On January 1, 2020, China’s law on cryptography came into effect. It may appear that this new law is part of China’s larger blockchain push, and is laying the groundwork for China’s new digital currency. These initiatives are indeed connected, as blockchain technology is based on cryptography. If the Chinese truly want to lead in blockchain, they must master cryptography first.
But this new law is much bigger than blockchain.
The law aims to regulate cryptography, enhance cysecurity and facilitate the cryptography business. It also supports cryptography research, talent training and intellectual property rights protection. According to the law, the state must use cryptography when transmitting confidential information.
Since major cryptographic algorithms are open source, the Chinese government has apparently calculated that it is more practical to try to control the technology than try to stop its spread. But there is a long-existing tradeoff facing the government: it is necessary for the government to both to protect individual and commercial privacy, but also to detect terrorists and criminals for national security.
The question is, why pass this law now? There’s no question the timing coincides with great enthusiasm about blockchain in China, especially after President Xi Jinping expressed his support for the technology. This legislation, however, was not drafted overnight. So while blockchain development is clearly a factor, the larger motivation is to ensure China’s competitiveness in the global battle between encryption and surveillance. Right now America, not China, is in the lead there.
Americans have long understood the power of both cryptography and surveillance. For many years, the U.S. imposed strict regulations on the export of cryptography. At the same time, it formed an alliance for shared surveillance with four other English-speaking Western nations: Australia, Canada, New Zealand, and the UK.
And those were far from the U.S.’s only forays into these areas. In the early 1990s, the NSA developed a mobile chipset named Clipper Chip that would encrypt and decipher messages through a built-in government backdoor. It failed, in part due to public backlash.
But in the 20100s, Edward Snowden’s leaks of the PRISM and Bullrun programs made it clear that the US hadn’t abandoned efforts to surveil its population, it had stepped them up, and was spending hundreds of millions of dollars on backdoors for surveillance. But those revelations failed to end domestic spying programs.
China’s new Cryptography Law may be best understood in this context. If China wants to take the lead in the global intelligence race, it has to legislate cryptography and make similar use of surveillance to respond to potential threats to the national security.
Blockchain, as the latest crypto-related technology, has been highly recognized by the Chinese government. Considering the future of the technology, especially the fact that few Chinese have been participating in its theoretical and practical development, we can't rule out the possibility that the new Cryptography Law may serve as a stepping stone for the regulation of blockchain technology.
The Cryptography Law does not explicitly mention blockchain, but it governs the use of cryptographic technology and categorizes cryptographic cyphers for management (Article 6).
Ciphers are categorized into core ciphers, common ciphers, and commercial ciphers. Article 14 stipulates that all state secrets transmitted through wired or wireless communications and information systems that store and process state secrets must be encrypted with core or common ciphers and protected by security verification in accordance with domestic laws and regulations. Highly confidential information must be protected by high-level cryptographic technology, which means that this kind of information should be encrypted in accordance with cryptographic algorithms recognized by China's State Cryptography Administration (SCA).
Different from the RSA encryption employed by blockchains, common national cryptographic standards mainly include SM1, SM2, SM3, and SM4. Today's most popular blockchains, such as Bitcoin and Ethereum, do not meet this requirement. In other words, instead of the prevailing blockchain solutions, China's national blockchain will likely adopt national cryptographic standards.
Blockchain is just a new application of cryptography, and legislation on cryptography implies an escalation of China’s effort to become a global leader in this area.