.

Why it matters: Ma had not appeared in public since Oct. 25, when he made a speech at a gathering of China’s top financiers and regulators criticizing Chinese regulation on fintech. The speech reportedly contributed to the negative attention from regulators that led to the suspension of Ant Group’s initial public offering just days later.

• Ma’s reappearance will likely quell speculation that his disappearance was not a deliberate choice to lay low, but a sign that he might be arrested—or worse.
• The resurfacing follows just five days after China’s central bank said Ant Group had established a rectification team to work with regulators.

Details: China’s most recognized tech billionaire held a video conference (in Chinese) with 100 teachers in remote parts of China on the morning of Jan. 20.

• “When the epidemic is over, we will meet again,” Ma said in the video.
• The event to recognize rural teachers’ achievements is usually held in the city of Sanya, in China’s southern island province of Hainan, state media reported.
• At the time of writing, the hashtag “Jack Ma made his first public appearance” has been viewed over 1.3 million times on China’s Twitter-like social media platform, Weibo.

Context: Within a few days of the fateful Oct. 25 appearance, regulators in November halted Ant Group’s planned $35 billion listing on the Shanghai stock exchange and released new antitrust rules that severely curb the fintech giant’s operations, as well as those of its e-commerce affiliate, Alibaba.

• In December, regulators fined Alibaba, Tencent, and SF Express for failing to report acquisitions to China’s market competition authorities.
• Ten days later, they launched an antitrust probe into Alibaba over allegations of “forced exclusivity.” On the same day, the People’s Bank of China called Ant Group in for a meeting.

READ MORE: CHINA VOICES | The unsigned op-eds that foreshadowed Ant Group IPO suspension

Digital yuan progress

• Ant Group employees can use the Alipay app for digital yuan transactions in select locations, including the Lujiazui district in Shanghai. The fintech giant is working with the People’s Bank of China to develop infrastructure to support the digital currency. (Mobile Payment News, in Chinese)
• The Industrial and Commercial Bank of China, one of the country’s big four banks, is accepting applications from customers in Shenzhen who want to open digital yuan wallets. (China Banking News)

Chinese miners in Iran

Iranian authorities halted all cryptocurrency mining operations operated by Chinese people on Jan. 14. Chinese crypto entrepreneurs flocked to Iran during the Bitcoin surge to take advantage of its cheap electricity.

An Iranian tech entrepreneur, Nasim Tavakol, tweeted on Jan. 8, “The Chinese have built a 175 MW bitcoin mining farm in the Rafsanjan Special Economic Zone,” (translation via Twitter), and added the mine’s coordinates. (Wu Blockchain, in Chinese)

More interoperability

Binance and Poly Network are launching cross-chain interoperability. Binance Smart Chain, the cryptocurrency exchange’s decentralized finance-oriented public blockchain, and Poly, founded by Neo’s Da Hongfei, are the latest two blockchain projects to try cross-chain transactions and data exchange.

READ MORE: Binance, Poly Network to launch cross-chain interoperability

Conflux lands $5 million grant

Public blockchain startup Conflux landed a $5 million research grant from the local government in Shanghai’s Xuhui district. Conflux is one of few decentralized chains to work with Chinese authorities. It received funding from Shanghai authorities in 2019 for a research lab, and scored a contract to revamp government data architecture in Hunan province in August 2020. (CoinDesk)

READ MORE: Public blockchain Conflux lands second government deal

Traditional institutional investors once considered cryptocurrencies an investment for the bold or the stupid: a niche market with a bad reputation and high volatility. In 2017, J.P. Morgan CEO Jamie Dimon called Bitcoin a fraud. 

In 2020, J.P. Morgan started offering banking services for cryptocurrencies and its analysts predicted Bitcoin’s price could hit $146,000 in the long term. Bitcoin’s price surged to $20,000 last year, entering the mainstream. On Jan. 9, 2021, it briefly hit $41,000. As of the time of writing, one Bitcoin costs $36,500.

Over the last year, affluent Chinese have flocked to blockchain-based digital assets as an investment—and a safer place to stash their money—industry insiders told TechNode. There are no hard figures on how much Chinese investors are putting into the largely untraceable world of crypto, but multiple insiders TechNode spoke with agreed that the virtual assets have caught on.

Chinese investors have historically preferred parking their assets in US markets through investments in stocks, funds, real estate, and more. The US is a mature and liquid market, with relatively tight control over corporate structures and low taxes on capital gains, making it a popular destination for the world’s wealth.  

High income Chinese are now looking at cryptocurrencies as a safe haven for their assets, said Flex Yang, CEO and co-founder of Babel Finance, a Hong Kong-based Chinese cryptocurrency asset management company.

About $50 billion in cryptocurrencies was moved from East Asia to overseas accounts in the 12 months ending in June 2020, according to an August report by US-based crypto analysis firm Chainalysis.

“China is a large part of this activity in East Asia,” a spokesperson from Chainalysis told TechNode, though it has not yet analyzed country-level data.

Based on their own interviews with experts, Chainalysis said that at least some of this $50 billion represents capital flight.

Tech war ripples

Yang said that after March, he noticed increased demand for his firm’s services from wealthy Chinese investors. 

Lennix Lai, director of financial markets at OKEx, the world’s largest cryptocurrency exchange by trading volume, and El Lee, COO of Singapore-based crypto asset custodial firm Onchain Custodian, agreed that cryptocurrencies have garnered more interest in the last year from wealthy Chinese individuals as well as the country’s institutional investors than in the past. 

Politics is one of the reasons for the shift, Yang said. Investors appeared concerned about the political environment in the US, following rising tensions with China. 

“Before, they thought it’s impossible for their assets to be frozen in the US. Now, the chances have increased by 100%,” he said. 

The tech war has accentuated an existing trend away from traditional assets and towards cryptocurrency trading in China, said Lai.

Investors have come to question the centralization of financial industries, especially given the potential of a decoupling between the world’s two largest economies, he said.

Lai brought up the example of the SWIFT system that underlies cross-border transfers of money, which is based on the US dollar. “There are a lot of discussions and rumors in China right now that this [reliance on US currency] could jeopardize the Chinese money flow,” Lai said. 

Follow the lead

Concerns about the US dollar is “one reason, but is not a major reason” why Bitcoin prices are soaring, according to Lee. 

“If that was the case, we would see our clients switching 80% of their fiat [currencies] into Bitcoin,” he said. The new interest is primarily driven by investors who want to diversify their portfolio, and people who see an investment opportunity in cryptocurrencies, said Lee. 

Central banks and financial heavyweights around the world have started endorsing cryptocurrencies in the last year, which has given them more credibility among mainstream investors. 

China is plowing ahead with its ambitious digital yuan project. The International Monetary Fund, European Union, and even several governments have taken up the development of their own digital or crypto currencies.

These moves are part of a trend toward a more “robust decentralized system” according to Lai,  one that isn’t controlled by a few stakeholders.

In 2020, non-crypto companies invested in Bitcoin and other coins, receiving widespread attention from media. Around the world, many people reading the news about Bitcoin prices want in on Bitcoin, Lee said. 

Fintech giant Square, Nasdaq-listed business intelligence software provider Microstrategy, and Stone Ridge Asset Management announced they are investing millions in cryptocurrency. Microstrategy owns more than $766 million in cryptocurrencies, and plans to buy an additional $400 million. 

In December 2020, Massachusetts Mutual Life Insurance, a Fortune 500 pension fund, bought $100 million worth of Bitcoin for its general investment fund. J.P. Morgan analysts viewed this as an indication that Bitcoin is “spreading from family offices and wealthy investors to insurance firms and pension funds,” Bloomberg reported based on an investment note. 

Mining cash

Another significant source of cross-border cryptocurrency flows from East Asia, particularly China, are cryptocurrency miners. China is home to around 65% of the world’s mining activity as of April, research from the Cambridge University Center for Alternative Finance indicated.

Miners need to convert their freshly minted cryptocurrencies into fiat currency to pay for bills like electricity and payroll. They prefer to convert them into stablecoins before converting them into fiat currency like US dollars, according to Chainalysis. Stablecoins are easier to convert to traditional currency and more resistant to cryptocurrency market fluctuations.

While the trend for Chinese investors has been to shift away from US-based investments, Chainalysis found that Chinese investors have a strong preference for Tether over other cryptocurrencies, a stablecoin pegged to the US dollar. It analyzed Bitcoin conversion into the most popular fiat currencies stablecoins in the last 12 months. All bitcoin converted from China went to Tether purchases, whereas in Korea and Japan it was mostly converted directly into local national currencies. 

READ MORE: Is crypto mining really moving to North America?

US tech giant PayPal is the first foreign firm to fully own a Chinese payments firm after its acquisition of GoPay on Dec. 31.

Why it matters: The PayPal acquisition is a landmark in China’s financial liberalization amid an antitrust clampdown in fintech.

Details: PayPal acquired the remaining 30% of GoPay, according to the Chinese government’s company registration platform. The US company had bought 70% of the firm in September 2019, becoming the first foreign company licensed to offer payment services in China.

• Details of the deal were not disclosed.
• PayPal could not immediately be reached for comment.

Cross-border payments: PayPal said in 2019 that it wanted to tap into China’s market for cross-border payments. Unlike domestic transfers, the market for cross-border transactions is not yet dominated by giants like Ant Group and Tencent.

• Because China is the world’s largest exporter and importer, “the market for cross-border payments is immense,” Bill Deng, co-founder and CEO of XTransfer, a Chinese cross-border payment and risk management firm, told TechNode.
• Deng added, “There remain a large number of unresolved pain points in this industry,” which is still in its infancy, so there is room for new players.

Regulation: Regulators have followed up on Ant Group’s IPO suspension with further antitrust moves as they seek to rein in Big Tech’s power over the economy.

• Last week, the People’s Bank of China asked Ant to retreat to its original payments business and overhaul its operations in credit, investment, and insurance.
• Regulators have also ramped up efforts to bring in competition from overseas.
• They have “vowed to open up the sector to all foreign investors, to issue licenses necessary to operate locally,” Deng said. In 2020, ownership caps on financial services firms were scrapped.
• Several firms have already taken advantage of the new rules to set up wholly owned subsidiaries in China, including Allianz, BlackRock, Mastercard, and S&P Global Ratings.
• “The timetable for the liberalization of specific segments will become clear in the future,” the XTransfer CEO said.

Poly Network, the interoperability solution launched by the founder of cryptocurrency Neo, has formed a partnership with cryptocurrency exchange Binance’s decentralized finance-oriented blockchain to enable cross-chain interoperability.

Why it matters: The partnership could bring more developers and decentralized applications (dapps) to both Binance Smart Chain (BSC) and Poly Network, especially from the booming DeFi space.

• Poly said in a statement sent to TechNode that it hopes the BSC partnership will bring network effects, meaning the value of the network will increase exceptionally as network participation grows.

Details: The partnership will allow interoperability between dapps built on the two networks; they will be able to transact tokens and exchange information across different blockchain protocols.

• Poly said that $3 billion in tokens had already been transferred between its partner networks.

Context: Poly is one of two cross-chain protocols currently used by the Blockchain Services Network to achieve interoperability. The BSN is a Chinese government attempt to create a global “internet of blockchains.”

• Binance is the world’s largest cryptocurrency exchange by trade volume, according to data from crypto monitoring platform CoinMarketCap.
• The BSC was launched in September and is already used daily for transactions in the tens of millions of US dollars, data from dapp monitoring site DappRadar said.
• Binance’s decentralized cryptocurrency exchange runs on the Smart Chain.
• The public chain allows developers to build applications that are compatible with the Ethereum network, but offers lower transaction fees and higher speeds than Ethereum.
• Poly Network was founded by Da Hongfei, one of China’s blockchain pioneers. Da started the Neo network in 2013, and its native token is now ranked 26th globally in terms of market capitalization.
• Poly Network already makes several blockchain protocols interoperable: Bitcoin, Elrond, Ethereum, Neo, Ontology, and Switcheo.

READ MORE: EXCLUSIVE: China’s BSN to test cross-chain interoperability in October

Corrections: updated to reflect that Poly Network was started by the founder of cryptocurrency Neo, not the company behind Neo, as previously stated. Corrected text that implied Da Hongfei is involved in operations of Neo, Ontology, and Switcheo. An earlier version of this story erroneously stated that $3 billion had been transferred between Poly Network and BSC.

One of China’s largest and newest manufacturers of cryptocurrency mining equipment, MicroBT, is readying a US public offering, according to Chinese media reports.

Why it matters: Business is booming for cryptocurrency mining rig makers, as Bitcoin prices have reached historic highs over the last two months.

• MicroBT would be one of three major Chinese cryptocurrency mining rig makers to go public, along with Ebang and Canaan Creative.

Details: The company is “preparing” to list in the US, Chinese crypto blogger Colin Wu (in Chinese) reported on Wednesday, but he did not specify a timeline for the offering.

• MicroBT is looking to do another round of fundraising prior to the listing to buy more chips from Samsung so it can churn out more product, according to Wu.
• The Bitcoin network’s mining capacity has lagged the currency’s rising prices. Mining rig makers are struggling to keep up with demand, and their orders are fully booked for months.
• Wu estimated that MicroBT’s 2021 revenue would reach $1 billion.
• MicroBT did not respond to TechNode’s request for comment on Wednesday.

Context: MicroBT is a relative newcomer in crypto mining manufacturing. It was only founded in 2016, about three years after most of its Chinese peers.

• The company quickly acquired market share with its Whatsminer series, in part because Bitmain, China’s largest player, was entangled in internal turmoil.
• In September, it set up its first overseas factory to better serve growing demand from non-Chinese clients.

Read more: Is crypto mining really moving to North America?

• The rig maker was considering an initial public offering in 2019, according to Bloomberg. A legal dispute with Bitmain reportedly put the plan on hold. MicroBT’s founder Yang Zuoxing was Bitmain’s director of chip design. When he founded his own company, Bitmain accused him of stealing intellectual property.
• Yang was arrested in December 2019 and released on January 2020 on bail.

Digital yuan trials

• A hospital in Shanghai started trialing the first “hard wallet” designed for the digital yuan, state media reported on Jan. 7. Employees of Tongren Hospital can use a smart card, as opposed to a smartphone, to pay with the digital currency at the hospital’s staff canteen. (The Paper on YouTube, in Chinese)

“The Shanghai DCEP pilot uses an ink screen similar to Amazon Kindle, which means that DCEP can be used without an Internet connection or mobile phone.”

—Colin Wu on Twitter

• China’s third lottery to distribute China’s digital currency took place last week in Shenzhen, the second to take place in the city. The lottery is part of the central bank’s ongoing trials. RMB 20 million ($3 million) were distributed in this trial. (China Banking News)
• Local media in Shenzhen reported that the Agricultural Bank of China is testing the use of ATMs for digital yuan deposits and withdrawals. (Shenzhen News)

The scramble for mining rigs

• As Bitcoin prices soared in the last month, demand for China-made cryptocurrency mining rigs surged alongside. The world’s top cryptocurrency exceeded $40,000 last week.
• Prices of new mining rigs have doubled in the last two months, and Bitmain’s inventory have been sold out for months. (CoinDesk)
• The bull market has even brought back old models that were on shelves. Previous rig models are also being sold for higher prices in second-hand markets, data from crypto intelligence portal Hash Rate Index showed. (8BTC.com)
• The topic was trending on Chinese social media platform Weibo, with more than 8.9 million views on Jan. 9.
• 500.com, a US-listed Chinese sports lottery company, plans to buy $14.4 million worth of Bitmain and MicroBT crypto mining equipment. The lottery operator will issue 11.9 million Class A ordinary shares priced at $1.21 to raise funds for the purchase. (500.com statement)

State media on Bitcoin

• The China Economic Daily said that Bitcoin trading is still in a legal gray area, and that the cryptocurrency will become worthless when governments ban it. The newspaper said it expects regulatory crackdowns on Bitcoin to intensify. (8BTC.com)
• State-owned People’s Daily discouraged readers from leveraged Bitcoin trading amid the coin’s bull run in a lengthy op-ed on Jan. 5. (People’s Daily)
• Mentions of blockchain in People’s Daily multiplied 700% from 2017 to 2020, research from policy analysis firm Macro Polo said. (Macro Polo)

Digital yuan rollout

• Shenzhen will hold a second digital yuan lottery to distribute China’s central bank digital currency, the digital yuan. Registration took placed from Jan. 1 to 4 for residents of the city in southern Guangdong province. The system will pick 100,000 people to receive “red envelopes” containing RMB 200 ($31) worth of the digital currency, double the amount given in the two previous lotteries, redeemable between Jan. 7 to 17. (Shenzhen government WeChat, in Chinese)
• Data released by the Suzhou government, which conducted in late December a lottery to distribute the digital yuan, showed that 55% of the funds were used offline, and the remaining 45% were used for online transactions on JD.com and other e-commerce platforms. (Sina Finance)
• The first place in Beijing to accept the digital yuan is Mancat Cafe in southwestern Fengtai district; whitelisted individuals participating in digital yuan trials can now pay at the coffee shop using the digital currency. (Sina Finance Weibo)

READ MORE: EXCLUSIVE: We got some digital yuan!

Rig makers expand

• Cryptocurrency mining rig manufacturer Ebang said Thursday it will start testing a new crypto exchange in the first quarter of 2021. The Nasdaq-listed rig maker’s share price has risen 17% to $7.14 since the announcement. (Ebang statement)
• Mining equipment maker Canaan, which has been struggling to regain momentum after a short report released in 2020, is partnering with The9, a Shanghai-based gaming distributor to launch a mining business. The9 brought World of Warcraft to China until the game’s publisher, Blizzard, sold the license to NetEase in 2005. (The9 statement)

READ MORE: Rig maker Canaan misses Bitcoin surge, losses top $12 million

Exchange fluctuations

• Chinese cryptocurrency exchange FCoin fired all of its employees and will be moving to a decentralized model, the largest exchange bankruptcy in China according to reporter Colin Wu. (Wu Blockchain Twitter)
• Shares of exchanges Huobi and Okex have made significant gains as soon as markets opened in Hong Kong on Jan. 4 for the first day in 2021. At the time of writing, Huobi’s stock is up 62%, and OKex surged 21%.

Carmaker’s Bitcoin misstep

A joint venture by state-owned EV maker NIO and state-owned legacy carmaker GAC announced on Dec. 31 that it would start accepting Bitcoin payments for its cars—a first for a major Chinese company. The carmaker quickly apologized on the same day for not fully considering and getting approval from financial regulators for the move. (China News Network Weibo, in Chinese)

Troubled rental platform Danke has repaid 86% or around RMB 1.3 billion ($201 million) of tenant loans underwritten by Tencent-backed WeBank, the bank’s chairman Gu Min said on Dec. 29.

Why it matters: The rental loan rescue plan is a positive sign for the survival of Danke, whose debt-fueled expansion led to public outcry and threatened the company’s future. The move may also release some pressure from WeBank, which faces questions about its exposure to Danke’s debt, as well as its due diligence and risk assessment processes.

• Neither WeBank nor Danke responded to TechNode’s requests for comment.

The Danke incident: In November, the local government of Beijing set up a special team to handle Danke, which was reportedly on the verge of bankruptcy and facing a $400 million cash shortfall.

• In the prior months, thousands of Danke tenants found themselves evicted from their apartments but still contractually obligated to pay rent—a result of landlords halting their collaboration with the platform, saying they hadn’t received their payments.
• Regulators reportedly spoke to Danke’s competitors Ziroom and 5j5j to take over its business. No agreement was reached due to Danke’s cash flow problems.
• On Dec. 2, an evicted tenant in Guangzhou committed suicide.

WeBank to the rescue: Just days after the suicide, WeBank announced two separate plans to help tenants in debt to the bank—and save Danke from collapse.

• On Dec. 3, WeBank announced it would extend by three years all outstanding rental loans for tenants whose contracts had been terminated early, waiving both the principal and interest payments.
• On Dec. 4 (in Chinese), the Tencent-backed bank announced it would transfer tenant debt to Danke, which alleviates some of the immediate risks around the platform’s business model and grants it some leeway with regulators.
• More than RMB 1.3 billion of loans from 136,100 tenants were repaid to WeBank under the debt transfer scheme as of Dec. 27, Gu said. Danke owed RMB 1.6 billion to WeBank for 161,845 loans as of early December.
• Gu stressed that WeBank has had a steady year for profits, and that its assets are enough to cover its exposure to Danke.

The Danke model: Under New York-listed Danke’s original business model, tenants would borrow a year’s worth of rent from a bank, like WeBank, when signing an annual lease with the rental platform.

• The bank would then pay the year’s rent to the platform upfront, which would repay the landlord in quarterly installments. Tenants would pay back their loan to the bank in monthly payments.
• At the end of 2019, 91% of tenants paid rent via loans, compared to 75.8% in 2018 and 65.9% in 2017, Caixin reported citing Danke.
• The company was using bank’s upfront payments to fuel its expansion, racking up debt without turning any profits. In November, it reportedly couldn’t pay its staff.

READ MORE: CHINA VOICES | Crisis at Danke has China worrying about out of control fintech

BSN eyes CBDCs

• The company building the BSN, the Chinese government-backed “internet of blockchains,” is working on two projects to tap into CBDCs.
• Red Date is working with eight major banks and tech companies to build a payment layer for CBDC and stablecoin on the BSN that will launch in the first half of 2021.
• The company is also a standalone public chain that substitutes cryptocurrencies with CBDCs and stablecoins.

READ MORE: EXCLUSIVE: BSN architect firm eyes CBDC with two new projects

Digital yuan insurance

Online insurer ZhongAn and China Construction Bank launched the country’s first insurance policy that is payable in digital yuan. Individuals who have taken part in the digital yuan tests can buy the eLife insurance policy. (Jiemian, in Chinese)

Bitmain conflict settled

The fight between the two co-founders at the world’s largest cryptocurrency mining equipment manufacturer appears to be drawing to a close.

At a shareholders meeting on Dec. 28, a deal to split the company between the dueling co-founders was approved and will be implemented in January.

Under the deal, Zhan “Micree” Ketuan will take over Bitmain’s mainland business, including cryptocurrency mining rig manufacturing and domestic mining operations. Zhan will mortgage company shares worth $600 million to buy out Wu Jihan’s stock.

The company’s overseas mining operations, cryptocurrency wallet BTC.com, and computer power-sharing platform Bit Deer were spun off with a $90 million valuation and will belong to Wu.

Government moves

• Beijing announced the third batch of projects in its fintech sandbox, a central bank-supported program to trial innovations in financial services. The proportion of blockchain-based projects rose, accounting for two of the four projects compared with two out of 11 in the previous batch. (China Banking News)
• China Zheshang bank and Zhejiang University released the country’s first white paper on blockchain-powered supply chain finance. (Gold Finance, in Chinese)
• Authorities in Zhejiang province launched a blockchain-based app to help police monitor live-streamed e-commerce. (Zhejiang government)

The company behind China’s Blockchain Services Network revealed two projects to build infrastructure for central bank digital currencies (CBDCs) and stablecoins, promising a BSN payments layer, and a public chain in which “gas fees” can be paid without buying cryptocurrency. He Yifan, CEO of Red Date Tech, spoke at a TechNode-sponsored webinar recorded Dec. 21. 

The payments network, a blockchain-based enterprise payments platform that will support CBDCs and stablecoins, is a BSN project and expected to launch in the first half of 2021. Stablecoins are cryptocurrencies pegged to traditional currencies, such as the dollar-linked Tether (USDT).

The public chain is at an early stage. He said that it would be a standalone chain but BSN-compatible.

