The Shanghai Municipal Government is interested in exploring how the city can leverage blockchain techniques to integrate traditional finance with decentralized financial services. Photo: AFP

The Shanghai government is open to experimenting with permissionless DeFi (decentralized finance) applications, Cointelegraph reports.

Conflux Network, a permissionless blockchain project endorsed by Beijing, said it has officially launched its Tree Graph Research Institute with the Shanghai government. 

According to Fan Long, founder of Conflux and director of the TreeGraph Research Institute, the Tree-Graph Blockchain Research Institute will experiment with local authorities to build a regulatory compliance platform that can bridge global DeFi applications and government regulations. 

He said: “DeFi is a new world and while it appears as though it may pose a challenge for regulators, they appear willing to listen. At this stage, the most important thing is to maintain a reliable communication channel between two sides – the DeFi innovators and the regulators.” 

When it comes to new techniques and innovations, the Chinese government has shown signs of tolerance for experimentation in the past. Fan indicated that the complexity surrounding DeFi and other relevant distributed innovations will make open communication crucial for continued legislative acceptance. 

He told Cointelegraph: “Regulators need a reliable way to learn what the new technique is about and where it might lead us to. Innovators need a way to understand the concerns and red lines of regulators.” 

At the moment, Conflux is working with the Shanghai government on several sandbox projects. Fan told Cointelegraph that these projects include integrating blockchain borrowing and lending services into Shanghai’s Pudong Development Bank, and leveraging the Shanghai Free Trade Zone’s unique regulatory framework to devise a unique stablecoin for the region.

Fan explained: “Shanghai Free Trade Zone is outside of capital control of China where RMB is offshore with its own set of rules, so we are trying to come up with some regulation breakthroughs with experimenting under the free zone framework.” 

Compared with the central bank’s digital currency, or CBDC, Fan pointed out that although a CBDC will allow the central government to maintain control of the financial activities, it would be hard for such a centralized form of digital currency to gain acceptence outside of China. 

Conflux is trying to either create a free zone stablecoin or build a public permissionless cross-chain for the CBDC.

The project, which began its life as a research project at Tsinghua University, has been working to provide a robust and cheap framework for developers to build decentralized finance applications. 

Fan explained: “Conflux Network seeks to provide a POW [proof of work] network with transaction speeds an order of magnitude faster. The key enabler technique is a novel DAG-based ledger structure together with an optimistic concurrency control to achieve a consistent order of transactions among all the nodes in the network.”

Fan believes that DeFi projects will only be able to go mainstream through willfully enacted compliance measures which evolve alongside government regulations. Blockchain and DeFi are new areas for regulators. Although he cannot speak to how regulators will go about this, his predicts that “decentralization will make it more difficult for regulators to control DeFi products, but there are still possibilities to exercise controls at the boundary between the decentralized world and the centralized world.” 

The Shanghai Municipal Government, one of the entities endorsing the project, is interested in exploring how the city can leverage blockchain techniques to integrate traditional finance with decentralized financial services, says Fan.

In order to connect global DeFi projects and regulations, the company also created the Conflux Open Defi initiative. 

Members include: Sequoia Capital, Blockpower Capital, Antelope Holdings, dForce, DeBank, and MCDEX along with Chinese state support through the Shanghai Science and Technology Committee. 

Fan says Open DeFi aims to unite Eastern and Western DeFi markets through three globally focused program tracks: risk management, new liquidity strategies, and incubation & innovation.

Asia Times Financial is now live. Linking accurate news, insightful analysis and local knowledge with the ATF China Bond 50 Index, the world's first benchmark cross sector Chinese Bond Indices. Read ATF now.