Draft Block-chain Rule: From denial to limited permission
By Xun Yang | Jianqi Yang
注: 本篇文章独家授权威科先行法律信息库发布, 未经许可, 不得转载。
Cyberspace Administration of China (“CAC”) issued on October 19 2018 the Administrative Rule on Block Chain Information Services (the “Block-chain Rule”) for public consultation. The Block-chain Rule does not supersede the ban on issuance and trading of coins within the territory of China, which ban is imposed under the Announcement on Preventing Token Fundraising Risks (the “Risks Announcement”) issued by the People’s Bank of China collectively with other government authorities in 2017. However, the Block-chain Rule does provide a legal framework which block-chain service providers can follow in China. In other words, the issuance of Block-chain Rule is a positive signal for all the practitioners of block-chain industry in China.
1. Scope of application
The Block-chain Rule adopts a territorial based jurisdiction. Article 2 of the rule stipulates that “the provision of block-chain information services within the territory of PRC is subject to the Block-chain Rule.” CAC explained that the provider of block-chain information service is defined as “any entity or node which provides block-chain information service to the public (in China), as well as any institution or organization which provides technical support to such provider of block-chain information service.” In our view, by using the terms ‘entity, node, institution and organization’, the Block-chain Rule will likely regulate all the service providers which may have any relation to block-chain information services.
Firstly, the Block-chain Rule includes ‘Node’ in the definition of “block-chain information service provider”. There is no definition of or interpretation on the term ‘node’ in the PRC legal regime. In practice, the term ‘node’ as used in the Block-chain Rule refers to a unique technical architecture applied in the block-chain. One of the most significant technical characters embodied in block-chain is ‘decentralization’, which means each ‘node’ distributed on the block-chain will have the right to access the all information recorded in the block-chain with no restriction. In other words, each node, as an information terminal, will be considered a ‘server’ hosted all the information stored in the block-chain. Therefore, theoretically speaking, in the event that one of the ‘nodes’ is distributed in China, even if its provider of the block-chain service do not have any entity or office in China, such node will be able to access all the information on the entire block-chain. As such, the inclusion of ‘node’ in the definition of block-chain information service provider is an reaction to the foresaid technical character of block chain.
Secondly, in practice, it is a customary business model to establish a overseas entity to operate the block chain business and to use a Chinese entity to provide technical support such block chain business. On this regard, the Block-chain Rule requires that all the entities and organizations which provide technical support to block chain business operations are subject to the Block-chain Rule. In particular, quite a number of block-chain service providers were no longer able to trade coins due to the issuance of Risk Announcement in 2017. Therefore, most of bitcoin (or other coins similar in nature) business operators move the business outside of China to avoid PRC law implications. Nevertheless, if the Block-chain Rule is adopted in its current form, the said business structure will still be regulated by the Block-chain Rules.
2. Overview of Obligations
The Block-chain Rule regulates the block-chain information services mainly based on filing requirement and supplemented by approval requirement.
2.1 Filing Requirement
Article 4 of Block-chain Rule requires that all the block-chain information service providers file a registration form via an online management system developed by CAC within 10 days as of their provision of service. For the purpose of filing, block-chain information service provides must submit the information relating its shareholders, its operation of business and the address of servers etc. Moreover, the block-chain information service providers must renew its filing information annually in accordance with article 5 of Block-chain Rule.
However, it remains uncertain under Article 4 as to the date of the provision of service. Especially, block-chain information service providers usually adopt different testing phases such as “closed testing,” “internal testing” and “public testing” to review their services and it requires further clarification as to whether such testing is considered commencement of services. In addition, it is also not clear whether the date of provision of service refers to the date on which the technical service is provided to the SPVs, or refers to the date on which the recipient (e.g. the SPVs) of such technical services provides the block-chain information service to the public.
2.2 Approval Requirement
Though, ‘traditionally’, the block-chain technology is mainly used in the financial sector, especially in the context of issuing and trading ‘coins.. However, such technology can also be used in other scenarios, such as preservation of electronic evidence. According to Article 7 of Block-chain Rule, the block-chain information service provider must apply for an approval from the relevant government departments if the service to be provided falls within the scope of restricted industry. In other words, the pre-approval requirement in restricted industries still applies to the block-chain related services in such areas.
