The Inclusive Future for China and the World!

Programmable governance for transparency, traceability and accountability is the future for not only China but also the rest of the world. No one would have thought that Satoshi Nakamoto, a name associated with cypherpunks, would appear in government official documents, especially in a country governed by the communists. That indeed is the case in the latest government report in China. In China, centralised governance is combined with distributed ledger technology² to build a Value for Everything (VoE) economy. VoE economy tokenises activities and things and excludes no one from the financial and economic systems.

Blockchain technology is now the focus of governments to build a VoE economy. The technology has entered into the arena that sees constant struggles between central and local governments, especially in regards to transparency in fiscal management and implementation of the regulatory framework. In the 1.4 billion populated Middle Kingdom, blockchain has become a powerful tool for the centralised authority. The mission of the cypherpunks is trust and power so that privacy is protected. Instead, some believe that blockchain technology leads to a more concentration of power and information. That need not be the case if the cryptography and distributed ledger technology are used appropriately. There is no contradiction in offline centralised governance and online distributed trust. The technology is neutral, and the outcome remains unknown. It all depends on the underlying blockchain design and the intention of the community and creator. What is clear, however, is the technology leads to more transparency and traceability, and therefore accountability for stakeholders.

This latest development in China requires close attention and the world should take notice. To accelerate the growth of blockchain technology and industrial innovation, the Beijing government has taken several initiatives. The Beijing Municipal Service Administration, Beijing Municipal Science and Technology Committee, and Beijing Municipal Bureau of Economics and Information Technology³ have made many efforts towards the application of blockchain technology in the realm of government services with significant achievements. To that end, the Beijing Blockchain Professionals Working Group⁴ has compiled a 141-page Innovation Blueprint of Blockchain Applications in the Government Services (or the Blueprint⁵). The report was officially released in July 2020. It summarises the developments of blockchain infrastructure construction and application status in Beijing. The intention is clear, blockchain is considered a public infrastructure, and it is not difficult to imagine that the central government will “build” this infrastructure throughout the country. This new GovTech leads to transparency and traceability and ensures compliance with centralised directives in the local governments.

The Blueprint has highlighted three critical issues faced by the Chinese society and public service. 1) Departments within the Chinese government and public service operate separately in silo-like manner, which makes data sharing difficult. One resultant issue of this is an inconvenience for the public at large. 2) There are problems pertaining to the factuality, reliability, traceability and verifiability of data. A data storage platform that can be trusted is in demand. 3) There are issues with the timeliness and accuracy of data. Due to rapid changes in personal data, civil services require a system that can offer updates and verifiable data to better serve the public. To tackle this, the Chinese government has innovated and popularised multiple initiatives in the field of digitalisation, networking, and intelligence. Recently, the “Internet + Governance” (“互联网+政务”) initiative has helped to improve government data sharing and increase workflow efficiencies for people in many places, including citizens in Beijing. Blockchain technology’s decentralised nature, along with its immutability and traceability, can mitigate these problems. The authorities pledge to work towards a programmable governance model that is based on blockchain 3.0.

However, implementing blockchain in China is not plain sailing. Departments within the Chinese government and civil service functions in silos each with their own respective data governance model. Besides, each department has different levels of digitalisation, making cross-departmental digitalisation difficult. Lastly, in terms of management and coordination, it takes effort to coordinate the flow and storage of data across multiple departments.

To resolve this, the Blueprint proposes a series of steps. Firstly, to focus on the construction of infrastructure that enables a blockchain-based programmable governance model to prevent isolation of data and value among different blockchain systems. Beijing may be one of the pioneer cities in this realm. A massive “New Infrastructure” project is in place to replace the existing data storage and sharing system across the departments of the public service. This includes adopting Blockchain 3.0 on a city-wide scale. Blockchain 3.0 is characterised by “programmable society” (“可编程社会”), because of its smart contract functionality. Such contracts can help to bridge the real world and the digital world, using the blockchain as the underlying basis for trust. Also, it will function as the “connecting link” (“连接”) between existing government networks and new technologies such as cloud computing, allowing better sharing of data across different public service departments.