Why it matters: Both projects will make it easier to use blockchain without buying cryptocurrencies, something He argues will make the technology appear less risky to large businesses. Separating blockchain from these state-free currencies will likely reassure accountants and annoy purists.

CBDC payments network

Red Date is already working on the network’s technical design with another tech company, He said. They are also in talks with eight large international banks and tech companies to work together on the network, he added.

• The network will provide all the backend support needed to process CBDC and stablecoin transactions globally, He said. Companies will be able to use wallets built on the network or plug in their own applications to send and receive funds.
• Initially, the network will be added as a layer on the BSN, but will eventually “become a standalone network to process all CBDC and stablecoin payments globally,” He told TechNode in a separate interview through WeChat.
• The network will be “ready for” the digital yuan when it launches, but can only offer interoperability once the People’s Bank of China opens up the digital currency’s application programming interface, he said.

READ MORE: EXCLUSIVE: We got some digital yuan!

The CBDC-fueled public chain

Red Date’s public chain project would be one of the first, if not the first, to allow “gas fees,” paid for smart contracts and other computational services, to be paid in state-backed or pegged currencies. 

What are ‘gas fees’?: Blockchains can do a lot more than support virtual money. They can also offer neutral and verifiable ways to perform computations, such as Ethereum’s automatically executed “smart contracts.”

• But users have to pay for the computing involved. In public chains, they put in money called a “gas fee,” usually denominated in a “native” cryptocurrency associated with the chain. For the Ethereum chain, this is Ether.
• He told TechNode that many traditional businesses are reluctant to use public chains because they receive income in fiat money, but have to pay gas fees in crypto. “They can’t control the cost, it could triple next year.”
• “Public chains with crypto will never serve real-life business and enterprise applications,” He said over WeChat.

Back to fiat: Red Date’s public chain would instead allow businesses to pay gas fees denominated in a traditional fiat currency, using a state-backed CBDC or stablecoin to make the payment.

• The lack of a native currency means the structure and consensus algorithm of the chain will be entirely different to other public chains, He said.
• Public chains like Ethereum create new virtual coins to reward “validators” for powering the system’s computation. In Red Date’s public chain, the different node operators will instead split the income from the gas fees, He said.
• Some purists argue that native currencies are essential to public chains. Red Date’s project might not sit well with them. 
• “A public chain without a token is not a public chain,” Chris Ba, head of business development in Asia at Solana, a public chain project, said during the Dec. 21 webinar. He was not commenting on Red Date’s project. 
• Gas fee prices will be voted on through a consensus algorithm, he said.
• The CBDC chain is Red Date’s own project, but it will also be integrated with the BSN, He said.

CBDCs bonanza: Red Date promises that its payment tools will support multiple CDBCs. While only two exist today, more are expected to be available soon. Central banks have been  researching digital currencies for years, but in 2020 the technology started to become real. The Bahamas and Cambodia launched their CBDCs in October.

• China is still trialing its own digital yuan. It has conducted two public trials in Shenzhen and Suzhou.
• Japan and Korea will start testing their own digital currencies in 2021, their central banks announced in the last few months.

Blockchain Services Network (BSN)
What: A platform for blockchain development, bringing together cloud services and different chain protocols on city nodes.
Why: To reduce the cost of blockchain application design and deployment while powering communication between chains. It will be made available around the world through local cloud providers, ultimately creating a global internet of blockchains.
Who: It is part of the government’s Global Blockchain Strategy unveiled by Chinese President Xi Jinping in November 2019, spearheaded by the China State Information Center, China Mobile, China Union Pay, and Red Date Technology.

Fintech giant Ant Group has been called in for a meeting with financial regulators, China’s central bank announced today, the same day that market regulators announced an anti-monopoly probe into sister company and e-commerce giant Alibaba.

Why it matters: This is the first publicly announced high-level meeting between regulators and Ant Group since the fintech giant’s IPO was abruptly suspended, days after another similar meeting.

• The company has been under regulatory pressure as China’s authorities tighten the screws on fintech, who are concerned that unbridled tech giants bring systemic risk to the economy.

Details: “In the coming days,” the Alibaba affiliate will be “interviewed” (our translation) by the People’s Bank of China (PBOC), the Insurance and Banking Regulatory Commission, the China Securities and Exchange Commission, and the Foreign Exchange Commission, the PBOC said in a statement this morning.

• Authorities will also “urge” Ant Group to comply with regulatory financial, antitrust, and consumer protection requirements, the notice from the PBOC said.
• Ant Group responded to the news just ten minutes after the central bank’s announcement with a post on its official WeChat account, say that it will “seriously study” and “strictly comply” with regulatory requirements.
• At the same time, Alibaba is trying to satisfy regulators concerned about its market power in an investigation into accusations of monopolistic behavior.

READ MORE: China launches anti-monopoly investigation into Alibaba

Context: On the same day that Jack Ma met with regulators, Nov. 2, new rules on microfinancing were released. Credittech makes up around 40% of Ant Group’s revenue, according to its IPO prospectus.

• On Nov. 3, the Shanghai Stock Exchange suspended Ant Group’s hotly anticipated $34 billion IPO, saying that the company didn’t meet disclosure requirements about regulatory risk.
• Since, Ant Group has made changes to its operations. Just yesterday, it lowered credit limits for younger users of its Huabei microlending platform. Last week, it stopped providing bank deposit products on Alipay.
• New draft antitrust rules were released on Nov. 10 by the State Administration for Market Regulation. Alibaba, Tencent, and and SF Express were fined over anticompetitive behavior on Dec. 14.
• Earlier in December, Guo Shuqing, the head of the China Insurance and Banking Regulatory Commission, called for more national level regulations on fintech.

READ MORE: CHINA VOICES | The unsigned op-eds that foreshadowed Ant Group IPO suspension

The digital yuan

• A second public trial for the digital yuan kicked off in Suzhou, a city in eastern China. A total of RMB 20 million ($3 million) was dispersed in red envelopes containing RMB 200 each to 100,000 lucky lottery winners.
• The digital yuan wallet can connect to one of five different bank cards. Each gives users the option to use the digital currency on different e-commerce platforms; e-commerce site JD.com, ride-hailing platform Didi, video-streaming site Bilibili, and services app Meituan.
• The wallet also has an option to pay Party membership fees.
• Lottery winners can use the money by Dec. 27.
• JD.com processed 20,000 orders using the digital yuan on Saturday, the day of its Dec. 12 “Double 12” shopping promotion. (South China Morning Post)

READ MORE: EXCLUSIVE: We got some digital yuan!

• China doesn’t aim to replace existing fiat currencies used in global trade with the digital yuan, Zhou Xiaochuan, the former governor of the People’s Bank of China and a towering figure in Chinese finance, said on Monday.
• Nonetheless, the digital currency might transform international trade because it can handle cross-border transactions simultaneously and in real time, he said. (South China Morning Post)

“Some countries are worried about the internationalization of the yuan. We can’t push them on sensitive issues and we can’t impose our will. We must avoid the perception of great power chauvinism.“

—Zhou Xiaochuan, former governor of the PBOC, as translated by the SCMP

The local governments

• The city of Xiong’an in northern Hebei province launched China’s first city-level blockchain operating system. It is a multi-layer chain that handles both the base architecture and applications built on top of it. (Xiong’an People’s Daily, in Chinese)
• Shenzhen in southern Guangdong province released a local standard for blockchain in finance. The Shenzhen Stock Exchange and Tencent’s WeBank were involved in drafting the standard. The new standard focuses on identity authentication, permissions management, and support for anti-money laundering, anti-fraud, and regulatory audits. (Fintech Micro Insights, in Chinese)

The bad Bitcoin news

• Sichuan authorities cut off electricity to cryptocurrency mines starting on Dec. 8. The southwestern province’s abundance of cheap power from its hydroelectric plants has made it home to many miners. But this electricity is scarce in winter, so authorities wanted to prioritize other industries. (Wu Blockchain Twitter)

READ MORE: INSIGHTS | Markets, not floods, will drown bitcoin miners

• A man in Dalian killed his daughter and together with his wife attempted suicide after losing RMB 20 million by trading in cryptocurrencies, some of which he had borrowed from his wife and parents. The man survived, but his wife and daughter did not. (Wu Blockchain)

As Christmas is approaching, many children might be wondering whether they’re on Santa’s naughty or nice list. Meanwhile, as China’s corporate social credit system is rolled out, companies in China are asking themselves whether they’re on any of 42 national-level naughty lists or one of eight nice lists. 

At the end of 2020, the planned first phase of development of China’s corporate social credit system is wrapping up. Announcements that will shed light on the next phase are expected by the end of the year.

A report by China-based policy research firm Trivium released last week provided one of the most level-headed and comprehensive looks into the emerging regulatory technology yet. Below, here’s what we learned from it:

• Bottom line: Corporate social credit isn’t as complicated—or exotic—as it sounds: It’s a giant corporate registry, with consequences for records of non-compliance. The system is still being rolled out, but large parts of it are already operational, and accounts for a wide array of corporate activities. There is little indication of discriminating against foreign companies, but government officials have indicated global ambitions for this regtech innovation, with implications for financial markets. 

A brief timeline

According to the report:

• 1999: A research team at the Chinese Academy of Social Sciences proposes “The National Credit Management System” as a solution to bad market behaviour.
• 2000: The development of a social credit system is discussed at the annual meeting of China’s legislature. 
• 2002: An updated version of the 1999 paper states that credit—perhaps best understood as trustworthiness—is key to a healthy economy and to socialist society as a whole. The revamped paper also examined US credit regulations and financial risk assessments. 
• 2003: Shanghai launches social credit pilot. 
• 2014: The government officially starts working on the social credit system, and creates a 15-year plan for its development. 
  • The creation of blacklists and their opposite, redlists, is formalized, as well as punishment mechanisms. 
• 2015: The State Council approves the construction of a national unified social credit system for legal persons, including companies. Business registration numbers are replaced by so-called the Unified Social Credit Identifier, a unique number that ties every company to its corporate social credit record.  
  • This sets the legal basis for the rollout of the corporate social credit system. 
• 2016-2018: Most blacklists and redlists are created. 
• 2019: The State Council urges regulators to ramp up implementation of the SCS and ties the system to algorithmic regulation. 

Real problems: The Trivium-USCC report writes that the social credit system began as a response to real problems with compliance: companies frequently ignored court judgments, and even if companies faced consequences the individuals behind them could simply move on and start new companies. The 1999 treatise that first proposed the CSCS complained that a large portion of contract violations are not persecuted and swathes of violators go unpunished. 

• The system was designed to name, shame, and punish companies with a history of bad behavior—and individuals running those companies.
• To this day, the largest blacklist in China is the Supreme Court’s list of court defaulters.

READ MORE: INSIGHTS | Social credit: A roadmap for a sincere and virtuous marketplace

A librarian’s dream

At its heart, the CSCS is a massive record-keeping system that brings together company information from different government agencies, as well as some non-government organizations. 

The data: Every company has a folder, tracked by a unique identifying number, in which an assortment of data is stored. 

• The folder contains basic facts about the company, such as equity information, annual reports, corporate structure etc. 
• Different government departments from all levels of government contribute additional information: records on taxation, personnel (including how many Party members work for the company), judicial, and compliance of all sorts, from markers of anticompetitive behavior to violations of environmental standards.
• Information from government agencies is the foundation of a company’s record. As of 2016, it contains over 400 categories, but this list could be updated in the near future, Trivium said. 
• Authorities also encourage non-government entities, such as private firms, industry associations, and consumers, to contribute data. This part of corporate social credit is “vague and poorly defined,” and its scope is ambiguous, Trivium said. 
• “In most cases, participation is voluntary,” Kinzius said, adding that it’s mostly related to what the government wants to build on top of the CSCS. 

Access: Much data collected by the system is made public through online credit platforms, such as the publicly run Credit China and the private Tianyancha.

• About 75% of data collated from government agencies is meant to be shared publicly, Trivium calculated. The National Development and Reform Commission (NDRC) has created an online platform where the information is public, Credit China. 

Work in progress: But data integration between agencies is incomplete, limiting the reach of the national platform, said Luisa Kinzius, project lead at Sinolytics, a Berlin-based consultancy that helps foreign companies navigate Chinese policies (and which authored a August 2019 CSCS report with the European Chamber of Commerce in China). 

• One reason is that much information trickles from the bottom up, from local governments to the national platform, she said. 
• The CSCS is “a bit like a jigsaw puzzle,” Kendra Schaefer, lead author of the Trivium report and head of tech policy research at the firm, told TechNode: , “The parts that are done are launched as they are completed, and upgraded on an ongoing basis.”
• Trivium found that 89% of blacklist records from the customs authority are on the publicly available Credit China platform, compared to 25% of Ministry of Transport records, and 20% of Ministry of Industry and Information.
• The Trivium report said that Shanghai is leading in system completion. At the end of 2018, the local government had centralized data from 88 government agencies on 11.3 million enterprises.

Carrots and sticks

The CSCS doesn’t just keep records—it also creates incentives for compliance. Among the data on the platform are two systems to reward and punish companies: black- and redlists, and scores.

Lists: Government agencies can place companies on blacklists—or their opposite, positive “redlists”—as punishments for breaking rules, or rewards for good behavior. If a company ends up on one of these lists, it will be noted in its CSCS record.

• Blacklists are more developed than redlists, Kinzius said. The “bigger focus” is detecting violations, she said. 
• But the redlists show “a new way of thinking about compliance” in that overcompliance can have positive consequences, she said. 
• The lists come with cross-agency disciplinary actions. Some authorities have made deals so that a violation of one regulation can lead to punishments from a range of agencies.
• A company that ends up on the Ministry of Agriculture’s naughty list for violating agricultural regulations will face 25 punishments across different sectors, Trivium said: the Ministry of Natural Resources might restrict its use of government land, while the People’s Bank of China and the Securities Regulatory Commission might stop it from issuing stocks and bonds. 
• A logistics firm that is on the Ministry of Transport’s good list will have access to 63 rewards: from fast-tracked licenses for imports and exports from the Ministry of Commerce, to preferential access to financing from the PBOC, the report found. 

Personal liability: The CSCS links the behavior of key personnel to the company’s records; they might be punished if the company is blacklisted, and the company’s record is affected by the personnel it hires. But these linkages only exist in “very specific areas,” in part because the personal social credit system is not as advanced as the CSCS, Kinzius said. 

• To get on the Ministry of Emergency Management’s redlist, the company’s legal representative and top level management must not have any record of violations in the last three years, Trivium said. To get a good customs score, key personnel must not have criminal records, Kinzius said. 
• One US company was barred from participating at a trade expo because senior staff was blacklisted for legal violations unrelated to the company, Trivium told TechNode. 

Grades: The corporate social credit record also includes several kinds of ratings, calculated using government data available on firms’ files by different local and national agencies, as well as some non-governmental entities. These include both letter grades and numerical point scores.

• Compliance grades score the extent to which firms’ abide by regulatory standards. Broadly speaking, the analysis is automated but data collection isn’t, Kinzius said. 
• Getting the lowest or highest grade can lead to the same consequences as being on one of the lists, Kinzius said. Being second worst might also bring on sanctions, and so on, she said. 
• Some are national, such as the score of companies building waterways and roads, compiled by the Ministry of Transport. Others are generated by local authorities, such as systems to grade hospitals, the report by Trivium said. 
• Agencies also grade companies based on the quality of the goods they produce. Many of these are compiled by industry associations based on government data. 
• Financial credit scores are granted by licensed credit rating agencies. 

The GPA: The NDRC has promised a unified “comprehensive credit evaluation” that rates a company’s overall social credit profile from poor to excellent. The evaluation is said to take into account compliance, quality, and financial scores. Officials haven’t clarified exactly how it is calculated. 

• The NDRC said in September 2019 that 33 million companies (in Chinese) have a Master Grade. Most of these scores are not public yet.

How far along?

It’s used for, well, credit: As of 2014, corporate records are used to supplement financial data in lending risk assessments, particularly for small and medium enterprises (SMEs). 

• In 2018, the NDRC and China’s banking regulator launched an initiative to encourage the use of CSCS government data when assessing lending risk for SMEs. 
• The 130 licensed credit rating agencies that rate corporate bonds and debt instruments are encouraged to align their assessment with government data. 
• The PBOC’s “second generation” personal credit reports for individuals include CSCS government information, which could affect entrepreneurs’ ability to take out loans when starting a new business, Schaefer said. 

Localization: Provinces and province-level cities are responsible for legislation on the local level, developing data collection infrastructure, and coming up with rewards and punishments. 

• This trickle-down legislative process has proved problematic in a project that requires a high degree of inter-agency coordination, Trivium said. 
• “All the local authorities tried to make their own blacklists” Kinzius said, “Now the government is quickly trying to get back control at the central level” so that the blacklisting can be standardized and only happens in severe cases. 
• Local governments have tried to leverage the system in ways that the public and the central government thinks lie beyond its intended purpose, the Trivium report said. 
• In April 2019, the government of Zhejiang announced plans to use the social credit system to penalize job-hoppers. There was public outcry in response and the plan was eventually dropped. 
• Beijing is working to rein in (in Chinese) provincial autonomy as it relates to the CSCS. 

A huge legal project: Corporate social credit requires a massive legal undertaking: Hundreds of laws must be updated to link to the CSCS. 

• The legal basis for the CSCS, including data aggregation, blacklists, redlists, and the resulting rewards and punishments has been broadly defined on a national level, but details are still being hammered out.
• Out of China’s 33 provincial-level units, 14 have drafted or finalized regulation for collecting and managing government data for the CSCS, Trivium said. 

Next steps: The CSCS will continue being iterated in the next few years. The plan outlined by the State Council in 2014 aimed to have established the foundation for the corporate credit system by 2020. Progress has been made, although the system is not complete. 

• Premier Li Keqiang recently outlined a vision for a “Differentiated Supervision System” which will process data from the CSCS to create predictive regulatory risk estimates wich will then inform regulators’ behavior, Kinzius said. 
• Kinzius expects an update on this phase of the CSCS development in the next few weeks. 
• The next step to the CSCS will integrate more data coming from non-governmental sources like industry associations, she said. 

Global implications

Discrimination? A January report by the US Congress Research Service identified corporate social credit as a “major concern” to Washington. The system could be used to align US citizens and companies with Beijing’s interests and expand China’s influence overseas, it said. 

• The current policy framework and implementation of the CSCS doesn’t discriminate against foreign companies, Trivium said. Google and FedEx have been blacklisted for tax violations, but so have 1,391 state-owned enterprises, Trivium said.  

Tightened control? While the system is not targeting foreign companies, it does create incentives or foreign companies with Chinese operations to toe the government’s line on political questions, Trivium wrote. 

• In 2018, numerous foreign airlines changed their websites to list Taiwan as the same country as China after the Ministry of Aviation threatened to blacklist them. 

Leading regtech? China is a first mover in this use case of regulation technology, and, some government officials have expressed an ambition to take the CSCS global. 

• As the system is refined, and especially its algorithms, it could be sold or imitated by other countries and eventually “could underpin a shift towards a Chinese-led model of urban regulatory frameworks,” Trivium said. 

Taking on the US: Some members of the government see company credit ratings as an area of strategic competition where the US currently reigns supreme. They have expressed a goal to create a competing credit model, like the CSCS, Trivium said.

• Currently, the big three credit rating agencies are US-based; S&P Global, Moody’s, and Fitch, which gives the US an advantage in international financial markets. This view has been expressed by policymakers such as China’s Finance Minister in 2016, Lou Jiwei.
• “Under the all-round opening up of international competition, [control over] credit standards … is also an important area of competition between countries, and is a manifestation of national soft power,” (Trivium’s translation), Wu Weihai, member of the NDRC’s International Cooperation Center member, said in a 2017 publication. 

At its core, the CSCS is not such an exciting concept: it’s a massive filing cabinet. Companies have already felt its consequences, but the full extent of its scope is yet to be determined. Authorities continue developing it and have not been clear on what the endgame is. 

LISTEN MORE: China Tech Investor podcast: China’s social credit system—everything you know is wrong with Kendra Schaefer

Lucky winners of Suzhou’s digital yuan lottery can spend their digital currency on JD.com, Meituan, Bilibili, and Didi, depending on their bank card, a look at the wallet app reveals. TechNode has seen the app in action through screen recordings sent by a user in Suzhou.

TechNode is the first English language outlet to see the digital yuan wallet in action during the Suzhou trial.

The trials are still limited: The winners received only RMB 200—about $30, enough to buy 10 coffees at Luckin or five at Starbucks. There’s no way to load more money on the digital yuan wallet. Users only have access to a few online shopping platforms, with the exact options depending on which bank card they used to register with the app. They can also spend the currency in some offline stores in the city.

The digital yuan also knows a trick that cash doesn’t: It has to be used by Dec. 27 otherwise, it pulls a disappearing act. Poof. It’s gone.

Why it matters: This is the first time consumers can use the digital currency to pay directly on e-commerce apps in the digital yuan’s public trials.

• The Suzhou lottery is only the second time the digital currency has been made available to the public. Another lottery took place in Shenzhen in October.

Connected to bank cards: Users are asked to link their bank cards to the digital wallet to get the digital currency. Only cards from China’s big five banks are eligible: Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), China Construction Bank (CCB), and Postal Savings Bank.

• The local government said users don’t have to register a bank card to use the digital wallet. If they do register a bank card, it has to be one of the five.

Where to spend it: All bank cards can connect to e-commerce platform JD.com, where users can spend their money. ICBC cards also connect to ride-hailing platform Didi and lifestyle app Meituan. BOC cardholders can connect to streaming platform Bilibili, and users of CCB cards can use the digital yuan on own CCB’s e-commerce platform.

• The city said it will enable nearly 10,000 offline merchants to accept the digital yuan. A list can be queried through the city’s app.
• The app has a button to pay Communist Party dues. But when TechNode tried, the app said that it was not available for the user’s Party branch.

No withdrawals: The digital currency cannot be transferred to other users’ digital wallets. It also cannot be converted to ordinary RMB in the bank account of the owner. If users wind up returning goods they buy with the digital currency, the Suzhou government said, they will be refunded only for regular currency used in the purchase.

Context: In a lottery (in Chinese) announced on Dec. 4, Suzhou distributed RMB 200 million ($30.6 million) of the digital yuan to 100,000 people in digital red envelopes of RMB 200. Only residents of the city who have paid monthly social security at least once in the last three years are eligible to participate in the lottery.

• The results of the lottery were announced today, and winners can spend their winning from 8 p.m. on Dec. 11 to Dec. 27. They money will be taken back from the account if it is not spent within this time window. The Suzhou government said the unspent red envelopes will be “recycled,” but did not clarify how.
• Prior to the Suzhou and Shenzhen lotteries, only a few whitelisted individuals were taking part in the digital currency trials.

READ MORE: INSIGHTS | China’s digital currency has a long way to go

Spillover of technology companies into critical financial sectors such as micropayments require unified oversight of China’s fintech sector, the chairman of China’s Banking and Insurance Regulatory Commission said Tuesday at an event in Singapore.

Why it matters: The CBIRC chairman’s remarks about fintech giants were conciliatory, but he also called for more regulation of the industry on the national level.

• Delivered as the dust settles following Ant Group’s suspended public listing, the speech brings rare insight into Chinese regulator plans.
• Guo Shuqing did not mention Ant Group by name, but he appeared to refer to regulator criticism about the fintech giant.

READ MORE: CHINA VOICES | The unsigned op-eds that foreshadowed Ant Group IPO suspension

The challenges ahead: Echoing criticism of Ant Group from other regulators, Guo spoke about “too big to fail” risks during a speech at the Switch conference on Tuesday. This phrase featured prominently in three anonymous op-eds that appeared in the PBOC’s official journal.

