Application of Blockchain

In July last year, I discussed in this column the privacy concerns arising from the use of block chain technology, such as the immutability of the data on blockchain. While regulators around the world are still working on the related privacy concerns, let me share with you certain recent use cases and regulatory actions in the mainland and Hong Kong.

To recap, blockchain is a distributed ledger technology that uses cryptographic techniques to create permanent, immutable and transparent records to trace transactions. Digital currency, such as Bitcoin, is one of the well-known applications of blockchain. Not surprisingly, blockchain technology has a wider array of applications than a digital currency or a FinTech.

Other blockchain applications

Dispute resolution

Courts in the mainland have begun to adopt the use of blockchain technology widely in case management and judicial processes. In September 2018, the Supreme People’s Court released rules concerning litigation procedures for newly formed courts that specialised in Internet-related cases. The ‘Internet courts’, which handle a range of civil disputes such as lending, defamation and domain names, will accept digital data as admissible evidence if the data has been verified by methods including blockchains and digital signatures.

In late 2019, a court in Shangyu District, Shaoxing of the Zhejiang Province imposed the first criminal sentence in the mainland by admitting blockchain evidence. The District’s judicial authorities joined hands with a technology company to develop a blockchain system to ensure that the authenticity of the evidence, as well as its chain, could not be tampered with once it had been stored.

In Beijing, a smart contract system based on blockchain technology has been launched to enable automatic case filing in the enforcement of mediation agreements where a party fails to pay the damages under the mediation agreement being a smart contract. It is believed that the system would make enforcement of mediation more intelligent, transparent and effective.

Motor insurance

In December 2018, the Hong Kong Federation of Insurers launched a blockchain-based authentication system for motor insurance. The system offers real-time authentication of motor insurance notes/policies and multi-stakeholder verification. The system does not only increase the efficiency of handling motor insurance claims, but also helps detect frauds.

Cross-border money transfer

In January 2020, the Hong Kong Monetary Authority announced the outcome of a joint research project conducted with the Bank of Thailand, which looked into the use of a ‘Central Bank Digital Currency’ to facilitate cross-border payments. A cross-border “blockchain corridor network” was developed to allow banks in Hong Kong and Thailand to conduct fund transfers and foreign exchange transactions instantaneously on a peer-to-peer basis, with fewer intermediaries or settlement layers. The system was intended to address the shortcomings of low efficiency and high costs in traditional cross-border payments, and facilitate central banks to monitor real-time cross-border transfers and foreign exchange transactions.

A Bitcoin case in Hong Kong

The High Court of Hong Kong recently granted a Mareva injunction to freeze the assets of a digital currency trader in a case concerning disputed ownership of Bitcoins (see Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718). The injunction restrained the defendant from disposing of assets valued at over US$2.6 million. This case dealt with, inter alia, the difficulty in proving ownership and tracing transactions involving blockchain or Bitcoins, particularly where the plaintiff in this case chose to protect his privacy right by conducting transactions anonymously.

Regulating blockchain

In Hong Kong, there is currently no specific regulation on blockchain, although the Securities and Futures Commission has set out its regulatory approach for virtual asset trading platforms in November 2019. For instance, platforms which offer trading of security tokens may apply for being licensed, but only where the operators are able to meet robust regulatory standards that address risks associated with virtual assets. In addition, licensed platforms will be placed in a ‘regulatory sandbox’ for a period of intensive supervision.

The mainland authorities have nevertheless established a regulatory regime to foster the healthy development of blockchain technology. In February 2019, the Cyberspace Administration of China released the ‘Regulations on the Management of Blockchain Information Services’. Some of the requirements include real-name registration of blockchain users (individuals or organisations) as well as blockchain service providers, security obligations, minimum standard of technical capabilities, and compliance with regulations on content and information publications. Indeed, President Xi Jinping stressed at a Politburo meeting in October 2019 that blockchain should be promoted as a core technology for innovation.

In late 2019, the People’s Bank of China announced a new verification system for a range of FinTech hardwares and softwares that facilitate digital payments and blockchain services, with a view to boosting the confidence of the public in blockchain-enabled services.

Another regulation that is relevant to blockchain is the ‘Encryption Law of China’, which came into effect on 1 January 2020. Encryption being part and parcel of a blockchain, the Law requires encryption products to adhere to the technical and security standards set by relevant authorities, which will increase the security of blockchain and its related services.

Blockchain technology has been a significant innovation of the digital economy. Its applications are growing rapidly in various sectors. In the mainland, as of October 2019, over 500 blockchains were registered with the Cyberspace Administration of China. If implemented with a methodical and balanced approach without compromising the personal data privacy right of individuals, blockchain will no doubt be an added value to digital development in businesses and the community at large.