Overregulation Hinders China’s Web 3.0 Developers While Investors Seek Options Offshore

China, US in race to develop next generation Internet

A man types on a computer keyboard in Warsaw on Feb. 28, 2013. Kacper Pempel/Reuters

The communist Chinese regime’s heavy-handed supervision of China’s high-tech industries has greatly hindered its domestic tech innovation, prompting many Chinese tech firms and industry professionals to seek development overseas.

Web 3.0 is referred to as the next internet revolution or the third-generation Internet that is based on blockchain technology and cryptocurrencies. It is being developed based on the philosophy of decentralization, promising a new era where users have more control over how their data is collected.

The next-generation Internet is developing rapidly in the United States. However, Chinese tech companies and investors are casting a less optimistic eye over its development prospects in China due to the regime’s regulations.

Compared with the current second-generation Internet (Web 2.0), Web 3.0 aims to be fully decentralized, meaning that platform owners can’t collect or monopolize users’ data and personal content, allowing users to be in control of their own creations.

Meanwhile, Web 3.0 aims to execute real-world financial transactions on the blockchain without the help of banks or the government, allowing users to conduct direct financial activities without intermediaries.

PracticalEcommerce defines Web 3.0 as the “read-write-executive” phase of the internet, where Web 2.0 could “read-write” and Web 1.0 could only “read.”

On April 29, a major Chinese scientific research publishing platform named Quantum School published an article titled “Web 3.0 has nothing to do with China.” The article was shared on many Chinese social media platforms and received millions of views but it was later taken down from those platforms.

The article said that the United States has led the world in the past three decades with its advanced internet technologies and that China’s internet industry has also developed rapidly in the past ten years. However, the next decisive battle is Web 3.0; whoever develops and establishes a complete Web 3.0 exosystem first will likely lead the era of the next 20 years.

It added that the Chinese Communist Party’s (CCP) strict regulation of blockchain-related technologies had hindered the domestic development of Web 3.0 in China, and that many of the country’s entrepreneurs are now seeking to develop the technologies overseas.

Since last year, the CCP regime has tightened its grip on China’s technology sector, putting in place new regulatory measures for Chinese companies looking to list abroad. Network platform companies seeking foreign IPOs were asked to go through a cybersecurity review, citing national security and anti-trust issues.

As a result, major internet giants such as Tencent and Alibaba lost over $1 trillion in their combined market value as of March 15, the Chinese edition of The Epoch Times reported.

A logo of Tencent is seen during the World Internet Conference (WIC) in Wuzhen, Zhejiang Province, China, on Nov. 23, 2020. Aly Song/Reuters

Following the new regulatory measures for China’s tech firms, in September 2021, China’s central bank also declared all cryptocurrency-related transactions illegal, while vowing to crack down on the virtual currency market.

The People’s Bank of China said that services offering trading, order matching, token issuance, and derivatives for virtual currencies are strictly prohibited, declaring overseas crypto exchanges that service mainland China also illegal.

China’s Web 3.0 Development Goes Overseas

According to an April 26 article by Chinese online media Huxiu, many Chinese internet giants, including Alibaba, Tencent, ByteDance, Meituan, NetEase, and Ant Financial, are losing many of their highly-paid employees who are leaving to work on Web 3.0 R&D start-ups overseas.

Some have reportedly gone to Singapore, the United Arab Emirates, and other places. Meanwhile, several tech giants such as Alibaba, Tencent, and ByteDance have also reportedly invested in Web 3.0-related industries overseas.

For instance, in March 2021, South China Morning Post, an Alibaba-owned newspaper, announced its venture into a new blockchain-based NFT business named Artifact Labs. Tencent and TikTok, a subsidiary of ByteDance, both invested in Immutable X, an Australian gaming start-up based on Web 3.0-related technologies.

NFT (Non-Fungible Token) provides verifiable ownership of encrypted assets, with each representing a unique asset like a piece of art, digital content, or media, according to Amazon Web Services.

Huobi Tech, a Chinese cryptocurrency trading platform, announced on April 24 that it had launched a strategic investment and M&A unit to seek investment opportunities in the blockchain industry overseas. It aims to look into areas such as Web 3.0, DeFi (Decentralized Finance), and the Metaverse.

Decentralized finance, or DeFi for short, is an umbrella term for a set of projects that aim to bring financial services to the blockchain era.

Some American venture capital firms with Chinese funding, such as Sequoia Capital and Tiger Global, have reportedly been shovelling cash into start-ups building Web 3.0. The two companies retained top spots on the leaderboard in terms of deal volume and capital deployed in 2022, according to a venture capital report from Bain & Company, a Boston-based management consulting company.

Development in the US

Unlike the CCP’s draconian regulatory environment for cryptocurrency-related industries, the United States has been more inclined to incorporate blockchain technologies into its financial regulatory system.

The U.S. House Committee on Financial Services held a hearing in December 2021 on the challenges and benefits of financial innovation. The hearing discussed regulatory policies on digital assets and the future of finance, examining new risks and benefits posed by blockchain technologies and decentralization.

The hearing examined whether excessive regulations on cryptocurrencies would discourage innovations and hinder the development of Web 3.0, as well as discussed ways to allow the United States to maintain a competitive edge in Web 3.0.

Silicon Valley and Wall Street firms have invested heavily in the development of Web 3.0.

A bitcoin logo is seen during the Bitcoin 2022 Conference at Miami Beach Convention Center, in Miami, Florida, on April 8, 2022. Marco Bello/Getty Images

In June last year, Andreessen Horowitz (a16z), one of Silicon Valley’s most prominent venture capital firms, announced a new $2.2 billion crypto fund, bringing its total assets under management that are dedicated to crypto to above $3 billion, according to Forbes.

Cryptocurrency trading platform Coinbase, in which a16z invested, debuted on Nasdaq in April 2021 with an initial market cap of $85.8 billion, CNBC reported.

OpenSea, which shares investors with Coinbase, controls most of the trading volume in the $17 billion NFT market.

On March 30, LayerZero Labs, a blockchain company with a16z and Sequoia Capital as its investors, raised $135 million in the first round to create crypto networks, reaching a valuation of $1 billion, according to Business Wire.

CertiK, a Web 3.0 and blockchain security firm founded by Chinese in the United States, received investments from Goldman Sachs, Tiger Global, and Sequoia Capital. The company has received four rounds of investments totalling $230 million in the past nine months, bringing the company’s valuation to $2 billion, TechCrunch reported.