• Some companies are dominant in digital payments, which make them “important financial infrastructure,” Guo said. The PBOC updated its mandate to include such institutions in late October.
• Fintech is a “winner takes all” industry, according to Guo. While traditional antitrust regulation focuses on “monopoly agreements, market abuses, and the concentration of operators,” fintech has created many new monopolistic phenomena which Guo said must be addressed.
• China released new antitrust regulations in early November.
• Fintech regulation should be unified across segments of the industry to preclude regulatory inconsistencies, leading to systemic risk, according to Guo. Some fintech platforms issue credit card overdrafts and loans to induce excessive consumption, often giving loans to people who can’t afford to pay them back. Laws should be unified to prevent such behavior.

The data road ahead: Guo emphasized the role of security and privacy laws, and said that regulators are working to build a framework for the protection of financial data. Three out of the five “problems to be studied and solved” Guo referred to in his speech were about data management.

• Network security is crucial to China’s banking system because 90% of transactions happen online.
• Data rights must be clarified so that the data economy in China can flourish. “The laws of various countries seem to have not accurately defined the ownership of data property rights, and large technology companies actually have control over the data,” Guo said.
• Countries should work together on cross-border data flows. China’s Global Data Security Initiative calls for “all countries to respect the sovereignty, jurisdiction, and security management rights of other countries.”

READ MORE: INSIGHTS | Data localization is going global

Pat on the back: He said the sector has promoted inclusive finance, particularly in the areas of credit and insurance.

• Loans to small and medium enterprises this year as of end-October were up 30% year on year, and loans to farmers rose 14.3% in the same time period, he said.
• Fintech firms have also contributed to poverty alleviation, according to Guo. Microfinance platforms had issued more than RMB 5 billion ($766 million) nationwide to support 12 million households year to date as of end-September.
• The chairman also praised the role of digital payments in epidemic prevention during Covid-19.

Cautionary tales: Guo said that regulators have taken a cautious approach in regulating China’s nascent fintech industry, “crossing the river by feeling the stones” (our translation). He cited two examples where authorities stepped in when companies were behaving as banks without following the relevant regulations.

• He pointed to peer-to-peer lending, an industry that fell as quickly as it rose once Chinese regulators started clamping down. P2P companies were poised to be “financial information intermediaries” but ended up underwriting loans and selling investment products, Guo said.
• As of November, there are no longer any P2P platforms in China.
• Another important lesson was the management of third party payment platforms’ investment functions. When digital payment platforms added investment and financial management functions to online shopping services, they started chipping away at bank deposits and taking over the asset management market without following regulations that banks have to abide by.
• Consumers preferred to keep their money on fintech apps because of higher interest yields, and the apps were able to invest these deposits. In 2018, China’s central bank told fintech apps that they must keep 100% of user deposits with the People’s Bank of China.

Based on ten interviews with industry insiders and regulators, TechNode tells the story of how Huawei established itself in the Greek market—and how the tables have turned for the Chinese telco giant. This is the first part of a three-part series.

In 2011, the Greek government was just embarking on what would turn out to be a years-long journey of bankruptcy avoidance with a cost of harsh austerity. Social welfare cuts, increased taxes and drastic public sector reforms sent unemployment and inflation soaring—and Greeks took to the streets en masse. 

Thousands of people were being laid off. Many businesses didn’t know if they would make it to the end of the year. The Greek government was so cash-strapped that it had to be bailed out by international credit institutions.

During this chaos, a small telco operator decided to upgrade its network (in Greek) to 4G. Wind Hellas wanted to spend three years rebuilding infrastructure that previously took 18 years to complete. 

Wind Hellas had a secret weapon: a relatively unknown Chinese company called Huawei. While the country was in deep trouble, Huawei helped Wind Hellas build a brand-new network. 

By 2014, the pair had built a 4G network that they claimed was the country’s fastest.

Today, Wind Hellas is Greece’s only surviving network operator that isn’t affiliated with a European telco conglomerate, and its relationship with Huawei runs so deep that its experience of other vendors is virtually non-existent. 

“We cannot compare with other suppliers, but from what we know, [Huawei’s] performance is on par with them,” Nikos Panopoulos, chief network and supply chain manager at Wind Hellas told TechNode. 

The telco wars

To China, Huawei is a national champion, proof that the Chinese model can birth global tech leaders. To the US, it is a Trojan horse, Chinese interests and state capitalism masquerading as a run-of-the-mill tech firm. 

But to Greece’s three telco operators, including Wind Hellas, Huawei—or “Hua,” as Greek telecoms professionals call it—has been a reliable partner for 10 years. It is a trusted supplier with a proven track record. 

Huawei equipment is everywhere in Greece. Although it has not been used in Greece’s core network, Huawei equipment makes up more than half of Greece’s 4G radio access network (RAN), the grid of cell towers that speak directly to cellphones. Wind Hellas built its RAN system almost entirely with Huawei equipment. 

RAN is the infrastructure that connects the end-user with the core network. If you’re sending an email, the first thing your phone does is to connect to the network using RAN. The EU considers RAN “highly sensitive” but not “critical” to network security.

It’s not just telecoms. The warehouses of IT providers in the country are full of Huawei products, ready to be integrated into server centers around the country. The Shenzhen-based company is so deeply entrenched in the systems of a US ally that it is all but impossible to imagine the country rejecting it.

With its most important military ally on one side and a vital trading partner on the other, Greece faces a dilemma that’s become common in 2020. 

We’re going to spend the next few weeks exploring what the fight over Huawei looks like when you’re caught in the middle, using Greece as our case study. Greece’s story is unique (as we’ll see next week, it includes the suspicious death of a Vodafone employee possibly involving a US security agency), but it exemplifies the conflicts US allies face as Washington tries to drop a Silicon Curtain.

For the past two years, US diplomats around the world have implored allies not to use Huawei gear in their 5G networks. The company is “an arm of the Chinese Communist Party’s surveillance state,” said US Secretary of State Mike Pompeo in an official press release. He has called on countries to form a coalition and “push back” against China. 

Some of the US’s closest allies have decided to exclude Huawei from 5G buildouts: Australia, New Zealand, Sweden, the UK, and, reportedly, France. The rest of Europe has so far resisted  singling out Huawei for a complete ban. 

Even three countries that signed 5G security agreements early on with the US—Estonia, Poland, and Romania—are trying to find ways to increase security without singling out Huawei.

Many European countries are still undecided: Austria, Finland, Luxembourg, the Netherlands, Norway, Portugal, and Spain. Some, like Switzerland and Hungary, have committed to buy from Huawei.

Huawei’s journey to the west

In the early 2000s, Ericsson and Nokia were the world’s biggest telecoms vendors, and China was still considered a developing country by the World Trade Organization. From 2000-2005, only about one in five people in China had either a mobile phone or a landline, according to data from the International Telecommunication Union. 

Huawei was a budget alternative at best. It started to explore business in Africa in 1998 and set off on its international expansion around 2000, Antonia Petrovits, a spokesperson for Huawei Greece, told TechNode. 

Telecoms equipment manufacturer Cisco was the first US entity to take aim at Huawei in 2003, alleging that the then-upstart had infringed on five Cisco patents. But Washington had yet to come up with an aggressive and comprehensive policy centered around a national security argument, which is what we see today. 

Low key

Huawei’s Athens office doesn’t have a big sign. The company doesn’t even list the address on their website. Unless you are invited, the only way to find out where they are is by accident (as TechNode did).

It’s a far cry from Huawei’s grandiose Shenzhen headquarters. A simple four-floor building houses a women’s health clinic, and the national headquarters of Huawei and Media Markt, a nationwide electronics retailer. 

But its strategic location more than makes up for its modest appearance. It is a stone’s throw away from the headquarters of Greece’s telco providers. 

The Chinese telco giant approached Europe via the Middle East, Paul Scanlan, head of Huawei’s Carrier Group, told TechNode. They wanted to build a good brand and understand the region better before dealing with more “mature customers,” he said. 

When Huawei opened its offices in Athens in 2005, it was a China-focused company with a few branches in developing countries. The same year it inaugurated its offices in Greece, it opened an office in Kenya.

Greece appeals to Chinese companies as a “landing point” for Europe. As a member of the European Union, it follows EU rules and is an entry point into Europe’s southern and eastern blocs, Andreas Polycarpou, who worked in Athens as an executive consultant for strategy and innovation at ZTE for six years, told TechNode. 

Good products, great service

At first, Huawei undercut competition with lower prices and aggressive marketing tactics. One person with direct knowledge of the procurement process said Huawei would directly compare technical specifications and pricing with competitors’ at sales meetings.

The company’s ownership structure allowed it to keep prices low while charging into new markets, like Greece. As a privately owned company, it can afford to be patient about turning profits.

“If their prices are lower, it’s not necessarily because they’re being heavily subsidized by the Chinese government. It’s because they don’t have to answer on their margins for shareholders,” Paul Triolo, practice head of geotechnology at advisory firm Eurasia Group, told TechNode. 

Greek telcos OTE and Wind Hellas first bought Huawei equipment eight years ago, OTE’s Director of Strategic Planning Pavlos Vihos and Wind Hellas’s Head of Communications George Tsaprounis told TechNode in separate interviews. 

Over time, Huawei’s products got better and its prices increased. But their relationships with local telcos had been established, and their equipment earned a reputation as reliable.

Industry insiders in Greece said Huawei’s equipment is excellent. Some even said that it is superior to Nokia and Ericsson equivalents, Huawei’s only real competitors. 

But Huawei’s success in the Greek market goes beyond technicalities. It is largely attributable to a knack for localizing to the market and providing technical support. “Localization has always been our strategy,” Petrovits said, adding that the company “combines the best of the Chinese and international approach.”

At first, “communication was very difficult,” but Huawei developed a very good team of Greek employees and, over time, they managed to make the partnership work, Wind Hellas’s Panopoulos said.

Today, out of Huawei’s 120 employees in Greece, 70% are locals, Kostas Vasiliiou, wireless solution sales manager at Huawei Greece, told TechNode. Half of the 120 are technical staff, he said.

Huawei earned its place in Europe by delivering what was most important to the Greek market: world-class equipment at irresistible prices, and support throughout the products’ life cycle.

The Huawei secret sauce

Huawei’s commitment to localization allowed it to distinguish itself from other low-cost suppliers. As fellow Shenzhen equipment maker ZTE learned the hard way, this was key to winning over new markets like Greece. 

ZTE entered the market in 2002 with a big sale of ADSL equipment—a type of broadband—to network provider OTE, Polycarpou said.  

But ZTE never managed to form relationships with Greek telcos the way Huawei did. Huawei was able to convince Greek telcos that it would provide dedicated support. ZTE wasn’t.

“When you buy telecoms equipment, you don’t buy it for a year. You buy it for decades. You need to convince the buyer that you will be there to support them,” Polycarpou said. 

Huawei had a technical service team tailored to the market from the moment it set foot in Greece. While ZTE improved its localization efforts from 2011 to 2017 and gained some market share, Huawei quickly rolled out new products to counter ZTE’s success. 

ZTE’s technical staff currently numbers two people. They can’t compete with Huawei’s “army” of 60 technical service specialists.

 “When they [Huawei] installed the IMS systems [IP Multimedia Core Network Subsystem], they brought armies of engineers with them,” Andreas Rigas, Senior Manager of strategy and development at OTE, told TechNode. 

ZTE also did not navigate the local business landscape well, sometimes trying to sell products by talking to the wrong people, Polycarpou said. 

“When the manager changes, he doesn’t listen to the locals’ advice. He wants to go meet a minister. But in Greece, the minister has nothing to do with sales of telco equipment,” he said. 

ZTE never gained traction in Greece. Today, Huawei is cozily nestled in the country’s RAN system, while ZTE mainly sells peripheral network products, such as routers. 

Seizing the moment

When the financial crisis spiraled into strict capital controls in 2015, the stars aligned for Huawei. Domestic politics, monetary controls, and other vendors’ finances came together for Huawei to embed itself deeper in Greece’s networks. 

Since 2010, the Greek government had been agreeing to difficult austerity measures in exchange for bailouts from international creditors, chiefly the European Central Bank and International Monetary Fund. Foreign direct investment, including from US companies, dried up. 

Washington itself sat out the Greek crisis, leaving the fate of its close ally to the hands of its creditors—other than the occasional diplomatic assurance.

Frustrated by austerity and “capitulating” governments, in 2015, the Greek people elected a “radical left” government which promised to stand up to its European creditors. 

Shortly after the election, a dramatic sequence of events led to the implementation of  capital controls to avoid a run on the banks and the catastrophic collapse of the financial system. 

Transfers of money overseas were banned, unless with explicit permission from financial authorities. Cash withdrawals were limited to €60 per day. Greeks spent their summer of 2015 waiting in long ATM lines around the country. 

Huawei seized the moment. 

When capital controls were introduced, European and US companies stopped most shipments to Greece. Many would only sell if they were paid in advance. With public and private debt reaching unprecedented levels in Greece, advance payments were basically impossible.

Chinese companies like Huawei and ZTE had more cash on hand, and a willingness to bet on the Greek economy—or the country’s geopolitical position. They turned a blind eye to the capital controls by offering generous terms.

These companies let Greek buyers have equipment on credit, accepting deferred payments of up to 15 months.

Such agreements were commonplace during the crisis across industries, an unspoken secret in Greek business. In the case of telco equipment, they boosted the Chinese vendors’ position in Greece’s systems. 

The Greek government could barely pay its healthcare suppliers. But Huawei and ZTE’s support allowed Greek telcos to continue investing in their networks. 

While Greek telcos were basically unable to buy from Western suppliers, their customers enjoyed substantial improvements in service

Between 2015 and 2018, the last year for which the EU Commission has released relevant data, one-third of Greek households gained access to very high-speed digital subscriber lines (VDSL). In the same time period, coverage of Long Term Network Evolution networks (LTE) increased by 20 percentage points. LTE is the technology that supports 4G connectivity. 

In the context of the crisis, these facts are astounding. As Huawei equipment was being used to build up capacity during the capital controls era, about 22% of people in Greece were unemployed, 35% of the population was at risk of poverty and annual GDP growth averaged a meager 0.7%.

Huawei was pivotal in achieving these gains in connectivity. It is unlikely that telcos would have updated their networks so drastically in the midst of a financial crisis without an equipment vendor that was willing to make concessions in payment schedules—Huawei.

The Greek sector took note: when Western firms fled, the Chinese stayed. They “stood by the market,” an industry insider said. 

As Huawei ties with Greek telcos were growing tighter, Washington damaged its credibility when it was caught red-handed spying on Greek telecoms networks. 

By 2018, when the US began lobbying long-standing allies around the world about the security risks of Huawei products, Huawei equipment was thoroughly embedded in Greek networks. Meanwhile, European leaders in Brussels were finally waking up to the importance of telecoms security. 

But in more than a decade in the market, Huawei had already made good friends in Greece. When the Huawei debate started, Greek decision makers had years of experience—and trust—with the company.

Part II of this series will explore how the US campaign against Huawei—and its own espionage activities—have affected EU policy.

Digital yuan partnerships

• The chief executive of Hong Kong’s Monetary Authority said it is in talks with the People’s Bank of China Digital Currency Research Institute to test the digital yuan for cross-border payments. (Hong Kong Monetary Authority)
• JD.com will be the first online platform to accept digital yuan payments during a trial in Suzhou starting on Dec. 12. (Reuters)

READ MORE: Second digital yuan lottery to launch in Suzhou: report

Crypto crackdown continues

• Authorities in China’s southwestern Yunnan province turned off the electricity supply to several miners in the region on Nov. 30, according to blockchain reporter Colin Wu. Wu added that it is a local government initiative rather than a nationwide crackdown. (Wu Blockchain)
• The founder of Hong Kong-based cryptocurrency exchange CEO Global has been taken away by Chinese authorities who are investigating fraudulent bank cards. The platform said it will indefinitely suspend all over-the-counter trading. (CEO Global, in Chinese)

BSN in Singapore

Singapore is launching a platform to test blockchain-based innovations for international trade. The platform, led by the city’s innovation agency and the Singapore University of Social Sciences, will be integrated with the Blockchain Services Network, a Chinese government-supported blockchain framework. (Singapore University of Social Sciences)

WATCH MORE: VIDEO | Can the BSN succeed in its global expansion?

The $4 billion bust

Authorities in Jiangsu province seized more than $4 billion in cryptocurrency in a crackdown on Plustoken, a Ponzi scheme.

According to a court filing dated Nov. 19 first and reported on Friday, authorities in Jiangsu seized 194,775 bitcoins; 833,083 Ether; 487 million Ripple; 79,581 Bitcoin Cash; 1.4 million Litecoin; 27.6 million EOS; 74,167 Dash; 6 billion Dogecoin; and 213,724 of the stablecoin Tether.

More than 2 million people were swindled out of RMB 50 billion ($7.59 billion) from the Plustoken scheme during its two years of operation.

A total of 15 people have been convicted so far in relation to the scheme, the court filing said, with fines ranging from $100,000 to $1 million and prison sentences from two to 15 years.

One of the members also laundered RMB 145 million, most of which was spent by the Plustoken team and their families on expensive cars, real estate, and insurance packages in Hong Kong, the filing said.

In total, 109 of Plustoken’s core members have been arrested, according to local media reports (in Chinese). Some had initially fled to the Pacific island nation of Vanuatu, where the scheme was allegedly active.

The latest court filing said the Ponzi scheme started in May 2018 by promoting a fake cryptocurrency trading platform. Investigations into its operators began in 2019.

The first ruling on the case came on Sept. 22 by a low-level district court in the city of Yancheng in Jiangsu. The latest ruling rejected appeals and is final. (The Block)

US crypto concerns

The Trump administration’s Director of National Intelligence, John Ratcliffe, sent a letter to the chairman of the US Securities and Exchange Commission, Jay Clayton, earlier this month, warning of China’s influence over digital currency technology, the Washington Examiner reported.

Ratcliffe said that China holds significant power over cryptocurrencies because it has the world’s biggest mining capacity, the computational process by which new cryptocurrencies are minted. He also warned that the US has been left behind in the race to a central bank digital currency as China is already piloting its own.

Ratcliffe proposed to have a team of “senior economic intelligence officials” brief Clayton, the report said.

Okex outflows

Cryptocurrency exchange Okex saw 24,631 Bitcoin ($482 million in Tuesday’s prices) leave its platform when it resumed withdrawals on Nov. 26 after pausing for nearly six weeks, Coindesk reported using data from crypto intelligence site Cryptoquant.

This is the largest outflow the exchange has seen since March, when Bitcoin markets were in free fall.

Okex halted withdrawals suddenly on Oct. 16 when one of the exchange’s key holders became “out of touch” because he were assisting with a government investigation.

The exchange’s founder was released by authorities on Nov. 20 after being held by authorities for weeks while he was cooperating with an investigation. It is unclear whether he was the key holder who was missing.

READ MORE: Okex founder is back, second digital yuan lottery: Blockheads

Canaan reports losses, again

Crypto mining rig maker Canaan’s losses widened by 400% to $12.7 million quarter on quarter in the three months ending September 30, 2020, its earnings report said. The disappointing results are made even more bleak by the fact that Bitcoin prices have risen by 30% in the same time period, and Canaan has reduced its product prices by almost 69%.

READ MORE: Rig maker Canaan misses Bitcoin surge, losses top $12 million

The TV blockchain

China’s National Television and Radio Authority released a white paper in collaboration with privacy-focused blockchain company Arpa to outline the potential applications of blockchain in media.

The white paper aims to”introduce the traceability, authenticity, and security of blockchain in radio, television, and other media,” Arpa said in an announcement. (Arpa on Medium)

The traceability project

Vechain, a Chinese blockchain company that works closely with government officials, released insights on its food traceability program with Walmart. It said that it expects the government to soon release a food traceability system to build trust after the Covid-19 pandemic.

The company rolled out a blockchain-based food traceability platform at Walmart China in June 2019. Consumers can scan QR codes on products to find out information about them. The data are compiled from different parts of the supply chain, and are stored on an enterprise blockchain.

The platform has been updated seven times, Vechain said, to connect with local government bureaus.

Videos to watch

• TechNode hosted an online panel to discuss the global expansion of the BSN with three experts from Shanghai, Singapore, and Hong Kong .
• An “old lady” talks about decentralized finance eloquently while she is promoting an allegedly fraudulent project.

Even as Bitcoin prices rocketed, cryptocurrency mining rig maker Canaan Creative’s losses in the third quarter jumped four fold to RMB 86.4 million, which company management attributed to pandemic and economic headwinds while competition intensified from rivals such as Bitmain and Microbt.

Why it matters: Canaan is one of China’s biggest crypto mining equipment makers, and one of only two listed in the US along with rival Ebang.

• In Q3, Bitcoin’s price more than doubled to exceed $19,000, nearing a historical high. The surge was a missed opportunity for the embattled crypto mining rig maker.
• Canaan’s share price in New York dropped 17.5% on Monday.

Details: Canaan’s third quarter losses widened to RMB 86.4 million ($12.7 million) from RMB 16.7 million in the previous quarter, according to a company filing released on Monday. In the same quarter a year ago, Canaan reported net income of RMB 94.6 million.

• Canaan’s net revenues sank 76% year on year to RMB 163.0 million, a 8% decline from the second quarter.
• Computing power sold dropped to 2.9 million terahash per second, a 20.7% decrease from the same period last year when the figure stood at 3.7 million terhahash/second, and a 13.4% quarter-on-quarter drop.
• Revenue divided by computing power sold indicate that Canaan has significantly reduced its equipment prices to boost sales.
• In the quarter ended Sept. 30, the price was $8.10 per terahash/second, compared with $27.5 per terahash/second in the same quarter a year ago.
• Canaan has been spending more on short-term investments, which has drained its cash and cash equivalents. It spent RMB 204.6 million in the third quarter compared with RMB 11 million in the same period a year ago. Its cash and cash equivalents fell by almost 66% to RMB 177.4 million in the same time period.
• The company’s spending on research and development rose to RMB 32.1 million from RMB 26.1 million in Q2. A short report in February accused Canaan of underspending on R & D and creating inferior products.

Context: The short report by Marcus Aurelius Value said that it found “undisclosed related party transactions, irregularities involving many customers and distributors, as well as a business model that we view as broken.”

• Canaan tried to list three times in Asia before managing to go public on the Nasdaq in 2019.
• The company’s stock lost 65% of its value between Feb. 20, when the short report was released, and the end of October, when Bitcoin’s price started to surge, and Canaan stock started to rebound. It had managed to halve its losses on a sequential basis in the previous quarter.
• Canaan’s latest mining rig, the Avalon A1246 Pro, can mine up to 90 terahash/second with a 38 jule/terahash power efficiency. It is losing out to the latest models by other companies including Bitmain’s Antminer S19 Pro which can mine up to 110 terahash/second consuming 29.5 jule/terahash, and Microbt’s Whatsminer M40 which can mine up to 410 terahash/second with a power efficiency of 25 jules/terahash.

The Blockchain Services Network (BSN) is one of the Chinese government’s most ambitious global blockchain projects. But can it succeed in its goal to become a global “internet of blockchains” in the face of rising tensions between the US and China?

“The BSN has already achieved this critical mass and it will have a snowball effect, as a lot more of worldwide technology infrastructure companies will want to come to it. The challenge is mainly geopolitical. Because of the current climate, this is going to be framed as the China Chain,” said Michael Sung, founding co-director at the Fanhai International School of Finance at Fudan University in Shanghai, at a panel discussion recorded on Nov. 16.

Moderated by TechNode’s blockchain and fintech reporter Eliza Gkritsi, three scholars and entrepreneurs from China, Singapore, and Hong Kong discussed what the future holds for the BSN—and whether its connection to the Chinese government will prove a blessing or a curse.

