China's New Regulations on Blockchain Information Services

The BIS Provisions do not explicitly define "subjects", but by referencing the options offered by the record filing system of blockchain information service providers, the term "subjects" is used to cover both legal entities and individuals. Another undefined term used by the BIS Provisions is "node", which, in blockchain practices, refers to a copy of the blockchain that exists on a computer or other types of hardware devices. The nodes are used to preserve the integrity of the blockchain and an entire blockchain history can be retained although only one node is running it from anywhere in the world. Therefore, under the BIS Provisions, blockchain infrastructure that supports information services will also be blockchain service providers as well.

The scope of blockchain service providers can also be mapped out by three service types provided by the official record filing system (see https://bcbeian.ifcert.cn/index) for blockchain service providers: (i) infrastructure services (mining pools, cloud mining and nodes); (ii) application services (wallets, blockchain transaction query explorers and other applications); and (iii) technical services (Backend-as-a-Service/BaaS and other technical services).

In addition, it is commonly understood that the institutions or organizations that provide technical support for the subjects are considered to be "blockchain information service providers"; thus, the current "offshore operation with onshore technical support" model for cryptocurrency exchanges is subject to the BIS Provisions as well.

How is it regulated?

The official explanation published by CAC clearly highlights the purpose of the BIS Provisions, namely, that the government's objective is to prevent blockchain technology from being used to "store, disseminate illegal information or commit cybercrimes". Due to the features of blockchain technology such as openness, immutability and decentralization, the Chinese government is concerned that such technology will be used to publish and disseminate certain illegal information. For example, in April 2018, an internet post criticizing a famous Chinese university's misconduct was considered illegal and it was deleted from all internet media in China, but it was published on Ethereum, an open-source, public, blockchain-based computing platform, where the post can still be read today. The government is also concerned with the use of blockchain technology to "white wash" content/information, for example, in the food industry, where blockchain technology could be used to trace the origins and maintain the integrity of entire supply chains.

It seems that the BIS Provisions are trying to directly address these concerns by requiring service providers: (i) to have the capabilities for the prompt and emergency handling of the posting, recording, storage and dissemination of information contents prohibited by laws or administrative regulations" (Article 6); (ii) to validate the real identities of their users in accordance with the Cybersecurity Law (网络安全法) (Article 8); and (iii) to take appropriate measures to prevent dissemination of illegal information (Article 16).

Some Chinese companies have proactively responded to the regulatory requirements already, for example, the Chinese e-commerce conglomerate Alibaba has filed a patent application with the US Patent and Trademark Office for a blockchain-based system that allows a third party administrator to intervene in a smart contract where there are illegal activities. Such a patent describes a blockchain-powered transaction method that enables authorized parties to freeze or halt user accounts associated with illegal transactions, or intervene in a blockchain network. It is expected that by using such technology, service providers will have the ability to intervene and control illegal content/transactions in a blockchain.

Commentary

The BIS Provisions provide regulatory requirements and guidance for service providers using blockchain technology to provide services in different industries. It is important to create a healthy environment for the development and use of blockchain technology. However, there is still a long way to go for the development of a sophisticated and balanced regulatory framework for blockchain. The regulator needs to provide clearer definitions of the terms used in order for service providers to have clarity and understand how they need to comply with the BIS Provisions. The contents of the official record filing system need to be updated consistently to reflect the evolution of blockchain technology and its new application. Finally, the regulator may also consider whether the public blockchain and private blockchain should be treated differently since they have distinct features and characteristics.