Inside China’s Effort to Create a Blockchain It Can Control

“If they do something wrong we can delete the whole chain.”

This is how Yifan He, the CEO of Red Date, the company behind China’s Blockchain-Based Service Network (BSN), describes the level of government control in the system. 

BSN is the government-blessed framework being developed in China for blockchain developers. The network can already support decentralized applications (dapps) or tools built on 15 public blockchains. Red Date claims that it offers developers access to blockchains, both inside and outside China, at a cheaper price. 

This all fits into a larger pattern. China is wary of cryptocurrency but has embraced blockchain technology, as long as it can be controlled. The country is actively pursuing global supremacy in blockchain and crypto, and that work has two prongs: the digital yuan, or DCEP, China’s central bank digital currency, and BSN, a framework for building enterprise blockchain products. 

But China’s approach differs from the original concept of a blockchain as a system that is supposed to be immutable and resistant to government interference.

The BSN-base enterprise blockchain systems have been deployed by the cities of Hangzhou, Xiong’an, Changsha and the Hainan Province, according to Red Date’s international business development manager, Erika Lou. 

Several provinces are planning to join BSN this year, she added. Some foreign governments in Asia, Europe, Turkey and North Africa have also expressed interest.

Read also: China Aims to Be the World’s Dominant Blockchain Power – With Help From Google, Amazon and Microsoft – CoinDesk

Two ways

BSN was founded by Chinese state-owned telecom giant China Mobile, UnionPay and IT startup Red Date. 

It offers developers two versions: service for developers outside of China and one for users inside the country. These services offer two different sets of blockchain options and are physically separate. The global service is run from Amazon Web Services data centers in Hong Kong, California and Paris, while the national one only runs in data centers inside China, said He.

The global service now includes 15 public blockchains, with a plan to add 30 more later this year. They are Ethereum, EOS (-5.54%), Tezos, Neo, Solana, Polkadot, Casper, Nervos, IRISnet (a permissioned fork of Cosmos created by Tendermint and Chinese company Bianji), Algorand, ShareRing, Oasis, Bityuan, Near and Findora. 

Read also: China’s Blockchain Infrastructure Goes Global – CoinDesk

Both local and global devs will also be offered Baidu’s Xuperchain, Fisco (a blockchain product by the Chinese bank WeBank founded by Tencent), as well as versions of Hyperledger and Quorum.  

So why would developers use such a heavily controlled blockchain when there are decentralized options available? It may come down to cost. For developers, using BSN is cheaper than paying for cloud services through a traditional provider, He said. He noted that devs will still get the technology that public blockchains provide, just in a forked, permissioned way. 

Make it permissioned

If a blockchain allows smart contracts, like Ethereum and many other chains that were created after Bitcoin, there is a possibility people can post content onto the network that might upset the Chinese government. To avoid that, enterprise blockchain systems in China must be controlled by the authorities, He said. This is where the so-called Open Permissioned service comes into play. 

The service, created as a hybrid of permissioned and permissionless approaches specifically for the developers inside China, now includes IRISnet, the permissioned fork of Cosmos; Fisco and a version of Free TON, the proof-of-stake blockchain using the code Telegram wrote for itsTON project but never launched it due to a regulatory battle with the U.S. Securities and Exchange Commission. 

Red Date is also planning to add Waves, a blockchain created by a Russian team, the enterprise version of which has been used in some of the government blockchain projects in Russia. 

Another future addition is a permissioned version of Ethereum. According to He, a joint venture of “a well-known VC and a well-known developer in Hong Kong” is currently working on it. He declined to reveal the names.  

Read also: China’s BSN to ‘Localize’ 24 Public Blockchains by Making Them Permissioned

The forks of these chains for the BSN allow Red Date to censor certain smart contracts if they upset the regulator, or delete the entire blockchain, He said: “If they do something wrong, the regulator says that there’s something wrong, we can click a button and delete the whole chain.”

All Open Permissioned users also must go through a know-your-customer, or KYC, process,  so their identities are visible to the BSN operator at all times.  He added: “If you do something wrong, we know who you are.”  

No crypto allowed

Another distinct feature of the national blockchain service for use inside China is that it can’t operate with a cryptocurrency. This means that when users need to pay transaction fees, they have to pay them in fiat, not blockchain tokens. 

“To pay gas, they need to go to a [dedicated] portal, input their wallets and use real money to fill the wallet. You can use WeChat, AliPay, UnionPay in China to pay,” He said. “We basically link the traditional payment system with the public chain infrastructure.” 

Transaction fees are essentially gathered by the BSN operator, and then it sends part of it to a partner, says Pavel Prigolovko, chief strategy officer of TON Labs, the company that helped Red Date integrate Free TON. 

TON Labs had been an unofficial partner of Telegram when it was developing the TON cryptocurrency. After Telegram shelved TON due to the fight with the SEC on the token’s legal status, TON Labs launched the network together with a bunch of professional validators. 

