In late June, Chinese internet giant Tencent’s gaming division sued spice maker Lao Gan Ma for an unpaid bill of nearly $1 million. In response, the court’s quickly froze Lao Gan Ma’s corporate bank accounts to preserve liquidity for a settlement. Confused, Lao Gan Ma executives said they had never entered into such a contract. In turn, Tencent produced a copy of the contract with Lao Gan Ma’s company chop — the presence of this sacred stamp means that someone at the highest level had approved the contract.
But it was all a ruse. The seal a fake, the contract a scam. Quickly, police in Guiyang, Lao Gan Ma’s corporate hometown, announced they had arrested three suspects who police say just wanted to get the digital codes Tencent gives as a gift to new marketing clients.
Scams involving fake company chops, or rogue actors inside companies absconding with them are common in China. Can blockchain provide a solution?
This tech story is surreal even by 2020 standard:
– Tencent sues spicy sauce maker Laoganma for 1m+ USD default marketing payment
– The court froze L’s 2m USD asset based on T’s story
– L said they never worked with T. Turns out 3 hustlers forged L’s chop and cut the deal… pic.twitter.com/3G1z5blTkv
— Tony Lin (@tony_zy) July 1, 2020
What is a company chop?
In China, company chops are effectively mandatory for doing business, and replace signatures used in Western countries. While companies in the West would designate officers that have signing authority, and revoke said authority if the person leaves the company or comes under legal scrutiny, in China whoever controls the chop has the power.
The scandal surrounding control over mining company Bitmain partially involves control of the chop. Often a firm’s legal representative has possession of the chop, and with it, broad, sweeping powers, and in the case of Bitmain contention comes from whether Micree Zhan or Jihan Wu have rights to this coveted position — and possession of the chop.
Given the weight of the corporate chop in China, and the potential for rogue actors or imposters to do serious damage to a company’s fortunes should they control it, there’s a lot of effort being put into creating secondary authentication methods for the chop using blockchain and smart contracts. One example of this is Zhixin Chain, a Hyperledger based platform used to execute smart contracts, digitize the company chop, and delineate ownership of intellectual property.
Can blockchain replace the company chop?
Zhixin Chain’s Proof of Credit system allows for contracts to be inked, recorded on the blockchain, and funds set aside from the counterparty that are to be paid upon completion of contract. Instead of relying on the company seal as validation that the contract has been authorized by a party, they can point to a timestamp and hash on the blockchain. Nodes of Zhixin Chain’s platform operate as a notary of sorts to help build consensus on the validity of the timestamp.
Zhixin Chain has partnerships with local courts in Shenzhen, internet law courts in Guangzhou, as well as a pilot project with notary offices in the province of Anhui.
As proof of the potential for the technology to be held up in the legal system, courts in Shenzhen recently heard a case regarding a copyright dispute where a blogger going by the name of Shushanbixia accused a large media company of plagiarizing one of his posts on a media platform owned by Tencent. According to reports, Zhixin Chain has used to confirm ownership and use China’s version of DMCA laws to remove 8 million files that were infringing on the rightsholders’ copyright.
Chops have been around since 220 BC, the era of the Han Dynasty in China, and have been used for authentication since laws in the country recognized the formation of the first company. A replacement isn’t going to be around anytime soon, however, timestamped, parallel records created by Zhixin Chain might be able to serve as complementary evidence to reduce the importance and take the weight off of such an archaic method of contract signing.