Making interoperability really work will be a real technical challenge, said Wai-shun Lo, adjunct professor The Chinese University of Hong Kong and partner at a Hong Kong angel investment fund. There is also a business challenge for portal operators around the world “to work in their own communities to really get people on board to develop dapps [decentralized applications],” said Lo.

The technology challenge will be overcome, “given time,” said David Lee, who teaches blockchain and fintech as a professor at the Singapore University of Social Sciences. But convincing “governments and incumbents to see the potential of BSN” might also be difficult in the short term, Lee said.

Blockchain Services Network (BSN)
What: A platform for blockchain development, bringing together cloud services and different chain protocols on city nodes.
Why: To reduce the cost of blockchain application design and deployment while powering communication between chains. It will be made available around the world through local cloud providers, ultimately creating a global internet of blockchains. The BSN is aligned with Beijing’s ambition to position China as a global blockchain leader.
Who: The BSN is led by the China State Information Center, China Mobile, China Union Pay, and Red Date Technology.

Speakers

Michael Sung

Michael Sung is the chairman of Carbonblue Innovations, a tech-transfer and commercialization platform focused on rapidly scaling internationally-sourced high-tech innovation, the founding co-director of the Fintech Research Center at the Fanhai International School of Finance at Fudan University, and a member of the faculty at the Chinese Institute of Economics and Finance, a national-level think tank focused on developing finance innovation policy for the central government in China.

Sung has served in advisory roles over the years for the Hong Kong, Taiwan, and China governments on international tech transfer, innovation ecosystem building, AI, blockchain, and fintech policy.

David Lee

David Lee Kuo Chuen owns Blockasset Ventures, a blockchain- and cryptocurrency-focused investment company. He has founded several companies, including Dlee Capital Management, Left Coast, and Ferrell Financial Group.

Lee is also a professor of fintech and blockchain at Singapore University of Social Sciences. He is an advisor to several blockchain organizations, including the British Blockchain Association, and was the director of the Sim Kee Boon Institute for Financial Economics (SKBI) at Singapore Management University (SMU). His research interests include digital and internet finance, digital banking, Asia, finance, impact investing, blockchain, financial inclusion, and asset allocation. 

Wai-shun Lo

Lo is an adjunct professor at The Chinese University of Hong Kong and a visiting Professor at Peking University’s School of Innovation and Entrepreneurship. Lo is currently a general partner of DL Capitals, an angel investment fund focused on disruptive and exponential technologies and has over 20 years of experience in intellectual property commercialization, business models innovation and technology transfer. Lo has also served as a senior researcher at Harvard Business School’s Asia-Pacific Research Center.

Crypto mogul emerges

The CEO of OK Group and founder of cryptocurrency exchange Okex resurfaced on Thursday after being unreachable for over a month, Bloomberg reported.

Xu Mingxing, also known as Star, posted on his Wechat moments that he had been cooperating with authorities investigating OK Group’s backdoor listing in 2017.

“The authorities have clarified the matter and proved me innocent,” Xu said, according to the report. The exchange said it expects to resume withdrawals by Nov. 27.

Okex paused cryptocurrency withdrawals on Oct. 16 because one of the key holders was unreachable, the exchange said. Rumors then began circulating that it was Xu.

Okex’s token, OKB, has gained about 19% since the news broke last week of Xu’s reappearance.

READ MORE: Major disruption at Okex, Filecoin strike: Blockheads

Xi urges cooperation on digital currencies

Countries need to come together to build standards for digital currencies “with an open and accommodating attitude,” Chinese President Xi Jinping said during the virtual G20 summit on Nov. 21.

The Chinese president said that digitalization is key to handling the global Covid-19 pandemic, but that a “digital divide” is emerging between countries that are pushing ahead with innovation and those that are being left behind.

1 billion users in 10 years

The digital yuan will reach 1 billion users in the next 10 years and account for 15% of China’s consumption, or RMB 19 trillion, in annual total payment value, Goldman Sachs said in a report.

The investment bank expects heated competition between banks and fintech companies for consumption transactions as the digital yuan is rolled out. (Coindesk)

Second digital yuan lottery

The city of Suzhou in eastern Jiangsu province on Dec. 12 will hold China’s second lottery to disperse and test the digital yuan, local media reported, part of ongoing trials.

Suzhou is one of four cities where China’s central bank digital currency is being tested, in addition to Xiong’an, Shenzhen, and Chengdu.

The testing in these cities had been limited to select individuals only until last month when Shenzhen held a public lottery and distributed RMB 100 million (about $1.5 million) worth of the digital currency to citizens in RMB 200 red envelopes.

The Dec. 12 giveaway will test new features, such as the digital yuan’s offline functionality, the report said. (TechNode)

READ MORE: Digital yuan rush and OTC crackdown: Blockheads

Chinese investors MIA

Bitcoin, the world’s biggest cryptocurrency by market cap, has been on a bull run. It is currently trading at an excess of $18,000—a historical high.

But Chinese investors are reportedly sitting out the bull run, potentially the result of a number of reasons including the ongoing cryptocurrency crackdown and the 2018 crash. (Decrypt)

The city of Suzhou will launch the second lottery to distribute the digital yuan on Dec. 12 and trial previously untested features, Chinese media reported.

Why it matters: China is racing to be the first major country to issue a central bank digital currency. If successful, it could spearhead a new era of government oversight of the monetary system.

• Details about the digital currency have been scarce, and testing has mostly been limited to select individuals.

READ MORE: INSIGHTS | China’s digital currency has a long way to go

Details: The city of Suzhou in eastern Jiangsu province will distribute 100,000 red envelopes. Still undetermined are key details such as the amount of digital currency each will contain, where users can spend the currency, as well as the method of distribution, the report said.

• The Suzhou pilot will test the digital currency’s offline capabilities, which use Near Field Communication (NFC), a set of protocols for mobile devices to communicate in close proximity.
• NFC allows users to send and receive money even when they are not connected to the internet, authorities have said.
• Merchants in Suzhou’s Xiangcheng district, where the pilot will be conducted, have already installed NFC QR codes, the report said.

Context: In October, a district of Shenzhen distributed through a lottery RMB 10 million ($1.48 million) in 50,000 red envelopes of RMB 200 each. It was the first digital yuan test that was open to the public.

• The lottery opened on Oct. 9, and the envelopes were usable between Oct. 12 and 18.
• Shenzhen users were reportedly unimpressed by the digital yuan, saying it was very similar to digital payment platforms Wechat Pay and Alipay.
• On Oct. 25, China’s central bank issued a draft regulation to legalize the digital yuan.
• The new law has “opened up further space for pilot cities to test and build the digital yuan payment infrastructure,” Flex Yang, CEO of digital asset lender Babel Finance, told TechNode.
• The digital yuan is being tested in the southern city of Shenzhen and Suzhou as well as Chengdu in southwestern Sichuan province and Xiong’an in northern China.
• Until Shenzhen’s lottery, only individuals whitelisted by authorities had been able to participate.
• More than RMB 2 billion worth of the digital yuan have been processed in more than 4 million transactions, Yi Gang, the deputy governor of the People’s Bank of China said on Nov. 1.

READ MORE: Digital yuan law, rig maker Ebang pushes abroad: Blockheads

Chinese public blockchain Nervos has launched a new token standard for use in a branch of blockchain-based finance to compete with Ethereum’s popular ERC-20 standard used in developing smart contracts.

Why it matters: With the launch of the new token standard, Hangzhou-based Nervos continues its decentralized finance (Defi) push, enabling many assets to be traded on its network.

• Defi is a blockchain-based experimental form of finance which aims to give users full control of their assets.
• Nervos’s Simple User-Defined Token (SUDT) will give “full ownership and control” of the token to the user, the company said. Creators cannot modify or seize tokens without user consent.

“The launch of the SUDT standard is a significant milestone in the progression of DeFi on Nervos.”

—Kevin Wang, Nervos co-founder

Details: Developers can use SUDT to issue their own tokens on Nervos’s network. SUDT defines the implementation of tokens in smart contracts, guides their distribution on the network, and secures them on Nervos’s Layer 1 blockchain, Nervos said in a statement.

• Before the new standard, only Nervos Network tokens, traded as CKB, could be used in decentralized applications built on Nervos’s network.
• One team of developers, Portal Wallet, launched a coffee token using SUDT. Each one of the coffee tokens can be converted to one cup of coffee at Starbucks.

Context: There are many token standards in blockchain. The most popular is ERC-20, an Ethereum-based standard that is widely used for smart contract development.

• Nervos has been all-in on Defi before the Defi craze took over China’s blockchain ecosystem. In a blog post in its official Medium account in a year ago, it identified Defi as a major use case for the Nervos Network.
• Nervos is one of the few public blockchains available on the Blockchain Services Network, a global “internet of blockchains” supported by the Chinese government.
• Founded in 2018, Nervos is a proof of work public blockchain. It has received $100 million in funding from some of China’s best-known blockchain funds like Wanxiang Blockchain and Hashkey Capital, according to startup data platform Crunchbase.

READ MORE: EXCLUSIVE: China’s BSN to integrate public blockchain Nervos

Crackdown continues

On Wednesday, $300 million worth of bitcoins moved from crypto exchange Huobi to Binance, following rumors that Huobi’s COO is missing while being investigated by the Chinese government. (Coindesk)

Rumors that Huobi COO, Zhu Jiawei, had been arrested began circulating on Chinese social media on Nov. 2.

READ MORE: Reports of Huobi COO arrest spurs whale transactions as token sinks

Huobi denied the allegations, but Zhu’s whereabouts are still unclear.

The fact that Xu Mingxing, one of the co-founders of crypto exchange Okex, had been arrested has only intensified speculation that Zhu is also under arrest.

On Nov. 3, another $400 million moved from Huobi to Binance, this time in the form of stablecoin Tether.

Another crypto exchange, Token Better, said in a Weibo post on Nov. 9 that it was under investigation by Sichuan authorities.

Miners out of power

Crypto miners are having trouble paying electricity bills, as the crackdown on crypto expands to the mining industry. Many have had their bank cards frozen by authorities and are unable to pay for electricity, without which they cannot operate their mining rigs.

About 74% of miners have been affected by the “frozen card tide,” an informal survey by crypto blogger Colin Wu found. (WuBlockchain, in Chinese)

M.I.A. blockchain bonds

On Wednesday, Malaysian digital asset exchange Fusang announced it would be issuing $3 billion worth of blockchain-based bonds in collaboration with China Construction Bank. The bonds could be purchased using bitcoins, among other forms of currency, and would mature in February 2021.

It would be the first time that a Chinese bank issued blockchain-based bonds, and the crypto world was alight with excitement.

On Friday, CCB clarified that it was not issuing the bonds, but was merely a sponsor, and that it would not be accepting bitcoins in exchange for the debt.

On the same day, Fusang said it would postpone the bond issuance without specifying why or when the bonds would eventually become available. (The Block)

Digital yuan updates

The digital yuan is in use in more than 6,700 locations around China, including transportation, government services, restaurants, and shops.

Transactions worth RMB 8.76 million ($1.33 million) using digital yuan were processed during a red envelope pilot program in Shenzhen. The digital currency has been used for RMB 1.1 billion in transactions in total across pilots nationwide.

The People’s Bank of China Digital Currency Institute has reached strategic agreements with Didi and JD.com, the article said, but there were no further details. (People’s Daily Finance, in Chinese)

China’s Huawei is falling behind in the race to supply telecommunications equipment for 5G networks in Europe, its largest market outside of its home turf.

As Sweden decided in October to exclude Huawei from its next-generation mobile networks, seven out of 27 European Union member states have made moves to heavily restrict the Shenzhen company’s participation in the buildout of 5G. The list includes heavyweights like France and the UK. 

Among countries that have not made decisions on Huawei, six have signed a declaration of intent to keep their networks “clean” of Chinese technology under the US “Clean Network” initiative. Signing the Clean Network initiative does not appear to bind countries to bar Huawei gear. 

While regulators are driving the shift against Huawei, telcos are jumping the gun. In another five countries, telco operators have signed contracts to procure 5G equipment from Huawei’s competitors, Nokia and Ericsson, likely anticipating regulation.

Experts say that the Shenzhen-based company may eventually face de facto expulsion from Europe’s 5G networks as countries move to make their final decisions.

Huawei supplied around 50% of the equipment for Europe’s 4G networks, according to a 2017 report by the European Trade Union Institute, an EU-backed research center. However, the company now faces a much less welcoming environment for 5G—at least two countries have banned its gear outright, and a dozen others are considering heavy restrictions.

“Chinese vendors will play a minuscule role in parts of Europe’s mobile networks that are considered sensitive or critical,” Jan-Peter Kleinhans, director of the project Geopolitics & Technology at German think tank Stiftung Neue Verantwortung told TechNode. 

Kleinhans said that he could imagine a full exclusion of Huawei equipment from Europe’s 5G core networks “in the long run.” 

“Since the European Union put the onus on member states to objectively assess risks and adopt mitigating measures to ensure the security of 5G rollouts, most countries have increased their scrutiny of Huawei,” Jan Stryjak, associate director at market research firm Counterpoint, told TechNode. “Since no country would want to be alone in bucking the trend, solidarity seems to be the name of the game.”

European countries so far haven’t banned Huawei from all of their 5G core networks, a Huawei spokesperson told TechNode on Friday. “Huawei calls and pushes for the establishment of network security standards, and hopes all vendors to be subject to the same scrutiny.”

The company said its commitment towards the European market is “unchanged.”

The EU toolbox

The first step towards an EU-wide policy on 5G security came in January, when the EU Commission released the so-called EU 5G toolbox: A blueprint for how the 27 member states should evaluate 5G gear provider risks and trustworthiness. 

The toolbox requires member states to assess supplier risk profiles on a national or EU level and apply restrictions on those deemed high-risk. 

“The EU toolbox recommends a set of key measures that should be taken by all member states and by the Commission. These measures will apply to everybody, without targeting any actor or country in particular,” Marietta Grammenou, a European Commission spokesperson, told TechNode in an email. 

The toolbox does not mention Huawei or China by name, but instructs national regulators to consider the “risk of interference by non-EU state or state-backed actors,” echoing US rhetoric. 

Some countries have taken a middle-of-the-road approach: They have chosen to raise security requirements for all vendors in a way that amounts to a ban on Huawei without naming it.

The EU toolbox was rolled out after the US government embarked on a campaign to pressure allies into excluding Huawei equipment from their 5G networks, and marked a sharp shift from earlier guidance in EU security directives, where country of origin did not feature prominently as a concern. 

Scholars have said that Huawei is owned and controlled by the Chinese state but the company maintains that it is a private company 100% owned by its employees.

The toolbox leaves the decision to ban Huawei up to member states: “While everyone who complies with our rules can access the European market, member states have the right to decide whether to exclude companies from their markets for national security reasons,” Grammenou said.

“Since mobile networks are considered a critical infrastructure with a direct impact on national security, member states are free to develop their own strategy and thus balance between costs and security,” Kleinhans said.

As countries set their own paths, a likely result is “a highly fragmented regulatory landscape,” Kleinhans said.

Security concerns

As more regulators and telecommunication operators put limits on Huawei, it’s getting more tempting to jump on the bandwagon. Europe’s military and intelligence community, meanwhile, has been voicing objections to Huawei gear, citing national security concerns.

“With no country wanting to be the odd one out, it wouldn’t be surprising if all member states follow the same trend,” Stryjak said.

While only two countries have specifically banned Huawei from future network buildouts, lawmakers and politicians are signaling that other European countries will likely follow their example or heavily restrict the company’s involvement. 

In July, the UK banned Huawei from its 5G networks and ordered its telecommunication operators to remove existing Huawei gear from their networks by 2027, citing a US ban on the company in May that could cut the company off from the global semiconductor supply chain. 

In a similar move, a Swedish telecom regulator said in October that potential grantees of the country’s 5G spectrum must not use products from Huawei in new core networks and existing Huawei gear must be phased out before 2025.

Sweden’s Huawei decision was made based on assessments by the country’s Armed Forces and the Security Service, the Swedish Post and Telecom Authority (PTS) said. On the announcement of the Huawei ban, Klas Friberg, head of the Swedish Security Service, said “China is one of the biggest threats to Sweden.” The country, Friberg added, must not forget when constructing its 5G network that China “is conducting cyber espionage to promote its own economic development and develop its military capabilities.”

Europe’s biggest economies and political epicenters, including Germany and France, have also indicated that they are turning against Huawei.

In October 2019, Germany’s spy chief Bruno Kahl said Huawei “can’t fully be trusted” to participate in the country’s 5G network rollout. While German Chancellor Angela Merkel was in September reportedly vehemently opposed to any restrictions that would single out Huawei, she faced a contingent of politicians who sought to effectively ban Huawei from German 5G networks. Later in the month, they appeared to have won.

In July, Reuters reported that the French National Cybersecurity Authority (ANSSI) had granted licenses to some operators that use Huawei gear. But the bulk of the authorizations were for three or five years, whereas most applications for 5G kit from European rivals Ericsson or Nokia received eight-year licenses.

Notably, the ANSSI informed operators during informal conversations, not stated formally in documents, that licenses granted for Huawei equipment would not be renewed once expired, according to the report.

The Huawei issue has been a flash point in escalating tensions between China and the US. For more than a year, the US government has continued to pressure its allies to exclude Huawei equipment. Not doing so, it said, poses the potential risk of Beijing using vulnerabilities in the company’s gear to spy on foreign 5G networks, an allegation Huawei has repeatedly denied. 

A full ban on Huawei equipment would almost certainly be seen by Beijing as choosing sides, and fodder for retaliation. 

Most recently, a UK oversight body said in October that Huawei had failed to adequately solve security flaws including a “vulnerability of national significance” in gear used in the country’s telecom networks despite previous warnings. 

In April 2019, Vodafone told Bloomberg that it found “hidden backdoors” in the software that could have given Huawei unauthorized access to the carrier’s system providing internet service in Italy. The carrier said at the time that the issues had been resolved after it asked Huawei to remove them.

‘A matter of time’

Huawei has not disclosed how much revenue it earns from Europe. According to the company’s annual results, it generated RMB 206 billion (around $31.1 billion) from Europe, the Middle East, and Africa in 2019, or around 24% of its total revenue for the year.

Stryjak of Counterpoint said that there could still be a play for Huawei in the radio access network (RAN) market, the less sensitive area of 5G networks that connect end devices to core networks. However, he said, Huawei’s RAN business in the continent is still subject to the “suspicion that governments and operators now hold.”

“It seems only a matter of time before all of Europe’s core 5G networks are Huawei-free,” Stryjak said.

Going to the toilet can be very difficult for employees in China’s big tech firms, claims an article that went viral on Chinese social media yesterday. Big tech offices don’t provide enough toilets for their staff, writes magazine Renwu.

Why it matters: It’s not the first time that big tech firms in China have been under fire for workplace practices, but it is the first time that toilets have been the issue.

• China takes toilets very seriously. In 2015, the Chinese government launched a “Toilet Revolution,” to build public toilets across the country, pursuant of higher sanitary goals.

In the eyes of managers, toilets are the enemy of efficiency. The toilet is the last part of the management system of a large factory. What this system has to do is to occupy the body of the employee as long as possible, so that the employee can create more productivity per unit of time.

Chinese magazine Renwu

Details: The viral article is based on reports from employees in China’s big tech firms who report long toilet queues due to insufficient facilities. It alleges that some companies limit toilet facilities in a deliberate attempt to control employees’ bodies.

• The problem is worst at Pinduoduo and Kuaishou, the article said:
• “I try to drink as little water as possible every day. If I urinate, I go to the mall while eating lunch downstairs,” Liu Xiaoran, a Pinduoduo employee, was quoted in the article (our translation). The e-commerce app has increased staff in a Shanghai office sixfold in the last year, but toilets have not been added to match the influx of workers.
• Similarly, short video app Kuaishou has expanded its staff from 1,000 employees in 2017, to 8,000 in 2018. In 2020, it has opened more than 10,000 new positions, but it has not added enough new toilets to keep up.
• Kuaishou has reportedly even installed timers on top of the toilets.
• Alibaba’s Ali Park in Hangzhou is not lacking in sanitary facilities, but employees told Renwu that during China’s biggest shopping festival, so many Alibaba employees work overtime that the toilets fill up.
• As of writing, the hashtag “big tech’s toilet problem” has reached almost 42 million views on Weibo.

The worst experience is when you wait for a long time to enter, and find that the last colleague who rushed back to work forgot to flush.

Chinese publication Renwu

Context: Big tech firms first faced criticism over working conditions in March 2019 after employees took to Github to protest its “996” working culture; working from 9 a.m. to 9 p.m., six days a week.

• Renwu magazine last blasted tech for working conditions in September, when an article accusing delivery companies of forcing drivers to take risks to meet tight schedules provoked outrage.

As fintech titan Ant Group prepared for a long-anticipated IPO, a struggle over the reach of regulation between founder and controlling stakeholder Jack Ma and financial regulators spilled into public view. 

In the days leading up to Nov. 5, when the fintech giant was set to go public and raise an estimated $34.5 billion, a series of pointed attacks on Ant Group were published in financial media including the central bank’s official newspaper. 

These articles called Ant Group “too big to fail” and a “systemic risk,” likening Ant Group to the sprawling financial institutions that brought about the 2008 crisis. One accuses it of tricking its customers in taking on extra debt. All argue that Ant Group should be required to follow the Basel Accords, the bank rules created in the wake of the 2008 crisis.

Some were rumored to be written by China’s top echelon of financial regulators. The people rumored to be behind the articles include Zhou Xiaochuan, the longest-serving governor of the People’s Bank of China—a figure who presided over China’s rise to a financial powerhouse and led the development of its modern financial system. 

These articles likely provide insight into regulators’ intentions for fintech. Ant Group’s lending practices have emerged as a key issue for regulators: On Nov. 2, the China Insurance and Banking Committee released a draft regulation that would limit the amount companies like Ant can lend out to micro-borrowers.

READ MORE:  UPDATED: Ant Group IPO delay and Jack Ma’s ill-timed speech

Ant Group: no need to regulate

In the last year, authorities have been making moves to raise the regulatory bar for Ant Group, among other fintech giants, and bring it closer to what banks have to comply with. 

In September, the State Council released new measures to introduce licensing requirements for  non-financial holding companies that are involved in financial services, and could potentially raise capital requirements for companies like Ant Group. 

“If you were previously unregulated, it feels like a clampdown,” Andrew Polk, co-founder of research firm Trivium, told TechNode. 

The People’s Bank of China (PBOC), which is chiefly responsible for “macro-prudential” policy to manage overall risk in the financial system, appeared particularly worried about Ant Group. In July, the PBOC asked banks to report lending data for H2 2018, the whole of 2019, and H1 of 2020. The central bank asked for separate reports on loans going through Ant Group’s platforms. 

As Ant prepared for a history-making IPO, regulators were asking the company to accept being regulated more like a bank. This posed a threat to the sky-high valuation that would justify raising more than any company had ever asked from the markets. 

But Ma believed that regulators misunderstood his business. Ant is more than a bank—as one of China’s two major online payments providers, it knows nearly everything about its customers—from rent payments to 3 a.m. e-commerce impulse purchases. Armed with this information, Ma believed, the company could assess risks with an accuracy banks could only dream of—making it safe for the company to operate at high leverage.

Ma thought the regulators were living in the analog past—and with weeks to go before the IPO, he decided to tell them in a very public setting.