To integrate Free TON into BSN, TON Labs’ team had to create tools for preliminary review of smart contracts before they get deployed, as well as for monitoring smart contracts’ activity in the network, Prigolovko told CoinDesk. 

To keep the system compliant with Chinese law, it’s important to make sure that users can’t send each other tokens. To ensure BSN operators can block non-compliant smart contracts, “each smart contract must have a code built in, so the BSN can stop it with its key,” Prigolovko said. 

Limitations aside, China is a big market for enterprise blockchain solutions and Free TON technology can get an adoption boost out of it, believes TON Labs co-founder Alexander Filatov. 

Read also: Ethereum-Based ConsenSys Quorum Partners With China’s BSN Blockchain

“Out of big countries, China is the most likely one to have explosive blockchain adoption,” Filatov told CoinDesk.  

For GoQuorum, the BSN-adapted version of Quorum by ConsenSys, the problem of gas doesn’t exist because this version uses the Proof of Authority consensus mechanism, said Charles d’Haussy, ConsenSys managing director for the Asia Pacific region. 

He also said ConsenSys didn’t have to build additional control tools for BSN as the technology already has all the needed functionality: “The maturity of our GoQuorum stack allows enterprises a high granularity of configuration to fit with their business and local requirements.”

D’Haussy praised the level of interest for the blockchain tech in China, saying:

“Chinese developers are extremely engaged and pull from us lots of content and training which our APAC teams are busy localizing.”  

Financial services have tended to soak up all the attention in the world of blockchain, but a new era is coming. In the first wave of initial coin offerings, companies proposed decentralized alternatives to everything from consumer products to ride- and home-sharing services. Most of those proposed alternatives disappeared because the early concepts lacked an execution model, but the concept of decentralized products and services are sure to come back as the blockchain industry matures.

In my experience, participants in centralized digital markets, both buyers and sellers, are often unhappy with what is on offer. The most vocal dissidents tend to be the sellers in these markets who find their access to consumers is now mediated by immensely powerful marketplace operators. Not only do these commanding operators have far more analytics and insight into the market than they share, they have the power to change rules of the market whenever they want. This is on top of the sizable share of revenue they take for their services.

Paul Brody is EY's Global Blockchain leader.

I have noticed consumers are not always thrilled either. The low prices offered in the early days of ride-sharing and couch-surfing are gone. Like the sellers in the marketplace, many are not happy to find the rules are changing and the increasing fees are coming on both ends of the transaction.

As blockchain technology matures, it is increasingly possible to build competitive decentralized ecosystems that offer similar services. Companies are getting better at structuring decentralized markets, leveraging designs that reward consistency and quality, and infrastructure that can handle some level of decentralized dispute resolution.

In other areas like decentralized computing infrastructure or financial services, a fairly typical business model is starting to emerge, where an open-source protocol is developed and a decentralized community takes over the long-term governance. A foundation or company is charged with doing the heavy work of maintaining and maturing the protocol in exchange for a sizable (but not dominant) chunk of the network governance and reward tokens.

This more mature decentralized approach balances the openness and transparency required to get buyers and sellers to join while putting enough incentive in the hands of a single entity to assure that someone takes a leadership position in maturing and shepherding the protocol forward. Companies like Aave, Compound Labs and SKALE Network are all deploying some variation of this model in finance. In my view, there is no reason why the same model could not be deployed for ride sharing or other services. These services have also put together all the infrastructure needed to support key activities like liquidity pooling and price discovery.  

It will be the battle of Web 3.0 vs. Web 2.0.

When this new model comes to these sharing services, real-world, non-financial consumer services may face a much tougher fight than the decentralized finance (DeFi) community for a number of reasons. First and foremost, they are not going to market against a municipal taxi monopoly or regulated, century-old financial marketplace. They face relatively new digital natives. It will be the battle of Web 3.0 vs. Web 2.0.

Secondly, it would be useful for these emerging decentralized protocols to remember that, notwithstanding all the carping about these new “monopolies,” very few of them are actually profitable. Entrepreneur Jeff Bezos is famous for saying that “your margin is my opportunity” – but without margin there is no opportunity. From ride-sharing to meal delivery to couch surfing, profitability has been elusive for many of these companies. How do you unseat a “monopolist” who is still engaged in such brutal warfare with its own legacy competitors that they are not yet making money?

Finally, the real world is exceptionally complicated. One of the things that has made DeFi such an elegant and compelling solution space is how little it depends on real-time connectivity to the physical world. Ride sharing and meal delivery, on the other hand, require nearly constant connectivity and updates to work well and they depend on data inputs from a variety of sources, some of which are very error prone. Very simply, these businesses are much harder than they look and they require a lot more active management than is evident from the outside.

