China and Web3 Crossover

Since launching our Web3 practice group, we have been getting steady inquiries regarding international business and web3 crossover, including China-affiliated companies. Essentially all web3 technologies are international in nature. But unless you are personally interested and invested in cryptocurrencies or your business is heavily dependent on blockchain technology, it is likely that you are part of the 80% of the population (my estimation) that is still deciding whether any of the web3 technologies are important enough to learn about. The tech aficionados in the U.S. and every other developed and developing nation, including China, are well ahead of the curve.

China and Web3 Crossover: An Introduction to Web3 Technologies

If you have been paying attention, you have probably heard of the “blockchain” that underpins this new wave of technology. This new ecosystem is called “Web3” (or Web 3.0).

You may know at least something about Bitcoin, which is the flagship cryptocurrency in use today, or Ethereum, which is like Bitcoin but with additional functionality beyond mere virtual currency. Web3 encompasses cryptocurrencies like Bitcoin, Ethereum, and the hundreds of others currently vying for viability. All of these virtual currencies are part of the decentralized finance (“defi”) movement, which is global in scope and disrupting traditional global finance.

Web3 also encompasses NFTs (non-fungible tokens) (see here, here, and here), which are unique digital-only assets that are created, bought, sold, and collected all over the world. Recently I spoke with a Chinese-owned media business that intends to hire a web3 artist to convert some of its existing traditional media into unique NFT artwork (these details have been changed to protect its confidentiality). The company will create some initial NFTs to test the marketplace. If the response is good, the company will mint (create) and drop (sell) a total of 1,000 unique NFTs. They will use the proceeds from these NFT sales as an additional way to interact with their existing consumer base and to grow their clout, potentially developing a DAO (more on this below).

China and Web3 Crossover: DAOs (Decentralized Autonomous Organizations)

Chinese-speaking people from China, Taiwan, and elsewhere, are members of DAOs. Many DAOs form with the express purpose of making money. Some DAOs create and sell NFTs. Other DAOs buy and hold NFTs as investments. And other DAOs have big aspirations, like acquiring functional businesses and operating them.

Not all DAOs are focused on forming a business venture. Some are merely interest groups that act like a subreddit. People form DAOs based on common interests. Thanks to the worldwide internet, DAOs are inherently cross-border, bringing together people across language, country, interest, and financial barriers. I was on the Mutant Cats DAO’s Discord server over the weekend, and they have special channels dedicated to speakers of Chinese, Japanese, Turkish, Portuguese, Spanish, Korean, French, Persian, and Indonesian.

Some DAOs use NFTs as tickets to entry (see here) to make the DAO more exclusive. This exclusivity has many functions. By creating artificial scarcity, the DAO can remain small enough to get something done. It can also increase the value of the DAO and the NFTs that are required to join the DAO.

MoonDAO was initially created around the group’s interest in space exploration. Its mid-term aspirations are to send two DAO members on a trip to the moon in 2022. Its long-term aspirations are to help rewrite the participation criteria and rules of engagement for everything outside of planet earth. Perhaps an analogous cannabis DAO would aspire to be the first group to establish a true “united nations” colony in space.

China and Web3 Crossover: Smart Contracts

DAOs cannot by themselves replace traditional companies without integration into existing legal and financial systems. Many smart legal, financial, and technical minds are working to develop DAO models that preserve the best aspects of DAOs while applying legal and financial best practices to ensure that DAO members have the best of all of these worlds. This is especially important and difficult given the international scope of DAOs.

Smart contracts are used in cryptocurrency transactions, NFT drops, and DAOs. Smart contracts refer to computer code that executes certain transaction protocols without the use of any intermediary approving the transaction or pushing the approval button. You can think of smart contracts as functioning like automatic escrow agents.

These smart contracts do not, should not, and cannot yet replace traditional contracts because they only contain certain parts of traditional contracts. When the day arrives that smart contracts incorporate terms and conditions that replicate traditional contracts, they will be good enough to use as traditional contracts (though the often-coveted user anonymity in web3 technologies will remain a hurdle). We will need wider adoption and better integration of lawyers with the coding community before that happens. And people will need to care about legal strategies underpinning business strategies, which is not the case even today in traditional business environments.

Just like the early days of China business, all of this web3 technology is moving quickly, and everyone is operating somewhere between unregulated and marginally regulated guardrails. We are in the middle of an explosion of technology and terminology (including settling on the “correct” translations across languages). Not far behind is the proliferation of litigation, followed by laws and regulations. Most people see this as a good thing because when investors and entrepreneurs know that their investments of coin and time will be both rewarded and protected, we will get more widespread adoption, providing more opportunities for everyone. Doing this across international borders will take years, if not decades.

China and Web3 Crossover: Cryptocurrency

China has a love-hate relationship with cryptocurrencies. In the early crypto craze, China’s cheap energy literally fueled the proliferation of crypto miners (linked computer systems), resulting in China accounting for two-thirds of global Bitcoin mining in 2021!

That craze ended in mid- to late-2021, when the Chinese government decided that it did not like the excessive energy consumption that contributed to China’s continuing rolling energy brownouts. The government also does not like financial transactions occurring without government oversight, so it banned cryptocurrencies and involvement in the industry while simultaneously developing and rolling out its own digital yuan ecosystem, which is not the same thing (really not even close) as true cryptocurrencies. In December 2021, experts estimated that as much as 20% of the worldwide Bitcoin network remained in China, mostly operating underground.

China and Web3 Crossover: NFTs

There are many more options for China’s growing entrepreneurial base to engage with web3 technologies that the Chinese government has not yet decided to regulate or ban. China’s web3 crossover extends into NFTs, which are a natural extension of its pop-idol community. NFTs are the second most talked about aspect of web3 at this stage because many prominent artists of all stripes have turned their art into NFTs. Some have sold their NFT collections for millions of dollars. I recently read an article (see here) about China’s current number one NFT contributor, and she is only 27 years old.

Companies Involved in the China and Web3 Crossover

In the past 12+ months, we have been helping clients with international and domestic DAO establishment, governance, and finance issues (both on-chain and off-chain financings, including ICOs) (see here and here).

We work with NFT creators and studios (see here) in determining the best way to form business ventures together utilizing creative compensation structures that also protect both sides’ intellectual property, which is always a concern when doing business with China.

Some of our tech clients are developing POS solutions and APIs that span the deep chasm between traditional banking, cryptocurrencies, and the international business community.

And we consistently warn our clients that smart contracts are neither smart nor comprehensive contracts upon which to establish business relationships.

How to Learn More About China and Web3 Crossover

If you are an international-facing company and feeling overwhelmed with this new technology explosion, take heart. I have attended several web3 conferences where even the die-hard defi, crypto, NFT, and DAO experts acknowledge that they once felt like they were drowning in the deep end of the pool. They all say that the technology and terms are proliferating so quickly that no one is an expert in all things web3.

In my corner of the international business legal world, issuing securities is not something we take lightly (see here), but even the SEC (U.S. Securities and Exchange Commission) is still trying to figure out how to classify the various types of web3 tokens (see here).

Start in your area of interest and educate yourself. Talk to experts. Attend conferences. Join web3 groups (often DAOs) you are interested in. And you can join our new Web3 Law group on LinkedIn for real time discussions about practical legal aspects of web3.

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Web3, China Business