China has joined the global race to develop the metaverse. But as with the internet itself, the Chinese version could end up looking very different from the one envisioned by Western companies.

The emergence of the world wide web in the 1990s led to predictions that it could accelerate a process of opening up and democratization in China. Instead, the country’s authorities created the so-called Great Firewall of China, inside which politically sensitive content is restricted from the internet, and local tech companies are largely protected from foreign competition.

The metaverse — a computer generated, interactive virtual reality space where people will be able to shop, attend concerts or sports events — is still in its early stages, with full development potentially five to ten years away. But experts predict the combination of tight regulation, promotion of local firms and the use of the country’s own digital currency will lead to a similar separation between the metaverse as it emerges in China and elsewhere.

“It will be much easier for China to oversee development of a local metaverse rather than allowing users to access the ‘global metaverse’ and spending significant resources censoring and blocking certain experiences,” says Mario Stefanidis, vice president of research at Roundhill Investments, a New York-based investment firm which launched the U.S.’s first metaverse exchange-trade fund last year.

U.S. tech behemoths like Facebook — whose parent company is now known as Meta — and Microsoft have been plowing billions of dollars into metaverse development. But the extent of Chinese interest in the technologies that underpin the metaverse is becoming clear too. Six Chinese tech companies including Tencent, Baidu and Alibaba, were among the top ten companies filing the highest number of virtual reality (VR) and augmented reality (AR) patent applications globally in the past two years, according to an analysis by Chinese-language IPRdaily. 

Tencent, the social media and online gaming giant that runs WeChat, was just 10 patents short from topping the list with 4,085 applications filed in 2020 and 2021 combined. Its president, Martin Lau, called the metaverse “a real opportunity” in a recent earnings call, and the company reportedly has plans to acquire Chinese gaming hardware maker Black Shark, which makes the equipment needed to experience virtual reality. 

Search engine giant Baidu has meanwhile announced its own metaverse app called XiRang, or Land of Hope, while Alibaba has trademarked several terms related to the buzzword, including “Ali Metaverse” and “Taobao Metaverse.” 

“You have this kind of foot race [over] which firms are going to be the ones responsible for a bulk of development of the metaverse,” says Stefanidis.

Metaverse development is receiving local and central government backing too. When Shanghai’s city authorities released their 14th Five Year Plan at the end of December, it referenced the metaverse and encouraged its use in public services, social interaction and entertainment, company offices and other spheres. In November, China formed its first Metaverse Industry Committee with state run telecom giants like China Mobile and China Unicom among the founding members.

“This is yet another frame of advanced technology in which the government at various levels is happy to say that China should be a leader,” says Graham Webster, editor-in-chief of the Stanford–New America DigiChina Project at Stanford University. “It’s a general national goal. If the hip new thing is AI, then a bunch of bureaucrats need to sit down and write a plan for how to develop an AI. We see the same thing happening with blockchain. Now we’re seeing it with the metaverse.”

The growing interest in the metaverse inside China is causing regulators’ antennae to twitch. The China Institutes of Contemporary International Relations, an influential state-run think tank, published an article last autumn saying the new technology has potential national security implications and requires government regulation. And while China hasn’t yet issued any rules explicitly covering the metaverse, the authorities have already put in place measures that could govern its development.

In January, for example, China’s cybersecurity regulator released an expanded draft of new rules that would require companies to submit for government review any algorithms related to the generation and modification of video, images, audio and text — the building blocks of the metaverse.  

It’s a general national goal. If the hip new thing is AI, then a bunch of bureaucrats need to sit down and write a plan for how to develop an AI. We see the same thing happening with blockchain. Now we’re seeing it with the metaverse.

Graham Webster, editor-in-chief of the Stanford–New America DigiChina Project at Stanford University

“It’s the first Chinese internet regulation to cover avatar creation, image-enhancing AI, and 3D synthetic reality, as earlier CAC rules also covered ‘deep fake’ but only from audio and video perspectives,” says Winston Ma, a tech investor and adjunct professor at New York University Law School. “The new rule probably is developed partly to address the concerns that Chinese state think tanks were voicing over the metaverse, which may trigger other countries’ potential lawmaking in the Metaverse.”

The video gaming industry, which is crucial to the metaverse in the U.S., is already tightly regulated in China, with new games subject to approval by the authorities and limits placed on the amount of time young people are allowed to play them.

“The Chinese government has made it very clear that any sort of metaverse that is developed has to abide by local regulations,” says Stefanidis. As a result, “the metaverse in China is going to look a lot different than the rest of the world’s metaverse.”

China’s ban on crypto currencies like bitcoin is another factor that will likely lead to the Chinese metaverse operating apart from the rest of the world. Most experts agree that China’s official digital yuan, or e-CNY, could be used as a local metaverse currency, making it harder for people outside of the country to access.

“If China goes down this path and they basically close off their metaverse, people will only be able to transact in the digital yuan. Whereas in other parts of the world, where they have a metaverse, they’ll be able to transact freely with Bitcoin, Ethereum, Cardano, Matic, Solana and many more cryptocurrencies,” says Carlos Betancourt, founding principal at BKCoin Capital.

The use of the e-CNY, a currency developed under the purview of the country’s central bank the People’s Bank of China, means the state will have an important role in the metaverse’s economy — a factor that runs counter to the spirit galvanizing the metaverse elsewhere in the world.

“Decentralization is an important aspect of the metaverse, and any development from China is likely to be highly centralized and subject to state oversight,” says Stefanidis. “It is highly unlikely that the [Chinese] government will relinquish control of the rapidly growing economy of the metaverse once it comes to fruition.”

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