To get a sense of how big the challenge is, compare precision-controlled environments subject to intense scrutiny, like regulated financial services or manufacturing, with crowd-sourced business networks. Manufacturing companies strive for Six Sigma quality, which amounts to 3.4 errors per million products or outputs. I can’t remember the last time my credit card company failed to correctly credit a payment, but my recent experience in burrito ordering has an error rate of one in three.  

I may be unusually unlucky in the burrito department, but even so that’s a very high error rate to be putting into an immutable transaction infrastructure.

None of these challenges are insurmountable. It’s entirely possible I will look back with pity upon the investors who poured billions into building Web 2.0 marketplaces with subsidies and price wars only to find their payday disappear into a decentralized marketplace. In the meantime, I can’t wait to see how a new generation of real-world decentralized services protocols take shape.

The views reflected in this article are the view of the author and do not necessarily reflect the views of the global EY organization or its member firms.

Open banking, the umbrella term for sharing banking, identity and payments data among fintech innovation firms, is being connected to the Ethereum ecosystem via API3, a startup focused on porting data onto blockchains.

Announced Monday, API3 (a “data oracle” service, in crypto-network parlance) has entered into a 10-year development partnership with the Open Bank Project, to merge over 400 banking APIs with blockchain smart contracts, Web 3.0 applications and decentralized finance (DeFi).

The move could one day give bank customers easy access to the online smart contracts that provide bank-like services (with more risk but often better yield).

Stepping back, the fintech revolution has relied on frameworks like the Open Bank Project so that banks can comfortably share their precious data to third-party innovators (the Revoluts and LendInvests of this world) — a data trove that includes everything from account information, to payment transaction requests, to know-your-customer (KYC) onboarding. 

API3’s “Airnode” infrastructure (roughly analogous to the job Chainlink performs in the DeFi space) adds blockchains and decentralized apps into fintech’s mix of Web 2.0 and mobile applications that use Open Bank, said Heikki Vänttinen, co-founder of API3.  

“It’s not necessarily about bringing private banking customer data onto the public Ethereum blockchain,” said Vänttinen. “A variety of blockchains can be connected to these APIs using Airnode. So it can be a very permissioned environment, something like JPMorgan and ConsenSys’ Quorum. Or it can be mainnet Ethereum, if you want to interact with common DeFi, for example.” 

API3 is focused on Ethereum-based blockchains for the most part, including scaling solutions like Polygon and enterprise versions of the public chain, but the startup also works with things like Polkadot, Vänttinen said. 

Open Bank Project CEO Simon Redfern, who has worked closely with the likes of HSBC, Santander and BNP Paribas as well as various regulators, said banks can sometimes be slow and bureaucratic, but they do carry an important trust credential. The API3 partnership will create a bridge between those banks and the worlds of DeFi, self-sovereign identities and data marketplaces, he said.

“This is about more than just customer data,” said Redfern, a 32-year veteran of programming database-driven web applications. “Banks are these sources of truth. Of course, that might include account-specific things, but I think it’s very broad, and banks have a huge amount of data.”

Swiss fintech firm Taurus Group is moving ahead with its digital asset marketplace after obtaining a securities license from the country’s financial regulator on Monday.

According to a press release shared with CoinDesk, the firm will launch its Taurus Digital eXchange (TDX) on May 10. The platform seeks to provide investors and banks with the ability to trade a number of assets including tokenized securities, private assets, real estate, art, non-fungible tokens and cryptocurrencies.

“We are convinced that the tokenization of real assets is the future of investment,” said Lamine Brahimi, co-founder at Taurus Group. Brahimi added TDX is targeted toward small and medium companies, non-listed large corporations and real estate firms. In that sense, these institutions will gain access to “greater liquidity and capital” currently only on offer for large publicly listed companies.

The Swiss Financial Market Supervisory Authority granted Taurus its securities firm paving the way for the launch. Various banks in the country have already begun onboarding including Arab Bank Switzerland, Hypothekarbank Lenzburg, Flow Bank and SEBA.

Switzerland’s first wave pool, dubbed Alaia Bay; private investment firm Audacia; and real estate firms Investis Group and Stoneweg are also onboarding, according to the release.

Taurus says both primary issuance and direct listings are possible on TDX with the platform being able to manage central limit order books, auction-based or request for quotes systems depending on the underlying asset and regulatory framework. The platform is also able to process smart contracts issued on Ethereum or Tezos.

See also: Digital Assets Firm Taurus Integrates Aave Protocol to Improve Banking Access to DeFi

The announcement follows changes in February to the Swiss regulatory environment for tokenized securities. Under the new “DLT Law,” trading securities on a blockchain has the same legal standing as traditional assets. Switzerland currently shares the mantle alongside Singapore for being the most advanced jurisdiction in the world for crypto regulation and clarity.

Taurus only provides financial services on an “execution-only” basis to institutional, professional and high-net-worth retail clients, according to the company’s website.