On Oct. 24, Ma spoke at the Bund Summit, a Shanghai conference where some of the world’s top financiers discuss the state and future of the world economy, and China’s role in it. Speakers at this year’s conference included: China’s vice president Wang Qishan; the current and former governors of the PBOC, Yi Gang and Zhou Xiaochuan; the vice chairman of the China Securities Regulatory Commission, Fang Xinghai; high-level executives of China’s big four banks; former governor of the European Central Bank Jean-Claude Trichet; former UK Prime Minister Tony Blair; former US Treasury Secretary Robert Rubin; founder of US hedge fund Bridgewater Associates Ray Dalio; and former governor of the Bank of Japan Masaaki Shirakawa. 

In this setting, Ma said: “The Basel Accords are more like a club for the elderly”—irrelevant to the “young” field of online finance. The accords are a set of international standards created in the wake of the 2008 financial crisis to reign in the banks and improve the stability of the world’s financial sectors. 

The Basel Accords are about treating the diseases of the elderly with antiquated and overly complex systems. What we have to think about is: “What we should learn from the elderly?” The elderly and young people are not the same. The elderly care about whether there is a hospital, and the young people care about whether there is a school district.

The Alibaba founder said that tech companies are not afraid of regulation, but regulation using antiquated thinking: 

We are not afraid of supervision, we are afraid of monitoring using the way of yesterday. We cannot manage the airport the same way as the railway station, and we cannot manage the future with yesterday’s methods.

China’s financial sector suffers from a “pawnshop” mentality, Ma says, that must be replaced with big data.

The pawnshop idea of ​​mortgage cannot support the financial needs of world development in the next 30 years. We must use today’s technological capabilities to replace pawnshop thinking with a credit system based on big data.

The day after Ma’s speech, at the same event, Shang Fulin, director of the Economic Committee at the Chinese People’s Political Consultative Conference and the former governor of the China Banking Regulatory Commission, said that regulation must catch up with financial technology in order to reign in its excesses, making special notes of risks to the economy and privacy that big tech brings to the finance sector.   

As modern information technology is more deeply involved in financial transactions, risk decision-making, internal control compliance, intelligent analysis, and other activities, information technology risks are more likely to lead to chain reactions such as operational risk, credit risk, liquidity risk, and so on. It is necessary to guard against the risks that may be brought about by the digitization of traditional business, as well as the risk of using technology to innovate in finance.

The ‘old men’ reply 

A week after Ma’s now-infamous speech, he got a response: three prominent articles in state media laying out a case for stricter financial regulation on Big Tech, widely taken to represent the views of regulators. 

The first shot was a forum comment highlighted by the online edition of Guangming Daily, an influential state newspaper on Oct. 26. Ma was “arrogant,” and “the speech was not an idle talk over tea, but a targeted one in the context of Ant Group’s IPO.” “Without this kind of regulation [the Basel Accords], the size of the IPO will definitely be proportional to the sound of explosive thunder,” the commenter wrote, drawing on an image frequently used to describe industries as out of control.

A week after Ma’s speech, three strongly-worded editorials criticizing internet companies’ involvement in finance, all attributed to pseudonymous “senior scholars,” were widely reprinted on Chinese media. The latter two were printed in the official newspaper of the People’s Bank of China, Jinrong Shibao (literally, “the Financial Times”—no relation to the salmon-colored London paper).

On Oct. 31, a pseudonymous op-ed called for strict financial regulation on big tech. Market insiders believe that the author, credited as “senior scholar” Zhang Feiyu, was an insider from the regulatory authority, Reuters China reported. We are a little confused about the place of publication—we’ve found reprints citing both independent financial media Caixin and the PBOC-linked Jinrong Shibao as the original.

“There was no supervision of the development of fintech in its early stages,” Zhang wrote, reminding readers of the scams and losses associated with peer-to-peer lending platforms, which rose and fell 2007-2018.

Financial regulatory authorities must dare to say “no” when supervising big tech companies—otherwise they will be easily misled by their technology, held hostage by public opinion, and fail to conduct effective supervision, which will eventually distort the market and generate financial risks.

On Nov. 1, a second warning about unregulated fintech appeared in Jinrong Shibao under the name Zhou Jueshuo, emphasizing the systemic risks associated with fintech.

Rumours on social media identify the author as Zhou Xiaochuan, who served as the governor of the PBOC for 16 years. Using pseudonyms when writing publicly is common practice among government-affiliated public intellectuals, especially household names like Zhou Xiaochuan. 

The article did not single out a target, but attacked internet companies that participate in the financial sector. In the first two paragraphs of the main body, the author makes note of the benefits of internet companies’ involvement in finance, mentioning “Alibaba, Baidu, Tencent, and JD.com.” It credits Ant with bringing hundreds of millions of people into the financial system.

Other than these name drops at the top, the text only brings up Ant Group as an example of a big tech company that has become too big.

The article argues that big tech firms in the finance sector must be reigned in, and outlines a strategy for regulators. The article blames big tech for:

• Using data to gain unfair advantages, effectively creating monopolies that cannot be easily managed by traditional tools against unfair competition.
• Evading financial regulation by obfuscating the true nature of businesses and products, and pushing the limits of business licenses to provide financial services.
  • “If a large Internet company provides a large number of financial services but claims to be a technology company, it is evading regulatory oversight, will be more prone to disorderly expansion, which causes hidden risks, and is not conducive to fair competition or consumer protection.”
• Complexity of technology makes it harder to identify risks and determine responsible parties if something goes wrong. 
  • “It is difficult for regulators to understand high-tech ‘black boxes’ and their hidden risks.”
• Data collection practices that pose risks to consumers through data leaks and algorithmic discrimination.
• Posing serious systemic risks to the financial system—with the possibility of a domino effect if they fail. 

Large Internet companies are [said to be] “too big to fail.” Ant Group counts over 1 billion individual users, over 80 million institutional users, and 118 trillion digital payment transactions. Its listed market value may set a historical record. If it [Ant Group] faces financial difficulties, it will cause serious contagion risk.

The section concludes:

Due to the wide network coverage of large internet companies, the convergence of business models and algorithms, the contagion of financial risk will speed up and may evolve into systemic risk in a very short time.

To solve these problems, the author argues fintech giants must be regulated in the same class as banks, but grants that authorities must update their systems for a tech-driven era. He calls for rules to protect consumer rights and prevent systemic risk, requiring fintech companies to seek licenses and accept oversight like traditional financial firms. 

Finally, on Nov. 2, a third essay appeared in the PBOC newspaper, this time credited to “senior scholar” Shi Yu. The Nov. 2 essay singles out Ant, accusing it of exploiting retail borrowers.

The author starts by saying that the “‘so-called’ innovative Ant Group” is “the institution with the highest degree of cross-industry sprawl in the world.” Rebutting Ma, it continues to argue that “‘Yesterday’s regulation’ is not useless, and the Basel Accords are not outdated.”

The essay attacks the lending models of Ant Groups’ virtual credit card Huabei and its money market fund Yu’ebao, saying that what it calls “inclusive finance” is actually very costly to consumers: 

The annualized interest rate when borrowing from [Ant Group virtual credit card] Huabei was once close to 24%, and has dropped recently, but is now about 15%. At the same time, the Huabei borrowing mode on Alipay’s Yu’ebao feature… raises the interest that borrowers need to pay from the 5%-6% of a bank loan to 15%.

It also accuses Huabei of manipulating users’ consent and tricking them into taking on debt: 

At present, Huabei’s lending interest rates are disclosed in the form of daily interest rates, and are not converted into annualized rates, as required by regulations. Borrowing is often set as the default choice during periods such as Singles Day, and customers are easily deprived of other payment options.

Finally, the article urged regulators to examine Ant Group’s structure to require it to place financial services like Yu’ebao and Huabei under properly licensed online banks.

The moral

Probably the strangest state media response to Ma’s speech was the victory lap from official news agency Xinhua.

On Nov. 2, Ma and two other top Ant Group executives were called in for a talk with regulators, while regulators issued new rules about microlending.

That evening, Xinhua rendered a verdict on the Ma affair via the medium of roundabout bedtime podcast. Xinhua’s “Evening read”—a podcast offering “beautiful writing, every evening around 10 p.m.”—selected an essay titled “You can’t just say anything, you can’t just do anything; people can’t just do as they please.” 

Ma is not mentioned by name, but he appears by rebus in a painting accompanying the article, which shows a horse-shaped cloud floating over a leafless, dark forest. The billionaire’s name can be translated as “horse cloud.”

In a gentle voice accompanied by light piano and strumming guitar, host Wu Weiling tells listeners: “You can have different opinions, but you don’t have the right to throw stones.”

“Everything comes at a price,” Wu said in words highlighted in red in the accompanying transcript. “If you don’t have the capital, don’t do as you please.”

Ant Group will begin this week refunding Shanghai investors who had placed orders for what was expected to be a record-breaking public listing on the city’s technology board, but instead became a record-breaking suspension.

Why it matters: The suspension on Tuesday of Ant Group’s widely anticipated public offering has brought uncertainty among markets and investors. Retail investors had bid a total of $2.8 trillion for shares of the company traded in Shanghai.

• The Shanghai Stock Exchange said that the company may no longer meet disclosure requirements after changes in regulations. Ant Group then cancelled its listing in Hong Kong.

Details: The fintech giant will issue refunds to Shanghai investors beginning Friday until Monday, according (in Chinese) to a Shanghai Stock Exchange statement on Thursday, but didn’t specify the method.

• Ant Group and the principal underwriters will refund the application monies and brokerage fees, as well as interest at the bank deposit rate for the time period that the funds were on hold.
• The company began returning $167.7 billion to Hong Kong investors on Wednesday, and said it expected to complete all refunds by Friday.
• Refunds to Hong Kong investors were set to take place in two batches, starting with those whose applications were unsuccessful before moving onto successful bids. No such details for the Shanghai refunds were released.
• The Shanghai Stock Exchange’s refund announcement said that Ant Group and the lead underwriters had decided to suspend the Shanghai public offering, while the initial announcement said it had been the bourse’s decision.

Context: Ant Group had been facing increased regulatory scrutiny, particularly over its microlending platforms and position in the digital payments market, when the group’s controlling shareholder Jack Ma told a crowd of Chinese regulators and financiers that China suffers from overbearing regulation.

• After the billionaire’s speech, authorities called him and two other top Ant Group executives for a “regulatory talk” on Monday.
• New measures on microlending were announced on the same day, and Ant Group’s IPO was abruptly halted on Tuesday evening.
• Chinese media reported that it will be at least six months before the company is able to relist.

READ MORE: UPDATED: Ant Group IPO delay and Jack Ma’s ill-timed speech

The US president has decided to put off blacklisting Ant Group after a phone call between a senior US official and an Ant executive, Reuters reported.

Why it matters: The US State Department had reportedly submitted a proposal to the White House to blacklist the fintech giant last month, citing security issues. The move would have cut it off from US capital ahead of what was expected to be a blockbuster stock market debut.

• Three sources said that US President Donald Trump decided against the move on concerns that it was too precarious ahead of the election.

Details: In a phone call, Alibaba President Michael Evans convinced US Commerce Secretary Wilbur Ross to reject the State Department’s proposal, the Reuters sources said.

• The Commerce Secretary feared that blacklisting Ant would antagonize Wall Street close to the election, potentially bringing a lawsuit or sending markets on a downward spiral, the report said
• Another source said that Wilbur Ross decided that Alibaba is already scrutinized because its e-commerce app, Taobao, is on the notorious markets list for selling counterfeit goods. Ross’s decision was not affected by the phone call or worries over Wall Street, the source said.

Context: On Tuesday evening, Chinese regulators suspended Ant Group’s Shanghai listing. The company consequently halted its Hong Kong listing.

• Experts TechNode spoke with agreed that a recent speech in Shanghai tipped Chinese authorities over the edge.
• China’s financial regulators have been working to de-risk the sector and increase oversight of fintech firms since 2017.
• Ma’s speech stepped on the wrong toes, and he was summoned to Beijing for a “regulatory talk” with regulators on Monday. The contents of that meeting are unknown, but the Shanghai Stock Exchange suspended the Ant Group listing the next day.
• The Ant Group IPO was set to be the biggest of all time at $35 billion.

READ MORE: Ant Group IPO delay and Jack Ma’s ill-timed speech

Ant Group’s suspended $34 billion dual listings in Shanghai and Hong Kong may have resulted from a combination of regulators’ increased intolerance for risk alongside recent bold statements from Jack Ma, the founder of parent company Alibaba Group.

Here’s what sources told TechNode.

The sequence of events

• On Oct. 25, fewer than two weeks before Ant Group was set to go public in a blockbuster dual listing, Jack Ma told a crowd of China’s top financiers and regulators in Shanghai that the financial sector was overly regulated.
• The country has “no systemic risk” because “there is no system,” China’s most recognizable tech billionaire told the crowd which included regulators who have have been working to minimize risk in the financial sector.
• China has “inertia” in its thinking, “innovators must make mistakes,” and there are too many “documents” that regulate what people can and cannot do, Ma said.
• With only three days to go for Ant Group’s Hong Kong debut, the company’s chairman and CEO, Eric Jing, was summoned on Monday to a meeting in Beijing with the People’s Bank of China, China Securities Regulatory Commission, and the foreign exchange regulator.
• The company said the meeting was a “regulatory talk” but gave no further details. “Ant Group is committed to implementing the meeting opinions in depth,” it said.
• On the same day, China’s insurance regulator issued new rules on microfinancing—a large swathe of Ant Group’s business—which tightened collateralization requirements. A Bloomberg report suggested that capital requirements for Ant’s lending business are the focus of the regulatory clampdown.
• The new rules will require Ant to fund at least 30% of the loans it gives out from its own balance sheet. This would render many of its loans noncompliant as Ant currently funds only 2% of its loans.
• Late Tuesday, just a day after the closed-doors meeting, the Shanghai Stock Exchange abruptly suspended Ant Group’s debut on the Shanghai bourse, saying there had been “significant changes” in the regulatory environment the company operates in.
• The company issued a statement just hours after the Shanghai bourse’s announcement seeking to assuage regulators.
• It will “overcome the challenges” and “live up to” principles of “stable innovation, embracing regulation,” it said, and is waiting on regulators to make further decisions on its listings.
• Ant Group also clarified that the pausing of its Hong Kong listing was a direct result of its Shanghai suspension.

Ignoring the signs

• Ma’s speech in Shanghai was just the tipping point in a long struggle between Ant Group and China’s top financial watchdogs, according to experts TechNode spoke with.
• Chinese regulators have been working to de-risk the financial sector since 2017, and Ant Group has been a key target of this campaign. “It’s really the culmination of something that’s been brewing for a while,” said Andrew Polk, co-founder of research firm Trivium.
• De-risking the financial system is one of Xi Jinping’s top policy priorities, along with poverty alleviation, and a reduction of pollution, Polk said.
• In the past year, dozens of new regulations have been enacted aimed at increasing oversight of fintech companies, including lending, payments, and liquidity requirements.
• The central bank is reportedly looking to launch an antitrust investigation into Alipay and Wechat Pay’s dominance over the digital payments sector.
• The People’s Bank of China updated its mandate just days before Ma’s speech to make special reference to digital payment providers and “important financial companies”—language that was absent in its previous iteration.
• “It’s straight out of a regulator’s playbook, but an industry that hasn’t been regulated in the past doesn’t like this,” Polk said.
• Traditional banks have not been fans of the fact that Ant Group and Webank have been allowed to grow into de facto banks in a relatively relaxed regulatory environment. They have been pushing regulators to increase their oversight of fintech companies, a source told TechNode.
• The China Banking and Insurance Commission is discouraging lenders from working with Ant Group to provide loans, which don’t fulfill capital requirements set out in the draft regulation announced on Monday.
• Ant’s credittech business brings in almost 40% of its revenue, according to its IPO prospectus.
• At the same time, China’s central bank has been working on the digital yuan, aiming to level the playing field for traditional banks in the digital payments sector, sources told TechNode.

The error of flamboyance

• In this environment, Ma’s boldness in rejecting regulators’ efforts to tighten controls stepped on the wrong toes. The Alibaba chairman’s cult of personality doesn’t sit well with conventional Chinese leadership, which leans on Confucian values.
• When pressured, Chinese tech entrepreneurs are expected to defer to leaders, who will usually let them off if they show respect, as indicated by past events.
• In 2018, Bytedance CEO Zhang Yiming issued an apology for going against “core socialist values” after regulators clamped down on its popular news-gathering app Neihan Duanzi.
• But the Monday meeting apparently did not appease regulators, who moved to shut down the Ant Group listing. “Ant came out with its tail behind its legs,” Polk said.
• Experts said it is unlikely that the suspension will be permanent, but it is unclear how long it will take for the company to come to an agreement with Chinese authorities.
• Ant Group’s valuation is also a key consideration for regulators. On Friday, Ant said that investors had placed orders worth $2.8 trillion in its Shanghai listing, a phenomenon likely to trouble authorities intent on reducing market speculation.
• A concurrent clampdown on cryptocurrency executives has been evolving in the last few weeks, with reports of top brass for Chinese crypto exchanges being arrested. “It all fits together in the policy of de-risking,” Polk said.

Updated: added regulator’s capital requirements for Ant Group’s loans to the first section, and that regulators are discouraging lenders to work with the company in the second.

The Binance papers

An allegedly internal Binance document obtained by Forbes said that the cryptocurrency exchange banned from China in 2018 was trying to set up a complicated corporate structure to deceive US regulators and aid customers in evading US laws, the site said.

Binance denied the accusation. The founder and CEO of the company took to Twitter to question the document’s authenticity.

The document in question dates back to late 2018, when Binance was setting up a US subsidiary, according to Forbes. It speaks of a plan to set up a company, dubbed “Tai Chi Company” in the document, to distract US regulators while Binance was working on regulation workarounds.

Binance US, the exchange’s on-the-books subsidiary, would go along with US compliance requirements and would not allow highly leveraged derivatives trading, the document said. Trading crypto derivatives is highly regulated in the US.

Meanwhile, the “Tai Chi Company” would feign interest in compliance, while it was teaching investors on its platform how to evade geographical restrictions and trying to find technological workarounds. The company would return revenues to Binance as licensing fees.

Binance is the world’s largest cryptocurrency exchange, trading on average $10 billion per day. (Forbes)

Government blockchain moves

• Chinese regulators released the first industry standard for security in blockchain technology. The standard was implemented on Oct. 1 and includes 62 provisions and has been approved by the Ministry of Information Technology. (National Internet Emergency Response Center, in Chinese)
• The government of Chengdu in the southwestern province of Sichuan released a plan to integrate blockchain in government and become a blockchain development hub by 2022. The city plans to use blockchain for traffic control, hazardous waste management, supply chain traceability, cross-border trade, intelligent manufacturing, and agriculture, as well as develop a testing ground for the digital yuan. (Red Star News, in Chinese)
• China should be proactively participating in the setting of global digital currency and digital tax standards, President Xi Jinping said in a statement on Saturday. (Coindesk)

The digital yuan

• The governor of the People’s Bank of China, Yi Gang, said digital yuan pilots have processed RMB 2 billion ($299 million) in 4 million transactions so far. On Oct. 6, the central bank’s deputy governor said RMB 1.1 billion had been processed in 3 million transactions. (BNN Bloomberg)
• Huawei’s newest smartphone, the Mate 40, will come with a built-in digital yuan wallet, the company said in a Weibo post. The wallet will feature “hardware-level security, controllable anonymity protection, dual offline transactions,” Huawei said. (Huawei’s official Weibo)

New blockchain partnerships

• Bitmain closed a deal to sell 10,000 of its newest cryptocurrency mining rigs to Marathon Group, a US-based crypto investing company. Bitmain signed a contract for 10,500 Antminer S19s with Marathon Group in August, and another for 17,595 with Core Scientific in June. (Globe Newswire)
• Poly Enterprise, a permissioned cross-chain protocol, became available to developers on the Blockchain Services Network today. (Poly Network official Twitter)

READ MORE: EXCLUSIVE: China’s BSN to test cross-chain interoperability in October

Hundreds of millions of dollars worth of cryptocurrencies were moved through Huobi in a few transactions and the exchange’s token plummeted Monday following reports that its COO had been arrested.

Why it matters: Huobi may the latest target for Chinese authorities cracking down on crypto exchanges, and it is feeling crypto investor jitters.

• There has been no evidence proving that the COO had been arrested, and the company has denied the allegations. But markets reacted nonetheless.

Rumors: Huobi COO Zhu Jiawei was reportedly unreachable on Monday evening, and rumors of the his arrest began swirling around Chinese social media. Local media reported on the rumors a few hours later.

• The exchange said that Zhu was on a flight returning from a conference in Guizhou and that he would be attending a meeting in Beijing on Tuesday morning.

Markets: At around midnight, Twitter accounts that monitor whale activity, or large cryptocurrency transactions, reported that about $400 million worth of the stablecoin Tether had moved to Huobi.

• Whale transactions of Bitcoin meanwhile have moved the world’s most valuable cryptocurrency out of Huobi, some reports claimed.
• The movement of large sums of money spurred speculation that insiders, privy to the exchange’s inner workings, are rearranging their funds.
• Around the same time that the Tether whale transactions were reported, Huobi issued an official statement saying that it was operating normally.
• Huobi’s token plummeted to $3.60 on Monday night, then regained about $0.20 during a short interval. It has been falling since. In the last 24 hours it had lost 13% of its value.
• It is unclear whether the Huobi token’s activity is related to the rumors of the arrest or are a result of market volatility. Crypto markets have been falling in the last 24 hours; Bitcoin is down nearly 2% and Ethereum has fallen by 5.8%.

Context: On Oct. 16, Okex paused cryptocurrency withdrawals because one of its founders had been arrested.

READ MORE: Major disruption at Okex, Filecoin strike: Blockheads

The Covid-19 pandemic has brought users and funding opportunities to healthtech startu­ps, but the industry is shifting away from B2C models due to high user acquisition costs, according to an early-stage investor speaking at TechNode’s Emerge 2020 conference on Thursday.

Many B2C healthtech startups, like Ping An Good Doctor, have followed a model popularized by China’s e-commerce platforms: They don’t care how much capital they spend on user acquisition, thinking that eventually it will pay off, said Linda Li, managing director and co-founding partner of investment firm Vickers Venture Partners.

Some startups have chosen B2B models, which Li said will win out for three reasons: Firstly, “They are more capital efficient.” Secondly, once you convince doctors to use your platforms, patients will follow doctors’ orders, she said.

Li also thinks that the B2B model will help democratize healthcare. The success of B2B models will lead to the development of infrastructure, especially that which creates information transparency. This infrastructure will serve as the base for democratized, patient-centric healthcare.

Mark Zhang, partner at law firm King & Wood Mallesons, said during the discussion that a major inflection point for China’s healthtech boom came two years ago in the form of comprehensive regulation.

“Before 2018, there was no nationwide framework to regulate online healthcare,” even though the industry had been growing for 10 years, he said. Platforms couldn’t really go into healthcare so the industry was focused on tasks like making appointments with hospitals. “The law was against anyone providing healthcare solutions online,” even though “everybody knew that the major platforms were playing around in that area,” he said.

Starting in 2018, three pieces of regulation cleared the way for healthtech innovation, Zhang said. The first allowed hospitals to use online platforms to collaborate; one hospital can assist another hospital’s activities. This could “solve the imbalances of resources across regions,” he explained. A second regulation allowed offline hospitals to provide online solutions, using their own physicians and nurses.

The most exciting piece of regulation opened the door to companies to enter the healthtech space, Zhang said. Under this law, any company can set up an “internet hospital” so long as it works with an offline hospital. “This internet hospital can draw doctors and nurses from various hospitals to practice on this platform,” he said.

