Editorial: Separating Gold from Sand Amid ‘Blockchain Fever’
Recently, the Political Bureau of the Communist Party of China’s 18th Central Committee held a collective study session on the current developments and trends in blockchain technology development. Afterward, related stocks and virtual currency prices soared, and members of the blockchain industry applauded. For blockchain, a hot new technology with prospects for broad applications, encouragement and regulation from the government is essential. It should be noted, however, that “blockchain fever” is unavoidably accompanied by a growing bubble. In this latest gold rush, governments at all levels and the public must be able to distinguish between what is gold and what is sand.
Blockchain technology, also known as distributed ledger technology (DLT), is a new application mode that combines distributed data storage, point-to-point transmissions, consensus mechanisms, encryption algorithms and other computer technologies that can ensure the uniqueness, accuracy, and security of information transmission. It is leading to a new round of technological and industrial changes in the world. In China, the blockchain industry has initially formed and has extended into digital finance, the Internet of things, intelligent manufacturing, supply chain management, digital asset transactions and other fields. Credit investigations, product traceability, copyright transactions, digital identity, and electronic evidence are promising bright spots. After vigorous development, Chinese enterprises have a good foundation in these fields and have more advantages in hardware manufacturing. However, domestic enterprises use more foreign open-source software for application transformation, and research and development of the underlying technology still needs strengthening. 2017 is the year that blockchain technology “landed,” and now the technology is about to enter the stage of large-scale application. This time, the decision-making level has sent strong support signals that will promote the blockchain industry to accelerate research of basic technologies and more actively explore application scenarios.
However, this technology is still in the early stages of development and faces bottlenecks and issues in capacity, time lags, energy consumption, security, ease of use, and other things. What’s more, around the boom in this technology, there has been speculation and counterfeiting. Some people overseas have called it the biggest bubble since “Tulip mania” in the Netherlands in the 17th century. This may be an exaggeration, but the government and the public should guard against deception in the name of blockchain and pay attention to possible risks brought by defects in blockchain technology so that the technology can truly benefit society.
The early development of new technology has inevitably spawned speculative bubbles throughout history. However, there is a fundamental difference between the enthusiasm for supporting technological development and speculation that leads to a frenzy. After the news of the Political Bureau’s study session emerged, it’s worth discussing how much the soaring prices of relevant concept stocks and virtual currencies reflected the expectations for the development prospects of this industry, or how much it reflected the misunderstanding of “government endorsement.”
Like other research allocation issues, the market also must play a decisive role in the development of blockchain technology. The government can play a role in helping the market overcome “externalities,” by strengthening basic research and improving innovation rather than selecting technical routes and blindly increasing investment. The two main bodies that will break through the difficulties in this core technology are enterprises and scientific research institutions. It should be acknowledged that in the face of unique uncertainties that come with cutting-edge technologies like blockchain, it is impossible for governments at all levels to have an eye for identifying dishonest enterprises. Profound lessons must be learned from the establishment of previous communication technology standards and the incidents of new-energy vehicle companies misleading the government in order to obtain subsidies. China is experiencing the transition from selective industrial policy to functional industrial policy. Blockchain technology can become the first field of experimentation.
After just a few years of development, China’s blockchain industry has in its initial stages seen a number of leading enterprises emerge. While many of them are not hot investment targets, they have still made real technological progress. Therefore, we have confidence in the technological innovation capability of Chinese blockchain enterprises. In contrast, virtual currency issuance and the typical trend of speculation attract attention that does not lead to any benefits. In September 2017, the central bank and six ministries and commissions issued confirmation that initial coin offerings (ICO) are an illegal form of public financing that does not have approval. The domestic virtual currency trading platform achieved a smooth exit. This is the correct measure to take to prevent financial risks. This regulatory philosophy should be consistent in the process of accelerating the development of China’s blockchain industry in future.
At present, we should abandon the pride and prejudice around blockchain. In the face of external puzzling and questioning, insiders tend to take on the posture that outsiders don’t understand and ignore the obvious bubbles and their financial risks. While the public and the media often associate blockchain with virtual currencies such as bitcoin, they think of the hype and ignore their broader application prospects. Pride and prejudice are two sides of the same coin, and mutually reinforcing, which is unfavorable for innovation, experimentation and application of blockchain technology. For this new technology, which has only been in development for about 10 years, people within the circle should be responsible and the public should be tolerant.
Technology itself is neutral. Because of its decentralized nature, anonymity and information security, blockchain can not only lead to a new round of industrial reform — it can also facilitate illegal activities such as money laundering, terrorism financing, gambling and so forth. Therefore we must be on guard against the tendency of “blockchain worship.” For example, in the financial sector, blockchain technology plays a limited role in the current risk points that China faces, such as illegal deposit-taking, fundraising fraud and excessive leverage. Institutional arrangement is the key to preventing financial risks and building social trust.
When it comes to blockchain technology, China and other countries are on a new starting line that offers rare opportunities. Government rhetoric shows the strategic vision and urgency for the development of blockchain. At the very bottom, behind the competition in technology is competition in systems. To distinguish between gold and sand in the development of blockchain technology, we must rely on fair market competition, as well as constant improvements in the national governance system and capacity.
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