China has passed a new law regulating cryptography, which
will come into force on January 1 2020. Cryptography is an
integral part of blockchain technology which has been strongly
supported by the People’s Bank of China and at a
high level, by
President Xi Jinping.
IFLR’s latest primer looks at how it will
impact blockchain development and the broader implications for
the government’s desire to create a national
Cryptography is the method of protecting information by
changing or encrypting it into an unreadable format so that
only those with a secret key can decipher it into plain text.
It’s used to secure data in transmission, data
storage and user authentication.
What’s the cryptography law about?
Under the new law, organisations working on cryptography
need to have management systems in place to ensure there is
sufficient security of their encryption. While the law
encourages the commercial development of encryption technology,
its use cannot harm state security or public interest.
In the legislation, cryptography generally refers to
technologies, products and services that apply specific
transformations to information to effect encryption protection
and security authentication.
The law stipulates that all state secrets have to be stored
and transmitted using core and common encryption. Commercial
encryption is the third type, which can be used by anyone to
protect information that is not confidential.
At this stage the law remains quite vague, and further
implementing guidelines can be expected in 2020. Many in the
market are enthusiastic.
"I think it’s a net plus for the blockchain
community since it will now be a mandate that they have high
quality encryption built in," says Richard Turrin, a
Shanghai-based author and fintech consultant. "Strengthening
the encryption or setting standards that guarantee the security
of that encryption are both fundamentally good things."
He continues: "There are hundreds of blockchain protocols
out there being built by developers in China, but right now
it’s unclear whether the encryption you're buying
into is as advertised when you use the system. So it's
certainly a form of insurance, in as much as the law can be
enforced on a vast army of coders."
PRIMER: regulating cryptocurrency
However, some believe that the encryption law
won’t have much of an impact. Samson Williams,
adjunct professor at University of New Hampshire school of law,
believes that blockchain laws are not needed.
"Laws pertaining to data privacy, data ownership and data
sharing are needed," he explains. "Blockchain is just the
plumbing of data collection, maintenance, sharing and
monetisation. We need laws that address how data is
commercialised and who owns it, not necessarily the means of
how the data is amassed."
What concerns does the industry have with the new law?
More clarity is needed on the definitions of certain terms
such as national security, and how much government interference
"I think we’ll see pilot projects first with
domestic businesses," says a Singapore-based in-house lawyer at
an international bank. "Until we see these test cases,
it’s hard to delve into the cross-border and data
Turrin says there may be a few points of contention for
foreign developers. For instance, the government will require
import licensing on commercial-grade encryption technology used
by companies to protect networks and for information
"Whether this licensing is simply a formality or will be
strictly enforced is not yet clear," says Turrin. "The good
news, though, is that the law explicitly forbids the government
from demanding source codes and proprietary information."
According to Sherry Gong, partner at Hogan Lovells, article
21 of the law provides that all commercial encryption
operators, including domestic companies and foreign-invested
enterprises, shall be treated equally.
But due to the general and somewhat ambiguous nature of the
drafting, it is still unclear whether the equal treatment
principle will mean that both domestic capital and
foreign-invested enterprises, and foreign individuals will be
permitted to import foreign-made commercial encryption products
Another unanswered question is whether the products may be
sold in the China market.
How does the law relate to China’s plan to
develop a national digital currency?
Chinese officials have been studying the possible rollout of
a national digital currency for some time now. Market
participants believe it will happen, although no formal
timeline has been set. The cryptography law is thought to
provide an overarching framework for the further development of
blockchain and digital currencies.
"It provides a broad-brush framework, including commercial
uses, for digital currencies. It’s a good move,
but more implementing guidelines are needed," says the in-house
According to Turrin, the law will support the national
digital currency by enshrining its high encryption standards in
Exactly what these standards are is unclear at the moment
but observers believe that evolving standards are inevitable
with the rapid changes in technology. With the passage of time,
though, many believe there’s potential for the
legislation’s mandated encryption standards to
change – which would require the national digital
currency encryption to change.
Takatoshi Shibayama, founder of Blockchain Centre Singapore,
believes the law demonstrates China’s sustained
interest in pushing for blockchain development, but
it’s unclear where it could be headed.
"Blockchain technology, from its first manifestation of
bitcoin to recent use cases in supply chain management, has a
spectrum of usability for the exchange and storage of data.
This can be fully encrypted and managed by a decentralised
system, or be fully transparent and be centralised," says
He continues: "The only commonality of the two is that the
data is being exchanged without going through an intermediary,
reducing human error and friction. But what gets recorded,
where it gets stored and how that is governed are the ultimate
questions, and it is a matter of where the
technology’s direction is spearheaded towards."
How ready is China for a national digital currency?
With the rapid advance of payment systems like Alipay,
observers believe that it’s only a matter of time
before China adopts a national digital currency. However, at a
global level, central banks are still grappling with creating
the appropriate governance structures.
"China has plans to launch a national digital currency that
will be pegged to the renminbi," says the in-house counsel.
"With so much of China already cashless, I think it wants to
set a benchmark to the rest of the world – and it will
also help internationalise the renminbi."
The in-house counsel adds: "Central banks around the world
are exploring the new risks associated with digital currencies,
and need to create the security, taxonomy and governance
building blocks – no central bank can do it
A key lingering question for Chinese officials is how best
to ensure oversight while providing space for innovation and
commercial success. It’s a delicate balancing act
that central banks and regulators around the world are
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