The Race to Embrace Blockchain – And What It Means for the Global Economic Balance of Power

When the Chinese government moved last year to ban Initial Coin Offerings (ICOs) and circulation of cryptocurrencies, it seemed to some a sign that the Communist Party had turned anti-blockchain.

These same voices misunderstood the motives that created the so-called Great Firewall of China in last 20 years. What has become apparent is that the Firewall allowed world-class Chinese technology companies to emerge such as Alibaba, Baidu, JD and Tencent. It was a case where protectionism actually created long term benefit and technological leadership for the country.

The key point that has been missed today is that China’s stance on cryptocurrencies is very different to its views on blockchain.

In fact, Beijing has made it very clear that it is taking blockchain technology very seriously indeed. According to state media, the organization that registered the highest number of blockchain patents globally in 2017 was the country’s central bank, the People’s Bank of China.

In May, President Xi Jinping called blockchain a “breakthrough technology.” And the city government of Hangzhou – home to the technology giant Alibaba – has pledged US$1.5billion to develop the sector. Meanwhile, the triumvirate of Chinese tech behemoths – Baidu, Alibaba and Tencent, known collectively as BAT – are all investing in their own blockchain-based systems.

It remains to be seen whether a ruling party accustomed to control will allow free rein to a technology commonly associated with decentralization and transparency. However what does seem clear is that China understands what is at stake, economically and strategically, in the race to develop and harness blockchain’s potential.

This concerted approach to embracing blockchain is worth watching, and for some countries it might be considered a warning signal.

History is a good guide to what conditions are needed for technology to develop, and when assessing which regions of the world have developed prosperous technology ecosystems it is useful to consider parallels with how the balance of economic and geopolitical power has tended to shift over time.

‘The Great Divergence’ is a phrase coined by the historian Samuel Huntington to describe how the West ­emerged in the 19th Century as the wealthiest and most powerful civilization yet seen, eclipsing any that had held sway in Asia or the Middle East. In crude terms, by about 1850, capitalism, advances in technology and the Industrial Revolution meant Europe and the US completely dominated the global economy.

This state of affairs persisted until APAC countries started closing ground on the West in what other historians have termed ‘The Great Convergence.’ Since 1990 or thereabouts, we’ve seen Asian countries, most notably China, re-emerge in a way that has done much to re-balance the global economy eastward. Along with the US, China is now a major center of economic gravity, while Europe’s relative share of the overall pie has shrunk.

With trade wars afoot and some analysts warning of another global recession ahead, it would be foolish to predict how this multipolar economic kaleidoscope might settle next. Moreover, our inter-connected global economy is not a zero-sum game. But when it comes to technology and its ability to deliver economic gains, countries that don’t realize they are competing on a global playing field surely miss the point.

Embracing innovation and creativity are necessary to stay ahead of the game and nurture tomorrow’s global winners.

In the case of blockchain, right now we’re in an intermediate phase where companies like Block.one are investing in the technology infrastructure, refining it and generating solutions that will hasten its mainstream adoption. To date, this revolution doesn’t have a geographical polestar in the way that Silicon Valley and later Shenzhen became synonymous with the internet revolution – but it’s likely that new centers of gravity will emerge and that they will be in countries that support entrepreneurship and investment and put in place conducive, forward-thinking policies and regulatory frameworks.

In the internet revolution, US tech trailblazers like Facebook, Apple, Amazon and Google thrived because they were supported to take risks and disrupt traditional businesses. They were able to benefit from constructive, incentive-driven regulatory, tax and trading environments.

The success of those companies was then replicated in China with the emergence of BAT, a trinity which – ironically, perhaps – owes its genesis to the above-mentioned Great Firewall, as China retrofitted its economy with homegrown versions of the pioneering American internet services it had blocked.

These American and Chinese internet giants are now among the biggest companies in the world. By way of contrast, Europe in the same period has not produced any tech companies of comparable size.

Of course, consumers everywhere have benefited from the internet’s evolution – mainly through increased choice, supply and competitive pricing – but the tech industry’s footprint across different markets has been uneven. And this is consistent with a pattern throughout history in which the countries that prosper most ­­– whether Britain during the Industrial Revolution, or America in the decades after World War II, or China in the last 20 years or so – are those where innovation and investment have been incentivized and encouraged.

Not everywhere has been as obstinate about cryptocurrencies and ICOs as China, but that doesn’t mean rival nations and blocs are ahead of Beijing when it comes to the bigger game.

In the US there are signs that government and businesses are coming to embrace the opportunities blockchain presents. Federal institutions are exploring ways of integrating blockchain into the running of government, and analysis by KPMG shows that blockchain investment in the country in the first half of 2018 exceeded that for all of 2017. The situation is less than crystal-clear in Europe, however. A recent report by the consulting firm Cognizant found widespread reluctance among European decision-makers to understand blockchain; and a debate on blockchain regulation in the European Parliament earlier this month did little to move the dial.

Cities as diverse as Chicago, London, Hong Kong, and Zug in Switzerland have all laid claim to being rising blockchain capitals. The proof will be in where world-class companies emerge and where innovation is given most license. And that in turn depends on creating favourable regulatory regimes and constructive business environments.

It’s a case of all to play for, but governments need to be clear that the opportunity is now. Waiting to see how the industry develops may be leaving it too late. In the meantime, China has already decided it wants to take the lead.

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