2.3 Cyber Security Requirement
The ‘network security’ has been considered a national strategy formulated by PRC government since 2015. Unsurprisingly, the Block-chain Rule provides for a number of cyber security requirements, which including real name registration (corresponding to Article 24 of PRC Cyber Security Law), content censorship (corresponding to Article 47 of Cyber Security Law), formulating a emergence plan (corresponding to Article 25 of Cyber Security Law), establishing a channel for reporting (corresponding to Article 49 of Cyber Security Law), security protection and cyber logs retention requirement (corresponding to Article 21of Cyber Security Law), as well as prohibition of illegal information requirement (corresponding to Article 12 of Cyber Security Law).
It is worth noting that the Block-chain Rule amphsizes the requirement of ‘real name registration.’ However, ‘anonymization’ has long been viewed as one of the most important technical characters of block-chain technology. A number of block-chain information services are developed based on the ‘anonymized function’ derived from such technology, for example ‘express delivery service’ (for protection of privacy) and anonymized financial trading service. The “real name” requirement may trigger customers’ a concerns about their privacy.
2.4 Eliminating Illegal Information Requirement
Block-chain information service providers are required to eliminate all the illegal information on their ‘block-chain’ according to Article 11 of Block-chain Rule, which will be a tremendous challenge for the block-chain information service providers in China. The block-chain technology enables a community of users to record information or transactions in a ‘ledger’ that is public to such community. Mo information or transaction can be changed once published. In other words, illegal information will be immutable once it is recorded into block-chain unless hacking the block-chain with enough computing power, which power is almost impossible to be generated by any commercial entities currently. Therefore, it would be a difficult mission for block chain information service provider to perform the obligation under Article 11.
Recently, a new technology has been created in order to solve with the above difficulties in the block-chain industry, which technology is called ‘sovereign block-chain’ by some scholars. According to a documents released on Oct 4 2018 by the U.S Patent and Trademark Office (the “USPTO”), Chinese tech giant Alibaba has applied for a patent for block-chain system that allows a third-party administrators to perform special transactions or instructions, e.g. stopping smart contracts or freeze accounts which suspicious of illegal activities. According to Alibaba's proposed block-chain system, dedicated administrators will be able to send special processing instructions to each nodes, making smart contracts perform corresponding operations on specific accounts. If such technology can be implemented as Alibaba’s description, it will enable the block-chain information service providers to perform the obligation under Article 11 of Block-chain Rule.
2.5 Security Assessment Requirement
For the purpose of prudential regulation, Article 16 of Block-chain requires that all block-chain information service provides apply to CAC or its local offices at provincial level for a security assessment prior to any development or operation of new product, new application and new function of its services, which requirement is quite similar to the security assessment review requirement applicable to network products and services. On May 2 2017, CAC issued the Measures on Security Examination for Network Products and Service (Provisional), under which the procurement of network products or services for important networks that may have influence on national security is subject to a cyber security review. Additionally, the Ministry of Industry and Information Technology (the “MIIT”) issued Measures on Security Assessment for New Internet Service for public consultation in June 2017, by which the MIIT would be able to establish a pre-approval system for any new internet service in order to mitigate the potential network security risks associated with such service. However, given the complexity and diversity of block-chain technology, it requires further clarification as to how the security assessment requirement will be performed.
3. A Perspective Vision
The public consultation for Block-chain Rule more or less reflects that Chinese government holds a contradictory view on the block-chain technology. On the one hand, the government has a serious concern on the issuance and trading of coins through block-chain information services which may distort the financial market, bypass foreign exchange controls and exaggerate financial risks. On the other hand, the government recognizes that the block-chain technology has unique merits and any excessive intervention may deter its application and development.
From a legal aspect, although the Risk Announcement has imposed a ban on the initial coin offerings, the application of block-chain technology itself is not prohibited in China. In this September, according to media report, the famous bitcoin enterprises “Huobi China” officially established a WFOE in Hainan Province, which has been interpreted as a symbol of legalization of block-chain technology in China.
Existing cases relating to bitcoins or other coins generated by block-chain technology indicate that, Chinese courts uphold the position that bitcoins are a type of property protected under the PRC laws. With the issuance of Block-chain Rule for public consultation, we are of the view that Chinese government will encourages the development and application of block-chain technology in China but the prohibition on initial coin offerings will still exist.
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