China’s Cryptography Law, which the National People’s Congress legislated and passed sometime in October 2019, took effect last January 01, 2020. The law intends to regulate cryptocurrency encryptions as a way of strengthening the safeguards against the threats posed by cryptocurrency operations to China’s national security.
In fact instead of combatting the blockchain technology system supporting cryptocurrency operations, the China’s State Cryptography Administration (SCA) of the Chinese Communist Party, developed the guidelines on how cryptography should be used by both the private and public sector.
According to reports, it took the SCA five (5) years to develop the initial draft that details the guidelines promulgated as Cryptography Law. Although viewed as a way of fostering the cryptocurrency business in China, it is largely perceived as a precursor to future laws that will govern the use, operation and application of China’s own Central-Bank backed cryptocurrency.
Currently called as the Central Bank Digital Currency or CBDC, its introduction will make China the first country to introduce a national cryptocurrency unit.
Overview of What China’s Cryptography Law Includes
The primary purpose of China’s Cryptography Law is to regulate encryption in its use for cryptocurrency operations that fall in line with the blockchain technology. The Cryptography legislation enumerates and describes three different types of encryption : Core, Common and Commercial encryptions.
Core and Common encryptions pertain to codes used in safeguarding all state secrets, which are further sub-categorized as “Secret,” “Highly Secret” and “Top Secret”. The Cryptography Law requires all agencies of the public sector to use core and common encryption in storing and transmitting state secrets contextual to China’s national security.
Private sector firms on the other hand have to use Commercial codes to protect their proprietary trade secrets.
In imposing the Cryptography Law, the main guiding principle is the protection of China’s national security. Therefore the new law sets forth guidelines on how cryptography should be used to help safeguard national security against cyber security threats on a nationwide scale.
Threats include encryption efforts deemed as causing harm to the Chinese Communist Party and any application that undermines public interest and the country’s national security.
That being stated, China’s Cryptography Law also gives details about punishment on anyone found using codes that threaten the state and its citizens.
Moreover, the law specifically states that companies in the business of providing cryptographic systems to consumers must first undergo examination and and authentication performed by the Chinese state.
China’s Cryptography Law Does not Bar Foreign Participation in China’s Cryptocurrency Industry
Enactment of the Cryptograph Law does not bar foreign users and providers of foreign encryption systems to participate in the country’s cryptocurrency industry.
However, international legal experts are wary of the conditions under which foreigh digital currency will work. The Cryptography Law allows a foreign cryptocurrency entity’s participation provided it merits the approval and certification of the state; albeit without any clear descriptions on how this condition can be met.
The condition also denotes that the Chinese government has the right to examine the underlying source code of any new digital currency technology, as a means of ensuring the protection of national security. It worries lawyers that in vetting a cryptocurrency company toward the issuance of a certification, the Chinese government will have backdoor access to the private and/or foreign entity’s cryptocurrency system.