In 2020, Covid-19 drew a lot of patients to online consultation services. In February, many patients didn’t feel that hospitals were safe. Even in late March to early April, when the Covid-19 outbreak was under control in China, “it was still very troublesome to go to the hospitals as they had to face more complicated procedures” because of the pandemic, Li said.

Some hospitals saw their business drop by 70%, then losses were gradually reduced to 50%, she said. But some hospitals say their business is still down about 30%, Li said.

“If people are not going to hospitals, they must go somewhere. This somewhere is online,” she said. With the support of China’s advanced delivery and logistics infrastructure, online prescription services have boomed along with online consultations, she said.

Following this surge in user growth was a jump in revenue, and funding for startups is now triple the average size compared to three to four years ago, Li said.

Better funding has helped startups make their case to hospitals, she said. Credibility and trust are very important to Chinese hospitals, who “don’t want to talk to small startups. If capital is really pushing some companies to be leaders, that solves some of these problems,” Li said.

At the same time, regulators are cautious: They “want to make sure the door is opened slowly and gradually,” and different cities are experimenting with different regulations, according to Zhang. Regulators are trying to find the right balance between growing the sector and protecting consumers.

Cybersecurity and privacy have emerged as key areas of compliance risk for healthtech companies. Many companies in healthcare, especially pharmaceutical, are attracted to China because of its immense data resources, Zhang said.

But multiple layers of new laws regulate data security and privacy, from data collection to storage and handling. Patient records, population data, personal information, and genetic data come with different compliance requirements, making data processing a tricky business, Zhang said. These days, “Data as a resource is very attractive but you have to be careful.”

Li agreed:“The data actually belongs to the hospital,” so a startup that wants to provide services must set up a server in the hospital instead of using servers or external servers.

READ MORE: INSIGHTS | High tide for healthcare apps?

So high is demand for shares in Alibaba’s fintech unit Ant Group that the company has decided to finish its institutional book-building process in Hong Kong a day earlier than planned.

Why it matters: Through dual listings in Shanghai and Hong Kong, announced in July, Ant Group is looking to raise $34.4 billion. This would make it the biggest public offering in history, bigger than parent company Alibaba’s listing in 2014 and Aramco’s in 2019.

Details: The company will close its Hong Kong books at 5 p.m. on Tuesday, a day earlier than planned.

• During the book-building process, underwriters invite institutional investors to bid for the number and price of shares they are willing to purchase. After collecting this information, underwriters set the cutoff price for the listing.
• Ant announced the pricing and date of its initial public offering (IPO) in regulatory filings made public yesterday.
• The Alibaba affiliate will sell 1.67 billion shares in each of the two bourses, roughly priced at $10 apiece. Shares sold in Shanghai will start at RMB 68.8, and at HKD 80 in Hong Kong.
• Ant Group declined to comment on this story.

Context: Soon after announcing its IPO plans, Ant revealed robust financial performance in 2020.

• In first half of 2020, revenues rose 38% year on year and profits rose almost 20% in the same time period.

READ MORE: Ant Group IPO filings: five key takeaways

Laying down the law

• On Sunday, the PBOC released a draft regulatory framework that updates the central bank’s mandate for the digital age. The regulation (in Chinese) is open for public comment until Nov. 23.
• The draft legalizes the digital yuan with a simple provision: China’s official currency, the renmimbi, comes in both physical and digital form, the law says.
• According to an article released by state-owned newspaper Global Times commenting on the new regulation, the digital yuan will not be rolled out nationally for another two to three years.
• The regulation states that the central bank’s jurisdiction include “important” financial “infrastructure” and “companies,” spelling out its authority over China’s sprawling digital sector. This language was absent in the previous iteration of the PBOC law, passed in 2003.
• The law makes special reference to “non-bank” digital payment providers, which include Alipay and Wechat Pay.

READ MORE: INSIGHTS | China’s digital currency has a long way to go

Global ambitions for Ebang

• Crypto mining rig manufacturer Ebang is looking to establish a digital asset management platform in Australia. The firm established a subsidiary in the country and has applied for licenses with the local regulator, according to a company statement.
• Ebang has been spreading its wings around the world. It set up a subsidiary in Singapore in August, looking to set up a cryptocurrency exchange.
• In pursuit of a global digital asset platform, it set up another subsidiary in Canada in September, and acquired a licensed New Zealand broker and wealth management firm in October.

Tether crackdown

• Last week, the Chinese central bank announced it cracked down on illegal activity tied to the cryptocurrency Tether. According to a statement posted on the PBOC’s Wechat account, 77 people were arrested and three sites were shut down, with the help of local authorities.
• The suspects laundered RMB 120 million ($17.95 million) of illicit gambling profits, using the stablecoin for some of the illegal activity. Tether is pegged to the US dollar at a one-to-one ratio.

Okex almost back to normal

• Crypto exchange Okex resumed some of its operations following a shutdown on Oct. 16 when one of its founders became involved in a police investigation.
• Fiat-to-cryptocurrency as well as peer-to-peer transactions were working again, the exchange said on Oct. 21. Withdrawals remain on pause.

READ MORE: Major disruptions at Okex, Filecoin strike: Blockheads

Government-backed blockchain

• A spokesperson for the China Securities and Exchange Commission said that blockchain technology will be used in the future for debt and equity registration. (Sina Finance, in Chinese)
• A blockchain-based health code registration system developed by FISCO BCOS allowed 17 million tourists to travel between Macau and Guangdong since May, it said on Oct. 21. (Cointelegraph)

Filecoin update

• Digital file storage token Filecoin got off to a bumpy start after its Oct. 15 launch. Chinese miners found that the late reward system made mining too capital-intensive, and unplugged their mining machines. Filecoin decided to allow for mining rewards to be released faster than the original six-month payoff window.
• The coin’s price started rising over the weekend and it hit a high of $40 on Monday. It is now trading at $35.

China’s biggest shopping festival has already begun. Like Christmas, Singles Day has sprawled from a day into a shopping season. There’s a whole culture of discount shopping on Taobao and its peers—and this year, our intrepid reporters are going to take you to the front lines of the e-commerce wars as they hunt for bargains.  

You need to be prepared, focused, and quick. If your internet connection is bad, you won’t get anything, Jiayi warned me. When you are competing with millions of people over limited stock, every millisecond counts. 

For the past year, my colleague and Taobao coach Jiayi Shi has been training me in the art of the shopping festival deal. In June, we spent the weeks before midsummer shopping festival 6.18 building trains in an in-app game, cashing out a cool RMB 9 and RMB 11 ($1.35 and $1.55).

READ MORE: I spent weeks playing games on Taobao and won $1.55

Disappointed and frustrated, I continued with my Taobao addiction as normal over the next few months, doom-scrolling without buying anything during idle moments. 

But when Singles Day season came around, I was ready for more. Singles Day is Christmas to 6.18’s Labor Day, in American terms. Like Christmas, it’s sprawling the calendar with sales that start as early as three weeks before the Nov. 11 main event.

By mid-October, my monkey brain had forgotten all about the time I wasted in June, and I clicked on the new game mentally salivating at the thought of the tiny drops of dopamine that would come over the next few weeks. 

The new game turned out to be a cat. Literally, just a cat. You pet it, and get rewards. That’s it. Taobao knows how to get my brain to stoop pretty low searching for those hits of dopamine, but I won’t go that low. 

I asked Jiayi what to do, and she told me I was ready. It was time for the epitome of online shopping: The Lipstick King’s pre-sale livestream. 

Training day

Livestreaming is a whole other level of Taobao shopping. It’s the big leagues: Tens of millions of people join in events like Li Jiaqi’s Singles Day pre-sale, hoping to get big discounts. 

The first step is planning: The King posted all the products he would be selling on his Weibo, outlining the price and overall discount. Most of them were cosmetics, the product he is best-known for, but the list included some oddities: A smart lock, a massage chair, a mattress. 

The goods are sold in bundles: you buy one or two full size items and get a lot of free samples or travel-size versions, so you get more bang for your buck. 

A lot of these deals aren’t exactly discounts—more like free gifts. You buy one 100ml bottle of perfume, and they throw in 10 sample-size bottles for free. You’re actually paying full price for the first bottle, but it’s billed as a 60% discount on a per-ml basis. Jiayi told me that there’s a hot debate on Chinese social media about whether these are really discounts. 

The biggest offers would be on the King’s livestreams on Oct. 20 and 21, three weeks before Singles Day on Nov. 11. During, Singles Day season, the King’s livestream runs at least five hours a day. 

The biggest sell

On Tuesday, Oct. 20, after a full day’s work, Jiayi arrived at my house at 7 p.m. “Are you ready?” she asked me. “I’m ready!” I replied, excited. 

My target was a bundle of L’Occitane’s four best-selling luxury hand creams, Jiayi wanted to get L’Oreal Revita lifting face masks. Both were about 60% off in total based on the free extras.

We sat down and turned on the livestream on Taobao. While Li Jiaqi was listing all the products he would be selling over the next five to six hours, Jiayi walked me through the basics. He’s going advertise the product for a few minutes, and then count down: “three, two, one.” Once he yells “one,” you have to click the little basket on the bottom left of the screen which takes you to the product page, where you can buy. 

Actually, because it’s a pre-sale, you don’t buy anything on the spot. You are just putting down deposits, and you will pay the rest of the money on Nov. 1. Because of this, it’s very important to tick a box saying you agree not to get back your deposit before you click “Buy.” 

If you don’t tick this box, a pop-up will appear telling you must do it. You will lose at least one second going back and ticking it. This second will probably mean you lose the product. 

We quickly learned that the products we wanted would be going on sale after midnight. We kept watching nonetheless, as thousands of eye creams, moisturizers, and hair conditioners were sold in minutes. 

The Lipstick King was not what I expected. TV shopping hosts in the West are usually quite chirpy. Li is a whole other kind of host. He is authoritative, almost abrasive. He doesn’t waste time. He wrangles the arms of his assistants in front of the camera, painted with different shades of lipstick or eyeshadow. He is mesmerizing, but it doesn’t feel like he is making a sales pitch. It feels like you’re joining a movement.

‘Lipstick king’ Li Jiaqi (at rear) is less chirpy QVC host, more charismatic cult leader than TechNode reporter expected before her first experience mainlining e-commerce. In a two-day livestreaming sales event kicking off the Singles Day shopping festival, he uses an assistant’s arm as a lipstick palette. (Gif captured by Jiayi Shi)

At some point I realized that 31 million people were watching. “I’ve never competed on this scale in my life,” I told Jiayi, “I need to get a drink.” I didn’t, fearing that alcohol would impair my ability to compete. 

I was stressed. Could I tap my phone faster than the millions of other people watching? Would I get my luxurious hand cream at a fraction of the sticker price? There was only one way to find out. 

I grew up watching the consumerist culture of the US from afar: People getting trampled on Black Friday would make the news in Greece. But I never participated in something of the sort. The Singles Day livestream is the online version of Black Friday. I felt millions of people watching simultaneously, poised to go through the same motions I would. I couldn’t wrap my head around the scale of what I was a part of. 

Show time

By midnight, 100 million people had joined. Jiayi had gone home and was supporting me through texts and voice notes; a last minute cram session before the big moment.

At 12.20 a.m., my hand cream went on sale. I screamed. I clicked all the buttons. In my delirious haste, I forgot the agreement box. The error box popped up. In the milliseconds it took me to go back and tick “yes, keep my money forever,” I felt a mix of hope and disappointment. Maybe, if I just clicked fast enough… Maybe…

It had been less than 20 seconds since the cream went on sale when I finally clicked “buy.” It was already sold out. 

I was devastated. I think I would have cried if I wasn’t supposed to shoot a selfie video for TechNode. 

“Don’t worry about it. It’s hard. It was your first time,” Jiayi texted me. “I guess this is the closest thing a foreigner gets to feeling the competition of the gaokao,” I texted back, referring to China’s two-day pressure-cooker college entrance examination. 

I went to sleep still checking the livestream. The next day, I watched Li Jiaqi’s livestream again. I didn’t plan on buying anything, but I couldn’t help myself. 

Calmer and more confident, I was ready to tap. I barely understood what the Lipstick King was saying, but he was somehow convincing me to purchase cosmetics. 

“Maybe I’ll buy this eyeshadow palette, what do you think?” I texted Jiayi, who was also watching. “BUY BUY BUY” she texted back. 

There were 150 million people watching now, but the competition was less intense. Perhaps the products were less desirable. Perhaps people were just tired, all 150 million of us. There was one face mask that me and Jiayi managed to buy that was competitive, it sold out in a couple of minutes. But I was ready. I ticked the box. I bought it. 

Before signing off at 11.00 p.m. that second night. I also bought a pair of Dr. Martens (at 25% off) that I didn’t intend to. I would feel bad for spending money on shoes I don’t need, but now I’ve felt the magic of the Lipstick King. You can’t blame yourself for falling for David Copperfield’s tricks.

The Lipstick King is still doing livestreams every day. Millions of people join him. Me? I’m just waiting for Nov. 1, to pay the rest of the money and see my products dispatched. 

For now, I’m done with livestreams. I have to prepare my shopping cart for the Singles Day showdown when the clock hits midnight on Nov. 10. But somewhere deep down I know, it’s just a matter of time before I fall back under the king’s spell. 

Bilibili wants companies in China to use its livestreaming feature to recruit university students and fresh graduates, as the Covid-19 pandemic has complicated campus recruitment.

Why it matters: The streaming platform has been looking for ways to expand beyond its core business in anime, comics, and gaming (ACG) streaming.

• Through ACG, Bilibili has amassed a base of young Chinese users, which employers could potentially tap as a big pool of fresh candidates.

Details: Campus Recruitment Express is a form of content collaboration with employers, a Bilibili spokesperson told TechNode.

• The platform also guides employers through the livestreaming format and provides other free resources, such as banner display ads and live-steaming channel homepage recommendations, the spokesperson said. The livestreams are saved on a dedicated page.
• During the livestreams, employers try to recruit students by giving information about their company and position, and answering questions from the audience.
• “Starting from the end of August, we noticed that due to Covid-19, many companies were independently using livestreaming as part of their recruitment efforts,” the spokesperson said.
• Tencent, Huawei, Meituan, Didi, Geely, L’Oreal, and New Oriental have experimented with livestreamed recruitment on the platform, the company said.
• Users have also started uploading video resumes on Bilibili, the spokesperson said.

Context: In the second quarter of 2020, Bilibili had over 171.6 million monthly active users, 12.9 million of which are paying users.

• The company is backed by both Alibaba and Tencent, and received a $400 million investment from Sony in April.
• Bilibili is also expanding into online education. More than 86 million people used Bilibili to study using its large collection of educational videos in 2019, the company said. This is more than eight times the number of people who sat China’s university entrance exam, known as the gaokao.

READ MORE: CHINA VOICES | ‘Bilibili is becoming Chinese Youtube’

Shanghai-based lending and wealth management unicorn Lufax is looking to raise $2.36 billion in its debut on the New York Stock Exchange, according to the market’s website.

Why it matters: Lufax is one of two Chinese fintech firms looking to raise multi-billion dollar amounts on US exchanges this autumn. Chinese tech companies meanwhile face increasing scrutiny from US regulators and China vies to keep homegrown tech companies from listing abroad.

• Ant Group has filed a draft prospectus to list on Nasdaq, for what could be one of the biggest IPOs in history.
• The Shanghai STAR market, with relaxed IPO rules, is aimed at keeping Chinese tech firms from overseas listings.

READ MORE: Ant Group IPO filings: five key takeaways

Details: Lufax filed in early October to go public but details have not been released.

• The Ping An-backed giant is selling 175,000 American Depositary Shares priced between $11.50 and $13.50, bringing the higher end of the range to $2.36 billion.
• Lead underwriters are Goldman Sachs, Bank of America Securities, UBS Investment Bank, HSBC, and China PA Securities.
• Lufax’s net profit dipped 2.8% year-on-year in the first half of 2020 to RMB 7.272 billion in H1 2020, according to a filing to the US Securities and Exchange Commission (SEC). In the same time period, its total revenues increased by 9.45%, the company said.

Context: Lufax was founded in 2011 by Ping An Insurance as a peer-to-peer lending company, but has gradually expanded its business into wealth management.

• In the six months ended June 30, 2020, less than 3.5% of the revenue of its tech platform came from wealth management services.
• Ping An reportedly now owns 43% of the unicorn after several rounds of investment.
• Lufax has raised $3 billion to date, according to startup information site Crunchbase. It was valued at $38 billion after its latest funding round in 2018, Reuters reported.
• In April, US-listed Chinese coffee startup Luckin Coffee admitted to fabricating RMB 2.2 billion in sales. Since, streaming platform Iqiyi and edtech company GSX Techedu have both admitted that they are under investigation for fraud by the SEC.
• Congress has proposed a bill to enhance regulatory oversight of US-listed Chinese companies, and a working group convened by the US president has made similar recommendations to the SEC.

READ MORE: INSIGHTS | What’s at stake in fight over delisting Chinese firms

• The prospects of increased regulatory oversight haven’t stopped Chinese tech firms from tapping into US capital markets. Electric vehicle companies Xpeng and Li Auto both went public in the US in the third quarter.
• JD.com’s fintech unit is one of the Chinese tech companies planning to float shares on the Shanghai STAR market.

Cyberx, a Hong Kong-based crypto prime brokerage, launched on Wednesday the world’s first cross-exchange portfolio margin service for spots and derivatives trading.

Why it matters: Prime brokerage for cryptocurrencies is still a nascent industry, with only a handful companies around the world offering such services. Most crypto-focused prime brokerages are headquartered in and focused on the US, away from the crypto liquidity of Chinese miners.

• The new offering promises to significantly ease much of the headache around trading crypto across hundreds of platforms.

Details: Cyberx’s new product, “Prime,” will unify portfolio margins across exchanges for derivatives, according to its press release.

• “We are targeting mining pools, wallets, and quant hedge funds,” the company’s CEO and founder Wang Hao told TechNode.
• The focus on quantitative strategies and derivatives is better suited to the Asian and Chinese market, the CEO said.
• Crypto investors in “the rest of the world, especially in the US, want to do buy and hold” strategies, “they are not really doing quant strategies and turnover is not that high,” Hao said.
• On the other hand, crypto investors in China, and Asia more generally, are “doing more on quant trading and market neutral trading,” for spots and derivatives. One reason why Chinese investors are more focused on derivatives trading is that they are less regulated in China, Hao said.
• China has a lot of crypto investors with a lot of liquidity and “most of the institutions are managing their own capital to trade,” mainly from miners and early crypto adopters, Hao said.
• “We are not only targeting China, but we know Chinese institutions well,” he said, adding that their expertise in traditional finance helps them gain clients’ trust.
• Hao also wants to attract hedge funds from traditional finance into crypto investing, so Cyberx is trying to make trading easier for non-crypto investors by unifying API gateways with their new product. “We have a lot of friends from the traditional finance world. They don’t really know how to gain their first bitcoin and they don’t have their own historical market data,” Hao said.
• “There are a lot of [traditional] hedge funds in Asia, in Hong Kong and Singapore, that are really interested in crypto markets,” the Cyberx CEO said.

READ MORE: Is crypto mining really moving to North America?

Context: Founded in 2016 by former Goldman Sachs executive Wang Hao, Cyberx offered trading services in traditional finance until 2018, when it switched to crypto.

• It is headquartered in Hong Kong and has offices in Beijing and San Francisco.
• Cyberx has been working with 50 institutional investors globally, its press release said. These include mining pools with a big presence in China such as F2Pool and Poolin, Chinese crypto wallets Bixin and Cobo, crypto lender Babel Finance, quantitative hedge funds with investments in traditional finance like Kronos Research, and exchanges, the CEO said.
• The crypto prime brokerage industry has been heating up in the last year, with heavyweights like Digital Currency Group and Coinbase acquiring prime brokerage startups.

The Okex drama

• Operations for Okex, one of the world’s largest cryptocurrency spot and derivatives exchanges, is facing major disruptions as Chinese authorities investigate its senior-level management.
• On Friday, Okex said that the exchange’s private key holders were unreachable because they were cooperating with a police investigation. Unable to authorize transactions, the exchange paused cryptocurrency withdrawals, but assured users that their funds were “safe and not affected.” (Okex press release)
• The exchange refused to give details on the investigation. Jay Hao, Okex CEO and co-founder, said on Weibo it was due to a “personal issue,” unrelated to the exchange.
• Right before the announcement, accounts affiliated with Okex withdrew large amounts of Bitcoin, Ethereum, and Tron coins. (Coindesk)
• Later on Friday, Caixin reported that founder Xu Mingxing, known as “Star,” had been arrested a week earlier and had not been seen in the company, citing two sources close to the exchange. (Caixin, in Chinese)
• Another report from a Chinese media outlet claimed that the investigation has to do with Ok Group’s backdoor Hong Kong listing in 2019. The report also said that authorities had released on bail another two executives who were arrested along with Xu. (Mars Finance)
• Xu was part of a fraud investigation by Shanghai authorities in 2018. (Sina Finance)

The Filecoin launch

• The much-anticipated mainnet of decentralized data storage network Filecoin launched on Thursday. Within a day, the price of Filecoin soared past $110, making it the third-largest cryptocurrency in the world by market capitalization.
• Chinese investors have been all-in on Filecoin since 2018. Chinese miners accounted for 80% of the mining power on the coin’s testnet.
• But on Saturday, five of Filecoin’s largest miners went on strike to protest the network’s economic model. Mining company Zhihu Cloud was operating only 276 out of its 8,000 mining machines on Saturday. (8btc, in Chinese)
• Under the Filecoin model, miners are required to stake coins as collateral before being allowed to mine. Rewards were released over a period of six months once a block is mined.
• In response to the protest, Filecoin changed its model to release 25% of the reward once a block had been mined. (Coindesk)

READ MORE: Filecoin fork, US and UK outspend China: Blockheads

The collaborations

• Ticket platform Demai, an Alibaba subsidiary, will issue and sell tickets for the 2022 Asia Games in Hangzhou through blockchain, Chinese media reported. The organizers struck an agreement with the platform in hopes that blockchain technology will help battle counterfeits. (China News)
• One of China’s largest petroleum producers, Sinochem, unveiled a blockchain-based warehouse receipt system. (Ledger Insights)

Give a man a fish and you feed him for a day. Give a tech reporter a smart guitar and one hour, and she will learn how to play “Where’s Dad?” If you don’t know this song, don’t worry, neither did we. 

That sums up our test session with the Poputar, a smart guitar made by Chinese company Beijing Shigan Technology Company, also known as Popumusic. Its first product, a smart ukulele, was “an epic momentum of consumer technology,” the company claims. Popumusic has sold 400,000 units of its two smart instruments worldwide since the 2016 launch of the Populele smart ukelele. The company is currently doing crowdfunding on Indiegogo as a way to promote this guitar on the western market for the first time. Production and shipping will start in December this year. 

The Poputar is a lightweight acoustic guitar with LED lights embedded in its neck. The instrument syncs with an app made by the same company that registers what you are doing on the guitar and gives you feedback as you play, much like karaoke games on a Playstation. The neck-lights indicate where you should place your fingers to play chords. 

The app includes bite-sized video courses that take you from the basics, including how to hold the guitar and pluck the strings, all the way to mastering popular songs like “Let it Be” by the Beatles and Billie Eilish’s “Bad Guy.”

The Poputar promises to teach you to “play a song in five minutes.” Unsurprisingly, this is not what happened when we tried it.

The app was not loading properly when we tested it, so we wasted a lot of time waiting for the video courses to load. A Popumusic spokesperson later told us that this was a VPN-related issue. 

