China’s Crypto Conundrum: Embracing Blockchain While “Cracking Down” on Cryptocurrency

China’s Ministry of Public Security is set to experiment with a new blockchain-powered platform to verify the identity of its more than 1.4 billion citizens. The move comes at a time when the development of blockchain solutions is being prioritized by the government and cryptocurrency-related activity is soaring in the country despite a national ban.

Known as Real-Name Decentralised Identifier (RealDID), the platform was developed by the Ministry’s First Research Institute and the government-backed Blockchain-based Service Network (BSN). The platform will allow Chinese internet users to log into platforms without disclosing any private information.

A New Way to Verify Your Identity

By obtaining blockchain-based digital IDs for anonymous website logins, China’s new digital identification system would allow users to keep their personal data disconnected from transactions. Users will be required to use Anicert’s Cyber Trusted Identity (CTID) to verify and manage their identities, with BSN expecting to issue 5 million RealDIDs over the next year.

While Chinese authorities claim RealDID will enhance privacy, privacy advocates worry it may increase state surveillance powers in a nation already known for its capabilities in this area. American lawmakers have also seen the Chinese government’s use of blockchain technology with distrust, prompting them to push legislation to ban its use.

The move signals China’s continued efforts to become a major power in the blockchain industry, an intention the government had already made clear back in 2022. However, despite the quick adoption of blockchain technology by the world’s second-largest economy, the situation of other blockchain-based technologies remains murky.

Crypto Trading and Mining Continues Despite Official Ban

The regulation of cryptocurrency has been a major headache for governments all over the world over the past few years. China, however, made its instance on digital assets pretty clear when it first banned it in 2017. Similar bans on the technology have been ensured ever since, concluding with the ratification of the ban on crypto trading and mining back in 2021.

While the Chinese government’s position on cryptocurrency couldn’t be clearer, crypto trading and mining have continued to take place in the country. According to The Wall Street Journal, leading crypto exchange Binance facilitated $90 billion worth of trading in China last month. This accounted for 20% of Binance’s global volumes.

The report suggests that Binance helped Chinese users bypass trading restrictions by redirecting them to separate domains. While this bypassing of restrictions would be against the government’s rules on the matter, the report suggests that Binance’s investigations team actually works with Chinese authorities to prevent criminal activity.

Similar workarounds have been implemented by platforms like Huobi, which incentivizes Chinese users to apply for “digital citizenship” elsewhere if they want to trade. Industry insiders even suggest Bitcoin mining is stealthily growing in China again through recycling projects.

Tension Highlights Challenges of Crypto Regulation

The Cambridge Centre for Alternative Finance found in 2022 that Chinese Bitcoin mining activity quickly rebounded after the ban in 2021 thanks to underground mining operations. In fact, the surge of these operations was so overwhelming that China was able to recover the second top spot for Bitcoin mining in only one year.

Bitfarms’ Chief Mining Officer Ben Gagnon recently told CryptoSlate that cryptocurrency mining was recently returning to China despite the 2021 ban. According to Gagnon, waste recycling efforts have resulted in mining being seen as a “net social benefit” that could counteract the “internal politics” leading to the ban.

The enduring strength of crypto in China highlights the challenges of regulation when assets can flow freely across borders. Even with China’s “great firewall” being considered one of the most sophisticated systems to regulate internet traffic, blockchain and crypto have found a way to surpass censorship.