Two Breakthrough Innovations to Power China’s Digital Ambitions

While the world has been embroiled in the containment of COVID-19, China launched two game-changing initiatives at the end of April that not only have massive implications for the Chinese economy and international trade and finance but also the entrepreneurial community. They are the Blockchain Services Network (BSN), providing backbone infrastructure technology on top of a myriad of underlying blockchains, and Digital Currency Electronic Payment (DCEP), China’s central bank digital currency (CBDC).

BSN is the manifestation of China’s desire to lead in the next generation IT infrastructure that will power applications like smart cities, financial services and data storage. Touted as the “internet of blockchains,” BSN is a framework, cloud and protocol agonistic infrastructure connecting data centers and distributed networks. Supported by Hyperledger Fabric, it is designed to be fully interoperable with major blockchain protocols including Ethereum, EOS as well as homegrown chains like Baidu’s XuperChina and WeBank’s FISCO BCOS (the Financial Blockchain Shenzhen Consortium). This new infrastructure can be deployed over a multitude of cloud services ranging from AWS, Google Cloud, Azure, to Baidu Cloud and China Telcom.

BSN essentially offers an abstraction layer on top of established permissioned or public chains where developers can plug in and build fintech and other service level applications. In its trial phase, BSN will roll out with 110+ city nodes throughout China, with the goal to connect all prefecture level cities over the next year. Each city node offers cloud computing resources through which information flows and transactions are processed. This network offers anyone the ability to deploy blockchain applications easily at drastically reduced costs, as low as $150–300 per year. Imagine what that could do for startup costs for those using the blockchain. As with any technology, affordability can meaningfully accelerate the adoption curve. BSN has the potential to unleash the promise of blockchain.

BSN also offers interconnectivity for governments, corporates, SMEs and consumers to access these applications and services and exchange data, value or digital assets. For example, a start-up can build a digital identity service on BSN to provide faster authentication of individuals and entities that connects seamlessly to government services such as utility bills payments and company registrations.

China has the ambition to take BSN global and has already announced eight international pilot nodes covering all continents except Antarctica. Applications developed in other parts of the world could be easily ported to work on BSN and gain access to Chinese users and liquidity pools, while Chinese solutions can reach an international audience via deployment on AWS. If successful, BSN has the potential to become a global marketplace that democratizes access to critical talents and tools on a common platform.

Along with BSN, China announced the pilot of Digital Currency Electronic Payment (DCEP), China’s central bank digital currency. Not surprisingly, the country with the most advanced system of mobile money in the world is also the farthest along the CBDC path. While regulatory headwinds have significantly pared down Facebook Libra’s ambitions, DCEP launched at the end of April and is already being piloted in four cities. Government employees and public servants there will begin to receive a percentage of their salaries and expense reimbursements in DCEP. Unlike existing mobile payment means, DCEP is positioned to be a true replacement of paper fiat, where payments can be conducted via NFC or Bluetooth, even when there is no internet or cellular connectivity. The plan for full rollout will not require a user’s mobile wallet to be tied to a bank account, thereby enabling adoption by the unbanked population as well. DCEP is designed to be highly scalable, supporting up to 300,000 transactions per second, much faster than any existing payment networks.

DCEP is being tested at the Agriculture Bank of China and is integrated with the bank’s mobile app and wallet. Post pilot, it is expected to be available to all four of the major state owned banks, as well as to China’s dominant mobile wallets — Alipay and WeChatPay. Given the pervasive payment infrastructure these two mobile wallets have established, integration would enable a rapid retail deployment of DCEP. The increasing global acceptance of Alipay and WeChatPay, particularly in emerging markets, also means they can help drive distribution of DCEP overseas and accelerate the internationalization of the RMB. If DCEP is able to leverage the payment, e-commerce and social media rails built by these tech giants, it can potentially create a quick, cheap and real time currency settlement and clearing network with the potential to reshape global trade finance. The implications are far reaching.

A notable feature of DCEP is its programmable nature. When that functionality is opened, developers will have the ability to leverage smart contracts to embed intelligence into transactions and build applications for a wide variety of use cases. For example, it has the potential to upend the $2.3 trillion letter of credit market that powers international trade today. Smart, self-executing contracts can enable the automatic, immediate and on-chain settlement of payments between trading partners upon fulfilment of specified pre-set conditions. All transaction related data are recorded in a transparent and verifiable manner. This would reduce fraud, discrepancies, delays and the need for costly intermediaries. One could envision a future of a nearly frictionless flow of data and money where payment via DCEP is layered on top of an IoT enabled supply chains built on BSN.

Just as China has extended its reach by financing and building highways and ports around the globe, BSN and DCEP add technology infrastructure to its diplomatic tool kit. While China is the world’s largest trading nation, RMB’s share of international payments is only around 2%, according to SWIFT. DCEP could potentially increase the use of RMB for cross border trade pricing and payment settlement. While the RMB is unlikely to challenge the US reserve currency status anytime soon, it could make inroads in countries participating in China’s Belt and Road Initiative as a key currency for infrastructure investment and financing. For other emerging markets with weak fiat currencies, signing bilateral swap agreements involving DCEP could allow them to reduce reliance on the US dollar. Similar to INSTEX, established by EU nations to facilitate trade with Iran and bypass US sanctions, an alternative clearing network independent of SWIFT could allow countries to sidestep costly US compliance requirements.

Globalization has come under significant challenge in recent years. There is increased resistance to established technology standards, perceived control of data and information by the incumbent US technology giants and even the US dollar as the world’s sole reserve currency. We are witnessing a world drifting towards multipolarity politically, economically and technologically. Similar to advancements in 5G, IoT and AI, China is certainly eager to expand its influence and become a standard bearer in its own right.

Written by: Wei Hopeman, Managing Partner of Arbor Ventures