The Poputar didn’t live up to the five-minute promise, but it was an enjoyable experience, and I felt like I learned something. Hey, I got a 79% on “Where’s Dad?” so I must have inched closer to becoming a guitar virtuoso. 

It is definitely worth a try if you are a complete novice and want to master the basics, or if you just want to learn how to play “Wonderwall” by Oasis. If you want to get Carlos Santana’s level, you need to hire a teacher somewhere down the line.

READ MORE: TechNode blind tasting: plant-based meat

Back in the 1990s, people thought the internet would abolish borders. “Cyberspace does not lie within your [governments’] borders,” wrote author and internet activist John Perry Barlow in 1996. 

The idea of a borderless network has held on. “One of the great things about the internet is that it does not have national borders. When a company in Tokyo sends a digital file to a company in New York, the data does not have to clear customs,” wrote the New York Times in a 2015 op-ed. 

While that may hold for Japan and the US, files going from Beijing to Brussels now often do have to pass digital customs inspections. 

China’s model of data localization, and the associated 2017 Cybersecurity Law, has been the subject of criticism and confusion. But now it seems that Beijing was on the cutting edge of a trend.

Bottom line: China is continuing to develop a system that limits where companies keep data, and what they can send abroad. Many multinational companies—and Washington—don’t like it, but they’d better get used to it: this idea is catching on around the world. 

What is data localization? Data localization regulations require that data be stored and processed on computers in a particular place, usually within a country’s borders, as opposed to letting them flow freely through data centers around the world. 

• This might not mean all data and always. Laws often specify particular types or data that must be kept domestically, and leave room for regulators to grant exceptions. 

Why localize?

• Security: Data localization schemes often cite “security” or “privacy.” But experts say that localizing data alone doesn’t mean enhanced security or privacy. Whitehat hackers contacted by TechNode said that domestic adoption of security and privacy best practices is a bigger issue. 
• Jurisdiction: Data localization does help governments regulate data, and proponents often cite the risk that companies will move data to less-regulated environments.
• Protectionism: Data is a valuable resource—so countries hope keeping it in country will give homegrown tech companies a competitive edge.

Regional styles: There are three main approaches to regulating cross-border data flows, said Nigel Cory, who studies cross-border data flows as Associate Director of Trade Policy at the Information Technology and Innovation Foundation, a think tank based in Washington DC.

• The US has little to no regulation on data flows. It also advocates against data localization in other countries.
• EU regulates cross-border flows based on privacy and security assessments.
• Chinese law treats data both as a valuable resource and a national security priority. The Chinese model asks: “What does data localization give the government from an economic perspective, but also a social and political perspective?” Cory said.  
• Legal models vary widely around the world, from bans on cross-border flows of locally harvested data (Russia) to requiring domestic storage of backups (Indonesia). 

China’s approach: The landmark 2017 cybersecurity law set the scene for data localization in China, but elements of data localization date back to 2006, Cory said.

• Under the 2017 law, “critical information infrastructure” providers, such as telecoms, utilities, energy, e-government, finance, must get permission from public security officials before transferring data overseas. 
• Information on the military, finance, energy, transportation infrastructure, and medical services, are among the law deems “critical.”
• Personal data related to over 500,000 people must also be stored within China. 

Slow roll-out: Details on how the law will be implemented on different sectors are still being hammered out in accompanying laws and regulations. 

• The key term “critical information infrastructure” is not clearly defined in the law. 
• In the absence of clear guidance, many multinationals assume their data will be included.
• Figuring out the details takes time:, in 2018, University of Hong Kong and McGill law researchers found that cross-border transfers of genomic data were subject to ten different regulations and guidelines, enacted from 1998 to 2017. Another one has been rolled out since. 

READ MORE:  Dust has yet to settle two years after China’s landmark cybersecurity law

Opening up: China is experimenting with relaxed localization rules in new free trade zones, said Xiaomeng Lu, an internet policy analyst at political risk consultancy Eurasia Group. 

• “There’s always internal debate about how to regulate new technology. When the internet first came about there was discussion about ‘how do we maintain party control of the country whilst also leveraging this for GDP growth?’,” Lu said. Now, the government is trying to strike a similar balance with data.

• The plan (in Chinese) for an FTZ in Hainan, revealed in January, talks about making outbound flows of personal data “more convenient.”
• A Shanghai FTZ plan released in April spoke of experimenting with cross-border data flows and governance—including a mention of providing access to the “international internet.”
• One of the reasons why the central government is letting such experiments run is the digital yuan, Lu said. 

Assessing the impact

Additional costs: Data localization costs international companies money. They have to build several local data centers to ensure data is backed up, Lu told TechNode. These costs are adding up as more countries adopt data localization schemes, meaning ever more local data centers.

AI headaches: Compliance becomes more complicated for global firms who use AI-empowered analytics in their products. 

• A financial firm, for example, that uses AI to detect and block suspicious transactions relies on the fact that data from different countries can be combined. A resident of Shanghai whose bank card is used in Nairobi, the system that looks over data globally will trigger some sort of alert. 
• There are ways to get around this problem, “firms may be able to find some imperfect work-arounds in terms of replicating the analytics services locally and indirectly feeding non-specific data through to their global analytics platform,” Cory said.
• But these solutions are “hugely complicated and costly.” For some firms localization workarounds are the “biggest cost in terms of how they manage their architecture,” he said. 

Competitive advantage: Chinese companies are more comfortable with data localization abroad, seeing their experience with it at home as an advantage.

• “Chinese companies take the cost and complexity of setting up an ex-China infrastructure as the cost of doing business,” sometimes even viewing it as a competitive advantage in other countries that also enact data localization, given the reluctance of some foreign firms to do the same, Cory said. 

Local champions: Data localization requirements have helped China’s domestic data center industry flourish, as large multinationals work with local firms in joint ventures to run data centers in China. 

• In the cloud space, AWS has partnered with two companies in Beijing and Ningxia. Chinese users of Apple Icloud servers will find their data stored on a Guizhou company’s servers. Microsoft Azure cloud services are hosted on Beijing-based 21Vianet’s data centers.

The opposition: In China, lobbying against data localization is a top priority for multinationals, Lu said.

• “Security and privacy often are cited as justification for data localization but, as we’ve seen time and again, hackers and cyber criminals are not limited by lines on a map,” a spokesperson for IBM told TechNode, adding that “forced data localization does nothing to make data more secure.”
• US big tech has lobbied hard against data localization. Google’s Sundar Pichai sent a letter to the Indian ministry of IT while India’s cybersecurity bill was undergoing public consultation. Facebook joined Google’s anti-data localization push in Vietnam. Mastercard and Visa convinced Indonesia to water down data localization requirements. 
• When China’s Cybersecurity Law was announced in 2016, the EU Chamber of Commerce in China cautioned that it could“hinder foreign investment and businesses operating in and with China.” 

More than data: There is no evidence that big multinationals have pulled out of China due to increased cloud costs. But data localization has other consequences that could make doing business in China less appealing. 

• When Apple moved its Chinese user data to Guizhou, it was criticized for moving the encryption keys that crack them open. 
• “Storing data locally might also mean storing or using locally mandated encryption keys, which undermines their global cybersecurity architecture. This potentially exposes communication on their platform and undermines their global products,” Cory said.
• This was not enough for the California giant to abandon one of its biggest markets, but other companies might be not be willing to expose their encryption keys and security architecture to Chinese authorities, one expert said.

Global trends

Loco for localization: China is not alone in pursuing data localization. Regulations started popping up around the world before China’s 2017 cybersecurity law, and the trend has accelerated since. 

• A 2018 study endorsed by the Center for Economic Policy Research, a European think tank, found that between 2006 and 2017, restrictions on cross-border data flows doubled around the globe.
• India first implemented data localization requirements in 2014. Regulators proposed new data localization laws in a 2019 personal data protection bill, but revised it to only pertain to “critical” personal data. Financial, biometric, genetic, and religious data can be transferred overseas for processing under the revised law. 
• Indonesia and Rwanda enacted localization laws in 2012, Nigeria in 2013, and Russia in 2015. 
• The European Union’s General Data Protection Regulation, enacted in 2016, regulates cross-border data transfers on privacy and security grounds. 
• In June, the European Court of Justice ordered restrictions on data flows to the US, saying that US privacy protections are “inadequate.”

Washington: More than Silicon Valley’s tech giants, Washington has lobbied hard against data localization around the world, with some results.

• The free trade agreement between the US, Mexico, and Canada prohibits parties from restricting cross-border data flows with each other.
• Similar requirements are part of the US’s free trade deal with Japan.
• The 2016 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free trade agreement between 11 Asia-Pacific nations, also known as TPP-11, also talks of maintaining free data flows. Donald Trump pulled the US out of the agreement as soon as he came into office. 

READ MORE: INSIGHTS | China’s digital currency has a long way to go

But Tiktok! But when it comes to China, even the US is starting to talk about data localization. When Washington moved to ban two Chinese apps—Tiktok and Wechat—from US phones, it cited the risk of sensitive personal data being sent to China.American authorities appeared ready to accept a deal that would see Tiktok’s US user data kept on local servers run by Oracle. 

A future of data corridors? The rest of the world doesn’t need signaling or support from the two superpowers to set its own course when it comes to data localization. While China, India, Russia, and others, are pursuing data localization within one country’s borders, new free trade agreements are creating free data flow bubbles between trading partners. 

CPTPP signatories have moved to liberalize data flows among themselves. A January agreement between Singapore, New Zealand, and Chile enshrined free data flows between the three countries. 

As data becomes a regular part of trade talks, bubbles like these, rather than a global network, could be the future.

The digital yuan

• Shenzhen launched the first public test for the central bank digital currency, which will distribute RMB 100 million (about $1.48 million) through red envelopes. A lottery system will randomly select 50,000 individuals who will receive virtual red envelopes with RMB 200 worth of the digital yuan. Residents of the Luohu district can apply through China’s big four banks and those selected will be able to use the coupons at 3,389 retail outlets around the city. Applications were due by Monday, and the distribution will take place on Friday. (Reuters)
• The People’s Bank of China has processed RMB 1.1 billion in upwards of 3 million individual transactions using the digital yuan, the bank’s deputy governor Fan Yifei said on Oct. 6. More than 120,000 digital wallets have been opened, 92% of which are personal wallets while the rest are corporate, he said. The bank has tested 6,700 use cases, according to Fan. (Fintech Futures)
• On Monday, another central bank deputy governor called for further acceleration of the digital yuan’s rollout. (South China Morning Post)

READ MORE: INSIGHTS | China’s digital currency has a long way to go

The OTC crackdown

• Chen Lei, the former CEO of Xunlei, China’s largest download software, has been accused of embezzling company funds to trade in crypto and is currently under investigation by authorities. (Sina Finance)
• The State Council said on Sunday that it will crack down on phone and bank cards that are used for illegal activities, and China’s crypto traders fear that they could have their bank cards frozen. OTC traders have recently reported that their bank cards have been frozen for five years. (Wublockchain)

The numbers

• A report by international consulting firm PWC said that China stands to gain the most from blockchain adoption. Blockchain technology could add $440 billion to its gross domestic product by 2030, compared with $407 billion net benefit in the US, the report said. (PWC report)
• A recent report based on data collected in October said China’s blockchain industry is dominated by small- and medium-sized enterprises. Companies with registered capital under RMB 5,000 account for 46% of China’s blockchain companies, a report by blockchain data platform Longhash said. Only 9% of all companies have over RMB 50,000 in registered capital, according to the report. (Longhash)

Reporting on blockchain from China is difficult; there’s a lot of noise and little substance. But the Chinese press sometimes offers some of the best leads on crypto stories. There’s one crypto blogger who’s my all time favorite—let me give you an introduction.

Beijing-based Colin Wu, who writes at Wechat public account Wu Blockchain, has the nose to sniff out exclusive stories and the knuckles to investigate them. More importantly, in my opinion, he is able to see through a lot of the smoke screens that plague China’s crypto world. 

I respect—well, sometimes I envy—his work, and I often refer to it in my reporting. On Sept. 6, he was the first to report that Chinese investors were staging a protest against centralized crypto exchanges. I reported on his work and took it a little further. 

Just last night, he broke the news of a crackdown against over-the-counter traders in Shaanxi province.

I’ll stop fangirling and get to the point: If you want to understand China tech, people like Wu are exactly who you should be following. Chinese media often get a bad rap for (allegedly) being little more than propaganda machines, but there are many amazing, often independent, Chinese journalists that do investigative work. Wu is one of them.

Granted, if you’re like me and have to use translation apps to read Chinese-language articles, it can result in some awkward phrasing at best. Luckily for us, Wu tweets the gist of his pieces in English. 

Wu started out as a journalist in Chinese media and later went corporate doing government and public relations at Bitmain, the world’s leading manufacturer of crypto mining rigs. The logic of this move, I am not privy to.

He left Bitmain after almost two years to “pursue some journalism ideals,” he told me, with a touch of self-mockery. Wu is a jaded kind of guy. 

He started writing on Wechat in his channel Wu Blockchain in November 2019, and initially built up an audience covering the months-long saga of two rival founders trying to oust each other from Bitmain. At the time, what we at TechNode call the Battle for Bitmain was only getting started; he had inside information and was the first to break the news.

“One day at 3 o’clock in the morning, I suddenly got inspiration and wrote this article. Many people were attacking Micree [Zhan Ketuan] at the time, but no one really understood it, so I wanted to write something from a neutral perspective,” he told me.

“He is small, short-tempered, he likes to drink, but is not materialistic, and wears a pair of New Balance sneakers and a gray polo shirt 80% of the time,” he wrote in reference to Zhan in his first article. 

His coverage of the dueling co-founders’ drama at Bitmain can seem partial to Wu Jihan (no relation), Zhan’s nemesis, at times. In his most recent article on Wu Jihan’s reinstatement he reported that employees were shedding tears of joy when he resumed leadership of the company. Despite this, Wu has been the first to report on new developments regardless of what they favor.

Wu has turned into a crypto investigator and a blogger with influence as his following across channels has grown: 50,000-80,000 by his counting. He has expanded his coverage to other topics, and he now employs three part-time people. His articles get reprinted in other Chinese crypto outlets.

I asked him how he gets his scoops. His network of contacts, as well as tipsters who come to him because, in his words, they appreciate his journalistic standards, have been a rich source of information. 

Exclusive: Inner Mongolia suddenly slashes 21 mines—suspended from electrical grid, could pay up to 30% more for power

Wu Blockchain | Aug. 25

Last month, Wu broke the news of a crackdown by the government of the Inner Mongolia Autonomous Region on crypto mining. 

At the end of 2019, on-site inspections of 30 big data and cloud computing companies in seven leagues [administrative units of Inner Mongolia] and cities were carried out, and 21 mining companies were found, and the qualifications for participating in the listing of characteristic industries were suspended. Companies that are no longer mining can have penalties revoked after verification.

According to the notice, in accordance with the requirements of the state and autonomous region on guiding enterprises to withdraw from the “mining” business, in order to effectively support the sustainable and healthy development of cloud computing and big data industries in the region, and to further regulate power market transactions, the lists of the companies’ names will be published.

The 21 companies include most of the large mines well-known in the industry, and the rest are mainly normal IDC [internet data center] companies. But there are also some mining companies not on the list. The requirements of this notice are more detailed, and industry professionals worry that they are stricter than in the past and enforcement will last a long time.

Exclusive: Droves of OTC crypto traders put on PBOC discipline list, bank controls getting tighter

Wu Blockchain | Sept. 23

Last week, Wu wrote that over-the-counter crypto (OTC) traders are facing heightened scrutiny from the People’s Bank of China, which has frozen the bank cards of a number of traders for three years. 

This year is the year when the People’s Bank of China cracks down on money laundering…

Wu said [he often quotes himself in this style] that Wu Blockchain has exclusively learned that recently many OTC merchants have been placed on the central bank’s “disciplinary list” and all bank cards linked to their IDs have stopped even ATM and banking app transactions.

This means that in addition to the traditional freezes on bank cards, banks and central banks have also begun active supervision of OTC merchants, and the crackdown is widening.

The logic behind what happened is:

The People’s Bank of China cracked down on money laundering this year, but delegated responsibilities and obligations to major banks and financial institutions. Subsequently, bank monitoring of suspected money laundering has become very strict, and any account opened needs to be reviewed by the anti-money laundering system.

Much-hyped buddies BSN and Huobi are doing plenty of PR—but don’t take it as fact (opinion)

Wu Blockchain | Sept. 28

The Blockchain Services Network (BSN) is widely regarded as one of the most important blockchain projects to come out of China: we’ve called it a state-backed, blockchain-powered internet.

Wu disagrees. He thinks that the BSN is just one of many similar projects made by private companies and consortiums. The only reason for all the hype on this project is that observers perceive it to have backing from the Chinese government. But Wu argues that the BSN is only supported by minor government agencies, which he sees as an indicator of the project’s importance. Frankly, I do not agree with him, but I hear his argument and I sure respect his fortitude in swimming upstream (and the BSN wasn’t even the only much-praised blockchain project Wu had dismissive words for last week).

Firstly, the white paper says that the initiators of BSN are the State Information Center [SIC] Smart City Development Research Center, China Mobile Design Institute, government and enterprise customer branches, China UnionPay, China Mobile Financial Technology Company, and the [BSN] operator Beijing Red Date Technology.

…

In China, cryptocurrency is managed by the central bank, and blockchain technology is managed by the Ministry of Industry and Information Technology. To some extent, the [SIC parent agency] National Development and Reform Commission is not the government department closest to this industry.

If you take a closer look, the initiator is not the State Information Center, but the Smart City Development Research Center under the State Information Center. The so-called government department that is endorsing BSN is a research center under a think tank of a department that has nothing to do with blockchain. Therefore, it is totally inaccurate to call the BSN an organization led by the Chinese government.

Secondly, in fact, there are many organizations similar to the BSN, and their models are similar, that is, to create a so-called blockchain platform, and allow enterprises and developers to design blockchain applications on this platform. Those with a little strength, such as Ant Financial, Ping An, and Weizhong, write their own code and build their own alliance chain platforms; those without strength, directly use overseas open source public chains, and copy them. A so-called alliance chain. We can see similarly the Trusted Blockchain Alliance under the Ministry of Industry and Information Technology.

Translations by Jiayi Shi.

China’s Blockchain Services Network, known as the BSN, will launch cross-chain interoperability on its testnets by the end of October and will integrate a second cross-chain protocol called Poly Enterprise, according to the CEO of the BSN’s main architect company.

Why it matters: With the inclusion of Poly, the BSN is edging towards a free-market approach to interoperability, first revealed to TechNode in June. The BSN is giving several options to developers instead of limiting the platform to one cross-chain protocol.

• Interoperability between multiple blockchains is the key to the BSN’s ambition to become a global “internet of blockchains.”

Blockchain Services Network (BSN)
What: A platform for blockchain development, bringing together cloud services and different chain protocols on city nodes.
Why: To reduce the cost of blockchain application design and deployment while powering communication between chains. It will be made available around the world through local cloud providers, ultimately creating a global internet of blockchains.
Who: It is part of the government’s Global Blockchain Strategy unveiled by Chinese President Xi Jinping in November 2019, spearheaded by the China State Information Center, China Mobile, China Union Pay, and Red Date Technology.

Looking for the right connection: “Today all interoperability technologies are at application-level or framework-level,” neither of which is system-level “true interoperability,” Yifan He, CEO of Red Date, the company which is building the BSN’s software, told TechNode on Tuesday.

• The Red Date CEO said the BSN team wants to test and understand how different interoperability solutions work and test them, which is why they are working with all kinds of application-level and framework-level solutions.
• They hope to eventually “find a system-level solution with all these wonderful partners.”
• Because the BSN’s underlying software is uniformly built, it is easy to deploy and test interoperability solutions. “We can add a system-level solution easily onto all public city nodes of BSN. It will be much easier on BSN than on the open Internet,” He said.

“A true interoperability protocol will be here one day, we hope BSN would be the one to create it.”

—Yifan He, CEO of Red Date Technology

The candidates: Starting in late October, developers will be able to use Poly Enterprise and Irisnet’s Inter-Realm Industry Trust Alliance (IRITA) framework to build decentralized applications (dapps) that can work with other dapps, even those built using different blockchain frameworks.

• For the first three to four months, they will be limited to the BSN’s testnets, before being moved to serve frameworks in production mode, He said.
• The two protocols will form the inter-chain communication hub, an architectural element of the BSN platform. It is likely that other cross-chain protocols will be added.
• Poly Enterprise is an adapted version of Poly Network, a cross-chain protocol launched in August.
• Poly is backed by three blockchain foundations that run their own chains: Ontology, Neo, and Switcheo. The company building the Poly architecture is Onchain, a Chinese company that builds blockchain solutions for enterprises, and was founded by Neo’s co-founder Da Hongfei.
• The goal of the team behind Poly Network is to eventually make it permissionless, Hongfei told TechNode.
• Poly Enterprise had to be spun off from Poly Network to be integrated into the BSN to meet regulatory requirements in the future, Hongfei said.
• “Ontology and Neo had already used Poly Network to transfer assets in and out from Ethereum. The total amounts to $600 million to $700 million,” he said.
• Irisnet is a Shanghai-based company behind IRITA, a permissioned blockchain development framework for enterprises built in the Cosmos ecosystem.

READ MORE: EXCLUSIVE: China’s BSN and Irisnet are building an ‘internet of blockchains’

Context: In June, Red Date’s He revealed to TechNode that Shanghai-based Irisnet will be the first company to enable interoperability in the BSN.

• He added, “By the end of next year we will have three or four ways to make the inter-chain communication very very easy,” hinting that more cross-chain protocols would be integrated with the platform.
• Since its launch in April, the BSN has attracted the attention of blockchain and crypto communities around the world, but is still in development, with new features being rolled out almost every week.
• Earlier in September, it launched its “open permissioned” project, which will adapt permissionless blockchains to a permissioned environment. Red Date has said that this step is necessary to ensure regulatory compliance in China.
• The BSN split into two networks managed by two separate entities in July in pursuit of compliance, Red Date told TechNode.

READ MORE: BSN says decoupling is to meet compliance rules in China

Mixed signals on crypto

• More than RMB 1 trillion ($145.5 billion) flows out of China every year through illicit gambling operations, a senior official from the Ministry of Pubic Security said on Friday. Gambling and casinos are prohibited in mainland China.
• Liao Jinrong, director general of the Ministry’s International Cooperation department, told Chinese media that law enforcement has a hard time tracking down the cryptocurrency flows. These outflows could undermine China’s economic security if the people running the illegal gambling operations collude with “foreign powers,” Jinrong said. (South China Morning Post)
• On the same day, state-owned CCTV said cryptocurrencies are the year’s best performing asset. The report said the world’s biggest tokens have gained 70% in value so far in 2020, compared to 20% for gold (CCTV, in Chinese). Xinhua news agency published a similar report on Thursday (Xinhua, in Chinese).
• The reporters cautioned investors that the market is volatile and attributed the price increase to the rise of decentralized finance and Covid-19.
• China’s crypto community was perplexed as to whether this amounts to an endorsement of cryptocurrencies.
• One thing the government certainly doesn’t like is over-the-counter trading in cryptocurrencies.
• The People’s Bank of China is blacklisting over-the-counter cryptocurrency traders. Some OTC account holders on the list are forbidden from using their bank cards for five years, and not just bank accounts associated with crypto transactions. (Wu Blockchain)

Russia and crypto… it’s complicated

• Chinese crypto exchange Binance has been blacklisted in Russia for disseminating information about trading in bitcoin, the company’s Russia director said on Friday. “Not sure if we should laugh or cry,” (translation via Facebook) Gleb Kostarev, director of Binance Russia said on the social media platform. The exchange was banned (in Russian) back in June but was just recently notified. (Kostarev Facebook account)
• Just two days later, Huobi announced it is launching a crypto trading app in Russia that will enable users to trade in Bitcoin. (Huobi statement)

Blockchain boosts privacy

• Ant Group, Tencent’s Webank, Tencent Cloud, Baidu, Intel, and Arpa co-authored a new set of standards aimed to help big data operators protect user privacy using a blockchain-based framework called privacy-preserving multi-party computation. The standards were unveiled at a conference organized by the China Academy of Information and Communications Technology and the China Communications Standards Association. (Arpa official Medium account)
• Chinese encryption startup Maskbook launched the first crypto trading plugin that enables users to trade on decentralized exchange Uniswap without leaving Twitter, powered by crypto information platform Coin Market Cap. Maskbook’s best-known product is a plugin for social media networks that provides end-to-end encryption on social media posts with the aim to safeguard user privacy. (Maskbook official Twitter account)

The mining companies

• Micro BT, a rising Chinese mining rig maker, is setting up its first offshore manufacturing center in Southeast Asia. The rig maker will use the new factory to fulfill orders from US clients, avoiding a 25% tariff on China-made goods. The first order the new facility will fulfill is for newly established Foundry, a mining financing company based in the US and backed by Digital Currency Group. (Coindesk)

READ MORE: Is crypto mining really moving to North America?