Secondly, data needs to be optimised and governed in a trustworthy fashion that still allows traceability, transparency, and transferability. Officials and experts in Beijing propose a series of governance structures that aim to solve the technological and process implementation issues when it comes to developing a digital government from the following seven perspectives:

1. Building a unified government blockchain technology application standard

2. Developing the application scenarios

3. Promoting the integration of cross-departmental and cross-regional government services

4. Open-source collaboration behind the underlying blockchain technology

5. Promoting blockchain applications that are easy to use

6. Supporting the innovation of blockchains from multiple angles

7. The overall strategy: laying a strong foundation

The last step is to deepen the collaboration between blockchain-based government services and businesses in the service sector to promote innovation. The Blueprint has shown promising results during the initial trial in applying blockchain in government services. There has been 140 application scenarios in the four pilot cities (Haidian, Xicheng, Chaoyang, and Shunyi⁶) and around 40% reduction of documentation. Many of these applications have proven to improve work efficacies of public service and optimise the business environment for private business entities. In total, 12 case studies were highlighted in the Blueprint. Each of these case studies involves an ecosystem of organisations linked via blockchain. Here is the summary of the findings:

– Tax and custom authorities: benefitted from enhanced monitoring and tracking of cross border trade activities. Relevant data is then shared with taxation authorities which simplified filing of taxes. This had a huge impact not just on improving trade governance, but benefits private business trade as well in terms of cross border trade.

– Beijing Local Financial Supervision and Administration⁷ partnership with multiple banks, financial institutes and monetary authorities: more accurate verification of client’s data can be performed (via eKYC⁸). Hence, it is easier for clients to perform secured and approved banking transactions.

– Tax authorities, schools, and hospitals: uniformed electronic receipts can now be easily issued, featuring a compilation of relevant personal tax, education and health data. The data can be used by private insurance companies as verification for pay-outs and at the same time, reduce loss from insurance frauds.

– Micro-financing ecosystem: SMEs accounts are made transparent and traceable. This promotes greater trust from micro-financing lenders and enhances their willingness to offer loans. SME owners can benefit from more business operational or capital loans.

– Ecosystem between public services and utilities boards: Citizens can have more convenient access to public services, without the need to offer additional identity verifications. This includes registration of marriage or making claims for welfare funds.

– Business registration: easier for aspiring business owners to register their business and obtain relevant permits

As seen from many of these cases, the use of blockchain technology has benefited the public service and has further empowered private sectors as well. This enhances the cooperation between the public and private sectors to ensure a more digitalised, inclusive and connected society in China.

The ambition of China to serve the people is much broader. By having more information and trading of things with value, those newly tokenise things and activities will have its value increased. The Blueprint shows the promising development of blockchain in local government agencies, yet it reflects just part of the nation’s actions as the Chinese government has been very proactive and has done in supporting the development of blockchain technology for the past few years. This Blueprint is one among many government initiatives.

The full picture is clearer if we examine the following initiatives. People’s Bank of China (PBoC) has been doing research on central bank digital currency (CBDC) since 2014 and already started the DC/EP (Digital Currency Electronic Payment, China’s CBDC) piloting⁹; China’s Blockchain-based Service Network (BSN), a joint initiative between State Information Center¹⁰, China Mobile, China UnionPay, and Red Date Tech, is now officially available for global commercial use¹¹; the Cyberspace Administration of China has issued a total of 730 licences to blockchain service providers¹²; the Standing Committee at the 13th National People’s Congress has passed the Cryptography Law of the People’s Republic of China¹³ to regulate how cryptography is used and managed¹⁴, which will have major impacts on activities and projects involved cryptography, including blockchain and cryptocurrencies. China is leading the digital transformation of the world economy. For DCEP alone, there are more than 50 patents¹⁵ or 80 patents¹⁶ filed depending on the source. What is interesting is that many DCEP related projects are public-private partnerships involving not only local enterprises and startups but with other foreign enterprises and Asian governments too.

