As local governments in China adopt blockchain, commercial banks edge out the competition from tech firms

"You have to be on-chain if you want to be paid by the local government."

That's what a regional manager at a Chinese state-owned bank told The Block recently when asked about the adoption level of blockchain in the city of Xiong’an.

The focal point of President Xi Jinping’s attempt to build a smart city from the ground up, Xiong’an is spending trillions of dollars on infrastructure building every year. However, actually accessing this money is not easy. Construction companies working for government projects have to first adopt the blockchain system that local agencies are using in order to verify all of their records and receive payments from the government.

“As long as the money comes from the [local and state] departments of finance, they [construction companies] have to be in the blockchain systems, otherwise they cannot settle payments and withdraw funds,” the manager, who spoke under the condition of anonymity, told The Block.

The underlying blockchain solutions that Xiong’an’s local government uses were all developed by state-owned banks such as the Industrial and Commercial Bank of China (ICBC) and the China CITIC Bank, according to media reports and the manager. In addition to construction, government fundings for other projects such as land requisition, building demolition, environmental protection were also managed through commercial bank-developed blockchain platforms.

Xiong’an exemplifies the scale at which blockchain technology is being deployed in China, where the government is driving for the adoption with significant fundings and lucrative deals.

Just in the city of Xiong’an alone, the local government issued over $4 billion bonds in 2019 to raise money for building basic infrastructure. These were funds that could be facilitated by commercial banks' blockchain platforms. The city also announced recently a $680 million project to build 11 energy stations, which asks all fund management activities to be conducted on the China CITIC Bank's blockchain platform.

The National Development and Reform Commission, which manages some of the most important long-term development projects in the nation, also recently classified blockchain technology as a new basic infrastructure. This means that it will be a part of China's most important economic development strategy, which is estimated to receive over $160 billion in 2020.

Behind the fast deployment of blockchains, however, is a catch.

Although technical details are sparse, it can be inferred from various media coverage and public information that all blockchains developed by commercial banks are permission-based, or so-called private blockchains. Nodes are usually run by a limited number of entities, including government agencies and banks, and third-parties need permission to join the network.

Moreover, although transactions and contracts are recorded on-chain, fund transfer still happens off-chain on the traditional banking rail. This means that onboarding can be as easy as opening an account with the bank that provides blockchain services and receiving payments from that bank account.

Tech companies

Elsewhere, tech companies are picking up blockchain business clients in sectors that banks haven't covered. Ant Financial, the fintech arm of Alibaba, Tencent, and search engine giant Baidu have all deployed their own blockchains.

Like commercial banks, these tech companies also act as blockchain service providers in government initiatives like invoice tracking and legal document sharing. However, the scale of these projects is notably smaller than the infrastructure construction project mentioned above.  

Instead, these companies can team up with nonprofit organizations for global influence. Ant Financial's blockchain platform, appropriately named the Ant Blockchain, was recently mentioned in a March United Nations newsletter. According to the newsletter, small and medium-sized medical equipment suppliers could apply for loans from banks based on invoices from enterprise buyers, with Ant Blockchain facilitating the authentication process of these invoices.

The company also co-hosted a webinar this week with the World Bank Group for blockchain adoption during the global pandemic, a company spokesperson told The Block.

Baidu, on the other hand, is part of the Blockchain Service Network, an initiative led by the State Information Center with the participation of the country's telecom and financial conglomerates. Baidu's Xuperchain is one of the several infrastructure layers that the initiative uses to provide services to domestic and oversea businesses.

Yet when bidding for government-sponsored blockchain projects, they may be at a disadvantage compared to their commercial bank competitors, even though they provide similar or sometimes even superior technology.

As a May 8 op-ed in the People’s Court Daily pointed out, when choosing blockchain services providers, local government agencies usually cannot accurately assess service providers due to a lack of understanding of the technology. In this case, working with state-controlled banks rather than private companies appears to be a safer bet.

Additionally, the banks may charge little to no fees for their blockchain services when working with the government, according to the regional manager. Unlike private companies, which work with the government as contractors, state-owned enterprises have the responsibility to support important government initiatives.

Ant Financial and Tencent's blockchain team did not respond to The Block's requests for comment.

Regardless, tech companies are inching ahead, targeting local government agencies and small to medium businesses. Ant Financial disclosed that it has deployed over 100 use cases of its Ant Blockchain. Tencent has also been signing up several government clients for its invoice tracking and taxation services.