Since Beyond Meat launched in China, plant-based meat has been all the rage—at least in news headlines. Rarely do the marketing-savvy earth warriors ask, does China really want new age plant-based meat?

Dozens of companies are betting that it does, including Yum China, the company behind KFC, Taco Bell and Pizza Hut. In July, we visited the fast food chains to try Beyond Meat’s plant-based meat alternative. It exceeded my carnivorous expectations.

READ MORE: We tried Beyond Meat in China. Did anyone else?

I was especially impressed by Taco Bell’s vegan taco. The vegan beef was really juicy and blended well with the sauce. KFC’s vegan burger was good for the first few bites, but the portion was too big for me, and I felt my stomach fill with fast food grease as I ate more. Let’s not talk about my Pizza Hut experience…

All these foreign brands entering the Chinese market with armies of branding and marketing specialists are facing competition from local startups—and a centuries-old industry of Buddhist vegetarian meat.

With China’s market heating up, we thought it’s time to do a taste test on some of the local veggie meat brands. A lot of the hype around plant-based dishes on the Chinese market has revolved around western food, but we wanted to see how they’d perform with Chinese basics.

We picked dumplings—if plant-based pork is going to catch on in Chinese kitchens, stomachs, and hearts, it has to work with dumplings. They are usually made with pork, which is China’s favorite meat.

To ensure our taste test adhered to the highest standards of justice and fairness, we would not reveal to our tasters which dumpling was made with which plant-based meat until after they had given us their feedback. In other words, the phyto-beasts were subjected to a blind test.

The dough-wrapped pockets of delicious Chinese cooking have the added benefit of hiding what’s inside, sparing us the cost of blind folds.

The contenders:

• Omni Pork, a company based in Hong Kong
• Z-Rou, a Shanghai-based startup
• Traditional Buddhist veggie meat maker Gongdelin, established in 1992.
• Pig-based pork, for the meat-eaters.

We invited two vegetarians and two meat eaters to try our dumplings. Check out the video to see their verdict.

The Filecoin Fork

A group of Chinese investors threatened to fork Filecoin, a cryptocurrency network whose main offering is decentralized file storage. The completed mainnet is scheduled to be released in the coming weeks.

The coin, which has been massively popular among Chinese miners, issued a $250 million initial coin offering three years ago.

The head of MIX Group, a Filecoin mining company, unveiled the threat at a conference in Xiamen. He said users are not satisfied with the governance of the network, saying it is too centralized, and with the fact that the mainnet launch has been delayed from its initial release in March 2020.

The mainnet launch could wash out as many as 80% of miners through a staking mechanism, a recent report said. (Decrypt)

The government connection

• The government of Beijing will pilot a blockchain-based system for monitoring and managing security risks associated with cross-border data flows. (TechNode)
• Vechain joined the China Animal Health and Food Safety Alliance, a government-backed organization that aims to provide a food traceability platform. It is the only company in the alliance that is entirely focused on public blockchain. (PRNewswire, Vechain press release)
• The Blockchain Services Network, a government-backed “internet of blockchains,” plans to integrate 24 public chains in the Chinese network by making them permissioned. (Coindesk)

The mining equipment makers

• Micro BT’s new Whatsminer cryptocurrency mining rig, expected to be released later this year, could top Bitmain’s Antminer S19. The M50S will use Samsung 8 nanometer chips and will come with an energy efficiency ratio of 30 joules per terahash (J/T), compared with the S19’s 34.5 J/T. (WuBlockchain, in Chinese)
• Bitmain will allow Core Scientific to build its first repair center in North America. Core Scientific is a US-based mining company that agreed to buy 17,595 of Bitmain’s Antminers back in June. The announcement came hours after recently ousted co-founder Wu Jihan had regained Bitmain’s reins. (PRNewswire, Bitmain press release)

READ MORE: Is crypto mining really moving to North America?

The numbers

• China will trail behind the US and Europe in spending on blockchain solutions in 2020, according to market intelligence firm IDC. China will have spent $457 million, compared with $1.6 billion in the US and $1 billion in Europe. But, by the end of 2020, China will have seen the most growth in blockchain expenditure in the last five years at 51.7%. (IDC)
• China ranks fourth globally in cryptocurrency adoption, surpassed only by Ukraine, Russia, and Venezuela, a report by Chainalysis said. The rankings are based on value received and sent through cryptocurrencies, deposits, and peer-to-peer trade volume. (Chainalysis)

E-commerce giant JD.com is partnering with the People’s Bank of China Digital Currency Research Institute to build mobile apps that can support China’s digital yuan, local media reported.

Why it matters: JD is not the first company reported to be working with the central bank on the digital currency, but this deal has been described in more specific terms. The news also confirms that blockchain technology will be used in dissemination of the currency.

• Direct support for the digital currency could offer JD an alternative to dominant payments apps Wechat and Alipay.

Details: JD.com has entered a “strategic partnership” to build what the announcement calls mobile and blockchain platforms for the central bank digital currency, local media reported, and to integrate those platforms with JD’s existing ecosystems.

• The partnership is said to promote online and offline payments, and the development of a “digital wallet.”

READ MORE: INSIGHTS | China’s digital currency has a long way to go

Context: The digital yuan has been in development since 2014 and is currently piloted by select individuals in Shenzhen, Suzhou, Xiongan, and Chengdu. But these tests appear to be very limited, and few details have surfaced.

• The People’s Bank of China has repeatedly said that the digital currency has no set launch timetable, but that hasn’t stopped speculation.
• The pilots will be extended to Beijing-Tianjin-Hebei region, the Yangtze River Delta, and the Greater Bay Area region, the Ministry of Commerce said in August. The expansion is could take place by the end of the year.
• Reports emerged in August that claimed that employees of China’s four biggest banks were also testing the digital yuan.
• The central bank has said the currency will be tested at the 2022 Beijing Winter Olympics, but the roadmap to 2022 has not been revealed.
• Earlier in September, China Construction Bank made public a digital yuan e-wallet. However, the bank quickly withdrew the app.

I love lurking on Linkedin. A couple of weeks ago, something struck me. While Tiktok was facing the prospect of a US ban under an Aug. 7 executive order, many people in my European networks were delighted to announce that they were joining the short video company. Countless emojis were harmed in the making of these Linkedin posts. 

As its future in the US is under threat, Tiktok appears to be trying to fortify its operations in Europe. On Tiktok’s careers site, 272 jobs are posted in Europe (excluding Russia) at the time of writing. Dublin takes the lead with 117 jobs, London comes second with 78, and Germany third with a total of 34. Germany is hiring for offices in  Berlin, Munich, and Hamburg. Positions in Madrid, Paris, Stockholm, Warsaw, and Milan are also seeking candidates.

In Europe, Tiktok’s hiring patterns reflect its growing ambitions on the continent and a push to localize and clear the bloc’s data security hurdles. 

A data sweep on Twitter conducted by TechNode indicates that Tiktok has ramped up its hiring in Europe. Bytedance employees and job advertising services including the UK’s Job Centre Plus, a state-run employment platform, have mentioned jobs at Tiktok more frequently in recent months.

In August, 42 links to the Tiktok global careers website were posted on Twitter, compared to 12 in February. 

“It’s quite incredible how many people they’re bringing on board. Every week there’s new people,” a new hire who joined Tiktok’s European operations in August told TechNode.

Open positions on the company’s website include a wide variety of roles, from advertising and brand strategists to privacy specialists. Tiktok appears intent on localization, seeking fluent speakers in most European languages, such as Swedish, Hungarian, and Greek.

“Of course everybody is looking at what’s happening in the US,” the recent hire said, “but there’s no anxiety. On the contrary, everyone is very optimistic.”

Despite the ongoing row with Washington, Tiktok hasn’t taken down its job listings in the US. Currently, 465 positions are listed as available in the US on the app’s website. 

READ MORE: China tech faces double compliance challenge in Europe

Bet on Europe

Bytedance’s continued hiring for the popular video app shows it is optimistic about the European market, despite criticism over its privacy policy. Regulators have expressed concern over personal data flowing from the EU to China, the app’s handling of minors’ data and consent. But as long as Tiktok complies with local data regulations, the company should be safe in Europe, experts told TechNode.

Tiktok currently has over 1,600 employees based in Europe, roughly 1,300 of whom are based in the UK and Ireland, the company said in a statement Monday.

A Europe-wide ban is “unlikely,” said Jan Stryjak, Associate Research Director at Counterpoint Research. “Tiktok has not faced the same levels of scrutiny and political grandstanding in Europe as in the US,” he said, so it makes sense that it “looks to establish itself to build on its rapid growth in the region.” 

In Europe, regulators have tried to appear neutral. “I am not in the business of banning any company, I am in the business of explaining very clearly what are our rules,” EU Commission Internal Market Commissioner Thierry Bretton told Politico earlier this month.

“In the short-term, I wouldn’t expect any comparable moves on Tiktok in Europe to match US actions,” Andrew Small, associate senior policy fellow at think tank European Council on Foreign Relations, told TechNode.

By contrast, the situation around Huawei includes “fundamental questions” about the company’s role in Europe’s digital infrastructure and “longstanding issues about Chinese subsidies undermining European telecoms firms,” he said.

Tiktok does not provoke the same sensitivities. “The issues at stake with Tiktok relate to censorship and data use, neither of which is likely to lead to an outright ban, and there will be no inherent objection to Tiktok hiring and investing in Europe either,” said Small.

Beefing up data security

New data privacy and security rules in the European bloc are compelling Tiktok to reconfigure its global operations.

Bretton stressed that the “key subject” when it comes to Tiktok operating within the bloc is data, highlighting the rigor of Europe’s data security and privacy rules in comparison to China.

“The EU has not had to deal with this issue on a really major scale given that Chinese apps have not made many inroads with European consumers,” Small said. 

In August, the European Court of Justice ruled that personal data collected on EU citizens can only be transferred to third countries that have similar privacy regimes. The decision, known as Schrems II, could mean that personal data collected by Tiktok on European citizens can never be legally transferred to China. 

A few weeks after the ruling, Tiktok said its Irish and UK entities will be taking over data management for European users from its US operations. Shortly after, the company announced plans for a new data center in Dublin. According to company statements, the data center will form part of a “Privacy and Safety Hub” for Europe, the Middle East, and Africa.

Bytedance said it plans to spend €420 million ($500 million) on the Dublin data center. The investment will “create hundreds of jobs” in the city, said Roland Cloutier, Tiktok’s Global Chief Information Security Officer in a blog post.

Cloutier previously worked at Automatic Data Processing, a Nasdaq-listed HR systems provider, as well as US computer manufacturer Dell. 

The job listings on Tiktok’s website appear to line up with this announcement. Dublin is the city with the most job openings. 

But the Dublin data center doesn’t mean that Tiktok can put the data security issue to bed. 

The EU is known for having some of the world’s most stringent personal data protection rules, known as the General Data Protection Regulation (GDPR).

In June, the European Data Protection Board, an EU body in charge of the application of the GDPR, set up a task force to probe Tiktok’s data processing activities and privacy practices across the EU, China’s Caixin reported.

Privacy watchdogs in France and the Netherlands have also launched inquiries into Tiktok’s privacy policies, especially as they pertain to Tiktok’s underage users. 

Tiktok has not replied to a Sept. 15 email seeking comment. 

London calling, Berlin texting

Tiktok’s job listings show that politics have not dented its ambitions to be a true multinational. The company is charging ahead with establishing regional hubs and localization teams in key European cities, all answering to a CEO currently based in California.  

London ranks second among European cities in active jobs listings on Tiktok’s careers website. The short video app operator is reportedly considering moving its headquarters from Beijing to London, British media reported in August. 

“A new global headquarters in London could be a huge boon for the UK’s job market, which has suffered in recent months due to the Covid-19 pandemic,” Stryjak said. 

UK Prime Minister Boris Johnson will welcome the Tiktok headquarters with open arms, risking the wrath of US President Donald Trump, UK media has reported. 

The British government is reportedly split over the potential Tiktok move. Trade and tech officials and ministers are at odds over how to handle the Chinese tech company, the Telegraph reported citing UK government sources familiar with the matter.

Germany, which ranks third in the number of listed job openings, represents a big market with a big pool of tech talent, experts told TechNode. 

It’s also a strategic location that Tiktok can use to “buy some goodwill, given its outsized influence over the European debate,” Small said. 

Joining the whirlwind

Yet those who decide to join the company in these times are taking on a lot of uncertainty. The app’s US and EU operations were nearly sold to Microsoft after pressure from the US government. After weeks of speculation about a deal with Microsoft, the company has reportedly settled on a partnership with Oracle instead. 

TechNode found two people who have been approached by recruiters. Both said they ignored the recruiters’ messages as they were not interested in working for the short video app. “Tiktok is stupid,” one of them said.

But Linkedin job updates indicate that Tiktok’s attempts to poach top tech talent have been successful at times. 

Many of the new hires came from some of the West’s biggest companies, including big tech. The person who onboarded recently said the salary offer was “very competitive” but didn’t give any further details. But “it wasn’t like I couldn’t trust my eyes,” they said.  

Another new hire said that they were under a non-disclosure agreement that is valid for 100 days after onboarding. 

In a Linkedin search, TechNode identified one person who worked at Amazon for seven years in Germany and recently said they joined the Bytedance app in September. A UK-based professional with four years of experience at Google and three years of experience at Netflix said they took a position at Tiktok in July. Another person who was at Google for two years also said they joined the app in September. 

The European who is considering a position said that working for the Chinese company in the midst of an international storm seemed “insane” at first, but that they have come to appreciate the challenge.

The recent hire said that Tiktok is “an exciting place to work in at the moment, regardless of how safe this job is in the long term. 

“We all know that this industry is moving very fast. But it’s really interesting to be part of this and get this experience at this time,” they said.

Beijing will pilot an intelligent system to assess and manage cross-border data flows as part of the city’s new free trade zone, the State Council said on Monday.

Why it matters: China’s data localization laws has been in place since 2017, but enforcement has been lagging. The law requires that overseas transfers of “important data” are cleared by public security authorities.

• The local government of Beijing has been pushing policy to boost technology adoption in the city.

READ MORE: Dust has yet to settle two years after China’s landmark cybersecurity law

Details: The cross-border data flow management pilot is part of a wider system aimed at monitoring and controlling risks related to the free trade zone. It will make use of big data, AI, blockchain, and 5G to assess the security of potential cross-border data flows, in line with China’s data localization laws.

• The pilot aims to explore whether the automated management system can correctly assess the risks related with transferring important data overseas, including the firms’ data security credentials and data backups.
• The “comprehensive platform” will also be used to warn exporting firms of potential trade risks stemming from their exposure to overseas markets and regulations.
• The FTZ plan also reiterates Beijing’s commitment to blockchain and fintech.
• The city will create a designated “testing pilot zone” for China’s central bank digital currency. It will also use the central bank’s blockchain platform to build a standards system for trade-related financial transactions.

READ MORE: Beijing unveils plan for blockchain-based government

Context: Chinese law requires that important data, distinguished either by the size of the dataset or the nature of the data, are stored within Chinese borders.

• Beijing unveiled its ambitious plan to integrate blockchain in several key aspects of the city’s governance in July, including customs clearance, real estate, finance, and more. The city wants to be a global hub for blockchain technology by 2022.

Governments love blockchain

• Huawei signed an agreement with China’s Copyright Protection Center to build a blockchain-based copyright management system dubbed “Digital Copyright Identifier.” (Tom.com, in Chinese)
• App platform Vechain is partnering with the government of Hainan, China’s southernmost province, to build a blockchain-based governance system for Wenchang, the “first aerospace cultural and tourism city.” The municipality aims to raise the profile of China’s space exploration industry. Vechain, along with Kingsoft Cloud, will build a “smart city brain” using blockchain, artificial intelligence, and big data. (Vechain official medium post)
• The central government launched its first “city blockchain innovation rankings” at a conference in Beijing. The program tallied up “objective data” on cities’ innovation and adoption of the technology. The capital topped the list with 99.82 points, and Shenzhen came second with 91.2 points, just above Shanghai. (Sina Finance, in Chinese)
• The eastern province of Fujian launched 20 blockchain projects aiming to spur innovation and revamp some local government functions. The projects include government services, public welfare, food safety, and industrial and agricultural production. Along the “Digital Fujian” project, the Blockchain Services Network (BSN) started construction of a node in the province. (Xinhua News Agency, in Chinese)
• The BSN said on Monday the platform will be compatible with smart contract-oriented blockchain-agnostic programming language Digital Asset Management Language. The language will be the “exclusive standard” for application of decentralized applications, BSN architects said. (TechNode)
• Meanwhile, a bill aimed to boost US competitiveness in the blockchain field passed through the US House Energy and Commerce Committee to the US House of Representatives. (Official Twitter of Cathy McMorris Rodgers, primary bill sponsor)

READ MORE: BSN taps DAML as ‘exclusive standard’ for dapp development

All aboard the Defi train

• The week in China’s decentralized finance world started with an online movement among investors to take down centralized exchanges by withdrawing their cryptocurrency deposits. The impact on reserves was small. Some exchanges blocked withdrawals citing unexpected maintenance. The movement came right after Sushiswap, a Defi token that had reached unprecedented popularity, crashed. (TechNode)
• A few days later, the anonymous co-founder of Sushiswap, 0xmaki, said in an interview that the project plans to launch a Chinese-language interface. (Coindesk)
• Cryptocurrency exchange Binance launched a $100 million investment fund focused on early-stage projects in decentralized finance. The exchange released its own Ethereum-compatible blockchain on Sept. 1, saying a number of projects were already working on the chain. (Cointelegraph)
• Police in China raided cryptocurrency exchange Gate.io over the listing of Defi token Kimchi. (Coingeek)

The mining equipment makers

• Crypto currency rig maker Canaan Creative announced a $10 million share buyback, following better-than-expected Q2 earnings results. The buyback has been approved by the board of directors and will take place over 12 months starting Sept. 22. (Canaan)

READ MORE: Blockheads: China sets global blockchain standards and Canaan is alive

• The Battle of Bitmain drags on. Wu Jihan took back control of the world’s biggest cryprocurrency mining equipment maker’s Beijing arm. Wu was ousted by his rival Zhan Ketuan in May, whom he had ousted in October. (TechNode)

The leadership at cryptocurrency mining rig maker Bitmain has switched again with the re-ousting of co-founder Zhan Ketuan from the helm of the company’s Beijing operations, rival co-founder Wu Jihan said on Monday.

Why it matters: The leadership drama at the world’s leading mining equipment maker is almost a year running. It has caused disruptions in the company’s supply chain, just as product orders from the US accumulate and China’s cryptocurrency regulation is heating up.

• It is uncertain whether Wu’s reinstatement will be the end of the saga as Zhan has shown an unwillingness to step down time and again.

READ MORE: Is crypto mining really moving to North America?

Details: The registration information for Bitmain’s Beijing entity changed to indicate that Wu was its legal representative, Chinese media reported on Monday evening. Bitmain employees in Zhan’s faction were seen packing up their office belongings, according to reports.

• Wu confirmed the reports in a statement (in Chinese) on Monday, conceding that the “management conflicts” have damaged the company’s brand image, customer relations, employee sentiment, and even “blocked” Bitmain’s plans to go public.
• The reinstated co-founder said he hopes that “meaningless and endless fighting” between the fighting factions will stop and extended his respect to Zhan.
• In August, Bitmain signed two agreements to sell $40.7 million worth of its newest mining rig, the Antminer S19, to North American bitcoin miners, the company said in two press releases.

“The options promised to employees have almost become waste paper.”

—Wu Jihan, recently re-instated Bitmain co-founder, in his Monday statement

Context: The drama started in October when Wu ousted Zhan in a boardroom coup. Wu claimed that Zhan had wasted company resources on an artificial intelligence chip push, far from the company’s main business model.

• But Zhan was not willing to go down without a fight. He sued Bitmain’s parent company in the Cayman Islands and filed complaints with Beijing authorities claiming that the paperwork that unseated him was not filed correctly.
• In May, Beijing officials granted his claim and handed him the company reigns. A physical brawl broke out between the rival camps at the government office.
• After Zhan gained control of the Beijing branch, which manages production across China, the Bitmain saga got even more complicated. Wu was still at the helm of the Hong Kong company that handles international payments.
• Over the next few months, the two had trouble coordinating production and Zhan even ordered deliveries to stop in June.
• Competing company seals and Wechat accounts gave conflicting information, furthering confusion amid staff, customers, and industry observers.

China’s Blockchain Services Network (BSN) has named programming language Digital Asset Management Language (DAML) the “exclusive standard” for developing smart contract applications on the platform, its architects said on Monday.

Why it matters: The BSN’s developers hope DAML will bring the platform closer to its most ambitious goal: seamless interoperability between all the major blockchain protocols.

• The platform aims to power the development of a blockchain-powered internet. Interoperability between different protocols and applications is the key and most difficult goal.

Blockchain Services Network (BSN)
What: A platform for blockchain development, bringing together cloud services and different chain protocols on city nodes.
Why: To reduce the cost of blockchain application design and deployment while powering communication between chains. It will be made available around the world through local cloud providers, ultimately creating a global internet of blockchains.
Who: It is part of the government’s Global Blockchain Strategy unveiled by Chinese President Xi Jinping in November 2019, spearheaded by the China State Information Center, China Mobile, China Union Pay, and Red Date Technology.

READ MORE: China’s BSN and Irisnet are building an ‘internet of blockchains’

Details: DAML is an open-source blockchain-agnostic language, meaning it can work with different ledger protocols like Hyperledger Fabric and Ethereum.

• DAML’s integration in the BSN will push its capabilities of interoperability. The language is mainly used to build different decentralized applications, but not to make them interoperable.
• BSN architect Red Date Technology and New York-based Digital Asset Holdings, the company that developed DAML, said they plan to complete a pilot in November and make the language available to developers in 2021.
• The pilot will test DAML’s interoperability across two ledgers, Hyperledger Fabric and Webank’s FISCO BCOS, as well as its integration with the fundamental architecture of the platform.

“By selecting DAML as the exclusive smart contract language of the BSN itself, our developers will gain the choice of using one unifying smart contract language seamlessly and interoperably across every blockchain.”

—Yifan He, Red Date CEO in a statement on Monday

Context: The BSN operates 130 nodes across China, according to Red Date.