China enacts new law on cryptography to pave the way for blockchain technology
In the past several years, the government of China has taken a number of regulatory measures to crack down on activities related to cryptocurrency in various aspects, from banning ICOs and cryptocurrency exchanges to discouraging bitcoin miners.
After years of public debate, on July 5, 2019, the Standing Committee of the National People's Congress of China issued a new draft cryptography law for public comment. The 2019 draft includes a range of issues, spanning cryptography classification and its usage to enforcement and penalties for non-compliance. This July 2019 draft also retained a number of items previously found in the initial draft that was issued by the State Cryptography Administration (SCA) in 2017.
Late on 26 October, following Chinese President Xi Jinping’s endorsement of blockchain technology, Xinhua- Chinese state media reported that China passed its new law on cryptography, which will become effective on January 1, 2020. In general, the new law regulates the use of cryptography in China by both the public and private sectors, facilitates business, promotes industry and aims to ensure cyberspace and information security.
The new law on cryptography is consistent with the country’s plan to launch its own digital currency. In particular, the People’s Bank of China (PBOC) plans to issue a Central Bank Digital Currency (CBDC) as legal tender. The PBOC, which is a state-backed cryptocurrency, may have some similarities to Libra – the digital currency proposed earlier this year by Facebook.
It is worth noting that the new cryptography law focuses on cryptography rather than any specific uses of cryptography in cryptocurrency such as Bitcoin or Litecoin. The new cryptography law lays down key points regarding the definition and classification of ‘cryptography’, which are categorized as ‘core and ordinary cryptography’ and ‘commercial cryptography’. Given that ‘core and ordinary cryptography’ is handled by the state, this type will be used to protect information that is regarded as state secrets and then subjected to strict regulatory requirements (Article 7). ‘Commercial cryptography’, in contrast, will relate to the protection of information that is not regarded as state secrets (Article 8).
As ‘commercial cryptography’ is a type of cryptography used for protecting information that is not state secrets, the new law will further encourage the use of ‘commercial cryptography’ by any entities or individuals in accordance with the principle of non-discrimination. The applicable article 21 binds the government at all levels. Furthermore, in the subcategory of ‘commercial cryptography’, article 28 conveys requirements pertaining to import and export control, with an exemption in paragraph 2.
It is worth noting that apart from the different restrictions for different types of cryptography, the new cryptography law includes general provisions that present general restrictions and background information which applies to cryptography in general. The general provisions include the prohibition of the use of cryptography of any kind to engage in criminal activities that harm the state security, public interests or the legitimate rights and interests of others (Article 12).
It is apparent that the general purpose of the new law is to clarify the regulatory framework relating to cryptography. On the other hand, the new law contains detailed principles for public and private use cryptography. However, it is worth noting that some important areas will require further clarification, for instance, ambiguous exemptions as specified under article 28 paragraph 2 in relation to the use of ‘commercial cryptography’. In particular, paragraph 2 of the article specifies that ‘commercial cryptography’ used in mass consumer products are not to be subjected to import and export control requirements.
While China still bans both ICOs and cryptocurrency exchanges, the new cryptography law aims to support the use of cryptography, which is generally referred to as a method of protecting information that is used in cryptocurrency.