China Tightens Grip On Blockchain-Based Services

China has tightened regulatory pressure on blockchain-based information services, in an effort to ensure that authorities can trace any information posted online in the country back to the person who posted it.

The move follows other regulations banning trading in virtual currencies on the mainland – even as Hong Kong makes efforts to turn itself into a global capital for investment in cryptocurrencies.

The new regulations, published by the Cyberspace Administration of China (CAC) on Thursday, were first circulated in draft form in October.

They are designed to safeguard national security and social public interests, the CAC said.

Registration

They require service providers to register the real names and identification card numbers of users, to edit out content deemed to pose a threat to national security and to store user data for inspection by authorities.

The regulations, the first that specifically target the blockchain technology that underlies Bitcoin and other virtual currencies, go into effect on 15 February, with service providers given 20 days to provide user registration data to the government.

There are currently no widely used blockchain-based information services in China. Matters, a Chinese-language equivalent of Reddit that is based on the technology, is currently invitation-only as it undergoes tests.

In April of last year, an anonymous activist in China posted an open letter that circumvented government censorship by attaching the information to the Ethereum blockchain, and the resulting controversy is likely to have inspired the new regulations, the South China Morning Post reported last year.

The open letter, which concerned alleged sexual misconduct at a top university in the country more than two decades ago, was attached to the blockchain in a transaction the unknown individual made to themselves.  The blockchain is visible to the public and is designed to be impossible to alter, since it functions as a distributed ledger system.

US startup Steemit is an example of a popular Reddit-like information service that uses blockchain-based virtual currency tokens to reward users whose posts are upvoted by readers.

Distributed ledgers on the rise

The new law is part of China’s complex response to the rise of distributed ledger systems and virtual currencies such as Bitcoin.

On the mainland, authorities instituted a complete ban on initial coin offerings and cryptocurrency trading exchanges in September 2017, following a number of market manipulation and fraud cases.

But at the same time, Hong Kong’s financial regulator, the Securities and Futures Commission (SFC), last October introduced a set of rules governing cryptocurrencies, in an effort to improve investor protections and help make the city a trading centre for virtual assets.

The new rules, which target both funds that invest in digital currencies and platforms that trade in them, ban consumers from participating in such funds or platforms, but allow professional investors.

Analysts said at the time the regulations could attract Chinese mainland investors to trade crypto-assets in Hong Kong.

“We hope to encourage the responsible use of new technologies and also provide investors with more choices and better outcomes,” SFC chief executive Ashley Alder said at the time, speaking during last year’s Hong Kong FinTech Week.