The initial thinking behind the crypto community was that the decentralised system works well as long as there is a good token design to incentivise network behaviour. That may be true if there is no involvement with the physical world where geographical location is never an issue. Once the physical world is involved, other technologies are essential for ensuring authenticity and traceability. These include working with cloud, Internet of Things, Artificial Intelligence and others. An “open” design thinking is crucial to ensure interoperability and future additions of technology and services. In this aspect, the report has given a broad framework in design thinking for inclusive blockchain. For those more technically inclined, we outlined six principles underlying blockchain network design thinking by the Working Group:

(i) Loose coupling: The underlying architecture has clear layers and distinct boundaries. Layer technology is decoupled or weakly coupled to ensure an accommodative environment for interoperability;

(ii) Safety: The security of core algorithms such as cryptographic algorithms, consensus mechanisms, and smart contracts are controllable and secured;

(iii) Compatibility: The underlying architecture is horizontally compatible with various functional sub-modules and backward compatible with the future technical iterations;

(iv) Modular: Adopt modular design and that the modules can be designed and implemented separately, and the looseness between modules can be realised through clearly defined module interface services to achieve scalability;

(v) Social scalability: Homogeneous blockchains interconnect and interoperate through interoperability protocols. Heterogeneous blockchains interconnect through relays.

(vi) Secured privacy. Provide transaction information to users, employing cryptography methods such as zero-knowledge proof, identification proofs, ring signatures, homomorphic encryption, and secure multi-party computing in a trusted environment.

These six principles are compelling as they ensure a very open, inclusive and adaptable approach to incorporate both future addition of hardware and software to the network. While payment and security tokens are banned for trading in China, crypto-tokens are commonly used for livestock, invoicing, supply chain, certification, and other tracing and transparency purposes. China has been more open than the crypto community in embracing the open environment. This is in great contrast to the earlier development that we saw in the open blockchain community where projects worked in a silo and each competing to be the best blockchain. However, that thinking has changed somewhat with recent progress¹⁷ in Cosmos, Polkadot, Chainlink, Wanchain, Quant, Cardano, Aion, Icon, Ark, Bytum, Dragonchain, Ferrum network, and SUSS-Smartmesh Living Lab¹⁸. Some of these projects have ensured that there is interoperability not only with software but also hardware. The design thinking of both cypherpunks and government are also converging not only in embracing the open technical approach but also in not being exclusive in every aspect from producers to users. “Every blockchain is a node” is the future of the community, especially for the smart governments. Indeed, the blockchain community have also been working closely with governments and corporates.

Data will be an asset class in the VoE economy. Privacy protection is the mission of the cypherpunks, and it is not inconsistent with programmable governance. Governments will certainly be protective of individual and collective assets in the form of bits and bytes. Programmable “government” is at a different level, especially if one has the imagination of a Skynet, an artificial general superintelligence system with self-awareness, that serves as the enemy to the people. That may be far fetched but it is nevertheless in the mind of the cyberpunks as written in their fictions and perhaps the cypherpunks while toying with their cryptography. But digital or data dictatorship and empire are not fictions. We now see monopolies built on the foundation of data collection and analysis. It is inevitable that software and cryptography will be regulated and China has already moved ahead of the curve.

A few years ago, who would have thought that the governments would ever harness the best in blockchain design and take the lead in interoperability, and data privacy protection with the convergence of hard and software! But Covid19 has changed all that. The interoperability of blockchains, the convergence of technology, the inclusion of the excluded population, have all led to a push towards the VoE economy. Through the tokenising of fiat (Central Bank Digital Currency), assets and activities previously excluded from the financial markets, technology has empowered society to serve the people and businesses in need of cash flow and cheap capital. This social objective is ingrained in the mind of the Chinese government.

Covid19 has devastated the global economy and changed our lifestyle. Among so many adverse outcomes, perhaps the most significant positive is that it has achieved something that no one was able to do: the change in mindset towards empowerment, complementarian, service to and inclusion of everything previously excluded from our economic and financial system. The blockchain future is bright if the intention is to serve rather than to rule, to complement rather than to compete, and to empower rather than to manipulate!