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Two Game Changers in China Technology that May Impact You — Is a Digital Currency the End Game?

As the Year of the Metal (techno) Rat is upon us, a couple of significant changes are looming in China’s technology space. “It’s not far-fetched to say that 2020 will be the year that digital currencies make their mark on the world.” writes Scott Babbage, Strategy Hubb, with a focus on China.

In the west, new technologies must consider privacy and law enforcement access, while in China national security is always the most important consideration as well as a desire to be autonomous and not dependent on foreign suppliers. These imperatives appear to be playing out now in some game changing technologies and we will be watching closely this year.

China has developed its first root server which is like a phone book of internet IP addresses, aiming to “break the western monopoly” according to China. China’s Ministry of Industry and Information Technology (MIIT) is pioneering the work and it will be set up at the China Academy of Information and Communications Technology under MIIT.

China believes that a single country can cut off another country’s access to the internet because of their hosting of root servers; it believes this happened during the Iraq War in 2003 when websites with .iq disappeared. While various experts say that it is not possible for one country to cut off another one, could it be possible for China to cut itself off?

How does it work?

When you type in a domain – say “chincommunications.com.au” the DNS (Domain name system) looks up the records from the nearest root server to ‘translate’ the name into numbers – an IP address; this will go up the line through various root servers until a match is found and the relevant site delivered.

According to the World Economic Forum, Future of the Internet Initiative White Paper in 2016, there is an increasing risk of the internet” splintering” or breaking up and the paper concludes that if various threats are left “unattended” it can “chip away … at the Internet’s enormous capacity to facilitate human progress.” Significant Alternate Root Systems is listed as one of the top 10 cases worth monitoring:

Section 3: Governmental Fragmentation The most common imagery of “governmental fragmentation” is of the global public Internet being divided into digitally bordered “national Internets”. Movement in the direction of national segmentation could entail, inter alia, establishing barriers that impede Internet technical functions, or block the flow of information and e-commerce over the infrastructure. Pressure and trends in this direction do exist, as do counter-pressures.

Six issue-areas are reviewed, including: content and censorship; e-commerce and trade; national security; privacy and data protection; data localization; and fragmentation as an overarching national strategy. Within these categories, 10 kinds of fragmentation of varying degrees of significance are identified:

Filtering and blocking websites, social networks or other resources offering undesired contents
Attacks on information resources offering undesired contents
Digital protectionism blocking users’ access to and use of key platforms and tools for electronic commerce
Centralizing and terminating international interconnection
Attacks on national networks and key assets
Local data processing and/or retention requirements
Architectural or routing changes to keep data flows within a territory
Prohibitions on the trans-border movement of certain categories of data
Strategies to construct “national Internet segments” or “cyber sovereignty”
International frameworks intended to legitimize restrictive practices.

It will be interesting to see what China’s intention is here.

The second development is that China has introduced a new Encryption Law from 1 January 2020 which means China will have greater control of cyberspace. This may impact anyone with dealings in China, even from overseas.

What is encryption?

Cryptography is a method of protecting information by changing or ‘encrypting’ it into an unreadable format, so that only those with a secret key can decipher it. It is used to secure data in transmission, storage and user authentication. It is an integral part of blockchain; it will also be important in any digital currency development. Various commentators see this move as the first step in digital currency development while providing a bigger window into its citizens’ activities.

President Xi Jinping has urged the country to accelerate blockchain technologies, and asserted that the cryptography law is important to safeguard national security.

According to the China Law Blog: “The system being designed for China seeks to pursue a challenging goal: make networks opaque to bad actors but transparent to the government and the CCP.” And “The Cryptography Law is silent on the issue of decryption and it is also silent on protection of passwords and other keys that prevent decryption. Its ultimate plan, the blog suggests, is to break all forms of end-to-end encryption by putting all passwords and decryption keys into the hands of the PRC government and the Communist Party. In other words, opaque to the public but transparent to the government.

In contrast, China’s stated purpose of the Law is: 1) to regulate encryption application and management; 2) to facilitate the development of the encryption industry; 3) to protect network and information security; 4) to safeguard national security and public interest; 5) to protect the legal rights of citizens, legal persons, and other organisations (Article 1).

Some commentators are calling this new law “malicious” and believe all businesses will have to hand over all their encryption keys, and that this information can be used by China against its competitors (Gordon G. Chang, Gatestone Institute). This will mean foreign companies will likely lose trade secret protection around the world (as the secrets would all be known and therefore without status). Chang suggests that companies will also be prohibited from using VPNs (virtual private networks) to keep information secret, and possibly not to be able to use private servers either.

Nowadays, virtually all electronic communication products and software use encryption technologies (certainly in the west), for example apps like WhatsApp have encrypted end-to-end information that only the receiver and sender can see, while in China such encryption would make data inaccessible to them. In fact China has banned them all.

We can expect growing Chinese involvement in blockchain and digital currencies which rely on cryptography and we’ll have to wait to see what the reality is on the new law and how it will impact foreign businesses and Chinese citizens.