The Chinese government views cryptocurrency as a serious systemic financial risk and has cracked down on its use in the world’s second-largest economy. Although China retains a thriving underground crypto ecosystem, Beijing’s various bans on digital assets ensure that the average Chinese citizen is not exposed to them.

That being said, Beijing has not voiced any opposition to blockchain/DLT technology; By contrast, the Chinese government believes that it can use blockchain for a wide variety of applications, from trade finance to improving supply chain security. Local governments in China, following the lead of the central government, have been very busy implementing all kinds of blockchain projects, some valid, some not, in an attempt to qualify for related funding and boost economic output.

The question now is whether Web3 can present itself as a branch of the blockchain, and thus be considered legitimate and useful from Beijing’s point of view, or whether the Chinese authorities will see it as part of the cryptocurrency ecosystem and eventually impose harsh measures. related restrictions as they have with Decentralized Digital Currencies.

NFT with Chinese characteristics

The most prevalent iteration of Web3 in China right now is in the form of a local version of non-fungible tokens (NFTs), known as “digital collectibles.” Given regulatory concerns about trading and speculation, as well as China’s cryptocurrency ban, these digital collectibles differ from typical NFTs in important ways.

In most of the world, NFTs exist on open networks that anyone can use, such as Ethereum.
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blockchain, but doing this in China would be anathema to regulators. The solution has been to create an open permissioned blockchain (OPB) for them built by the state-backed Blockchain Services Network (BSN).

In January 2022, the infrastructure, known as BSN-DDC (Distributed Digital Certificates), was launched, with its leadership promising that it would serve as a one-stop-shop for companies to create and manage their own non-crypto NFTs. The name “DDC” was chosen to emphasize its focus on technology rather than speculation. He Yifan, CEO of BSN founding member Red Date, has described it as “distributed database and certification technology that can be applied in any scenario where digital proof is required.”

BSN-DDC is shaping up to be a unique piece of China-focused Web3 infrastructure with a nascent ecosystem. It has integrated with several other blockchains, including ported versions of Ethereum and Corda, as well as Tencent-backed Fisco Bcos. Transaction fees for BSN-DDC are paid in non-tradable token (NTT) instead of cryptocurrencies like Ether, Ethereum’s native token. Also, NTT cannot be transferred to other wallets.

As a state-backed platform that benefits from government support, BSN can offer certain advantages to users, such as low fees. Currently, it costs just $0.03 to mint a standard NFT on the Ethereum version of BSN.

growing market

Despite the significant constraints facing the China NFT market, it has been growing rapidly. According to Gyroscope Finance, which tracks metaverse activity, there were 681 NFT trading platforms in China as of June 2022 with 100 established in March, April and May respectively. ResearchandMarkets.com estimates that the China NFT market will be worth $4.8 billion in 2022 and will expand at a CAGR of 49.6 between 2022 and 2028.

In recognition of the booming NFT market, China launched its first national digital asset workplace in January. Unsurprisingly, it includes a strong state presence. Two of its three operators are state-backed, China Technology Exchange and Art Exhibitions China, while Huban Digital is a private company. It will also be used to market digital copyrights and property rights, as well as collectibles.

Great Firewall 3.0

Given the heavy government intervention in China’s NFT ecosystem, the market is likely to play out in a very different way than elsewhere. To that end, He Yifan, chief executive of Hong Kong-based technology firm Red Date, a founding member of BSN, told PingWest in September 2022 that he expects “billions of DDCs will be issued annually in China in the future”. The biggest market for CDDs is in account and certificate management for all types of businesses.”

Beijing’s unwillingness to allow the integration of its NFT ecosystem with the much larger decentralized global version and its continued opposition to cryptocurrencies suggests that it plans to develop a stand-alone Web3 as it has for the first and second iterations of the internet. The Chinese government will choose which aspects of this next-generation internet it wants to embrace, while rejecting those it deems problematic. While in previous versions of the Internet the main issue was how the technologies posed a perceived threat to social stability and government control, this time around there are genuine risks to the financial system to consider as well.

As with Web 1.0 and 2.0, China’s preference for its own unique version of the next-generation Internet will come at the expense of a few things, although the potential to achieve economies of scale in the huge domestic market could attract a large number of investors. interest.

“Great creative artists, they will like the real Web3 because that is what they really represent and there is also a global market,” Qinwen Wang, Chinese community leader on the Polkadot blockchain project.
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he told CoinDesk in a September 2022 interview.

Empowering the private sector

The key to Web3 thriving in China is not so much giving up on opposition to cryptocurrency (we think China can probably fix it ultimately), but empowering the country’s dynamic private sector to lead the way. We only have to look at the results when companies like Alibaba and Tencent were given room to develop, for example, world-leading e-commerce and fintech innovation, to see how such an approach can pay off.

However, if Beijing chooses to rely on state-owned enterprises to spearhead its Web3 push, the results may be disappointing. The government needs to focus on setting the regulatory bottom line and letting the private sector figure out the best business models.

And when it comes to regulations, more clarity would go a long way. With China suddenly cracking down on cryptocurrencies in late 2017, there are concerns that the same could happen to Web3 and NFTs in particular.

In the absence of a clear policy stance on Web3 technologies, uncertainty will prevail, which could eventually hamper market growth.