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From Pigs to Party Fealty, China Harnesses Blockchain Power

A flurry of gimmicks could just be the first-rush response to Xi’s call to no longer play second fiddle to the U.S., as Beijing stakes a claim on blockchain technology.

(Bloomberg) -- Verifying pigs, tracking shares of liquor maker Kweichow Moutai Co., and pledging loyalty to the Communist Party. These are just some of the blockchain projects getting a boost amid a frenzy spurred by comments from President Xi Jinping.

Companies and government officials alike are embracing the technology underpinning Bitcoin after Xi urged faster development of blockchain ahead of a recent key policy meeting by high-ranking Chinese officials.

Call it blockchain with Chinese characteristics. Many of the applications have little reason to be decentralized -- a key merit, if not requisite for a blockchain to be tamper-proof. A flurry of gimmicks could just be the first-rush response to Xi’s call to no longer play second fiddle to the U.S., as Beijing stakes a claim on the technology -- but doing so in a way that’s a far cry from the vision of the technology’s creator Satoshi Nakamoto.

“I can’t see them doing much decentralization at this point, without the blockchain players being under the watchful eye of the government,” said Martin Chorzempa, research fellow at the Peterson Institute for International Economics. “If we have blockchain with these Chinese characteristics, we eschew the central ethos of cryptocurrency and blockchain and the technology that underlines it.”

A startup in Chengdu that aims to use blockchain to raise pigs and provide safe pork became buzzy on Chinese social media. Shares of Shenzhen-listed MYS Group Co., known for its quick embrace of artificial meat and industrial cannabis, jumped 22% when it announced a foray into blockchain. A news publication operated by the People’s Daily asked Party members to stamp their declarations of loyalty to the organization on a blockchain, so that “it can never be tampered with.”

A burst of activity also ensued in the stock market, with more than 70 tech-company stocks surging by the daily limits in Shanghai and Shenzhen. Regulators stepped in to ask companies like MYS Group to explain their involvement in the technology.

“I think in the short term investors are so thirsty about any signal about mainstream adoption, and I think this is one of them,” said James Wo, founder of Digital Finance Group, which focuses on investment in the field.

Some think they’ve cracked the code for more practical financial applications. Players including billionaire Jack Ma’s Ant Financial have been quietly experimenting with adapted versions of the technology for cross-border micro-transaction payments and medical reimbursement. The PBOC’s Shenzhen branch said its blockchain-based trade finance platform has processed 75 billion yuan ($10.7 billion) of transactions in the year since its introduction, applying it to accounts-receivable financing and supervision of cross-border trade.

Traditionally, blockchain-technology transactions are recorded and verified by so-called miners who use powerful computers to solve complex math problems. For the network to be inviolable, a significant number of miners need to be involved, with no one controlling more than half of the mining power.

As the value of cryptocurrencies grew, companies and government entities began looking at the underlying technology, proposing use it for other purposes. Many of those projects are built on private blockchains, where people need to be invited to become a node to document the ledger. Some Bitcoin fundamentalists argue these private blockchains are not tamper-proof due to their pre-screened nature and limited parties involved.

Even though Xi’s speech was an endorsement of blockchain, not cryptocurrencies, it still helped fuel a rise of about 30% in the price of Bitcoin within days. But there’s no reason to think the country will open the floodgates for crypto trading or regulations for foreign players.

Last year, China cracked down on cryptocurrency activity, halting trading on domestic exchanges, discouraging Bitcoin mining, and banning initial coin offerings, the equivalent of an initial public offering for new virtual currencies.

“I’d be very careful if I were a foreign blockchain company contemplating entry into China,” said Chorzempa. The line between “encouraged blockchain” and “discouraged Bitcoin” is constantly moving, he said, and navigating it requires deep knowledge of China.

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