Xu Zhifa, deputy director of the China Academy of Information and Communications Technology: What far-reaching impacts does blockchain have on the financial system?

The first Global Blockchain Technology Development Forum (GBF) was successfully concluded in Guiyang recently. Xu Zhifa, deputy director of the Industry and Regulation Research Institute of the China Academy of Information and Communications Technology, gave a speech on "Prospects for the Application of Blockchain in the Financial Field" at the forum. He pointed out that the attention index of blockchain in the financial field is far ahead, and focused on analyzing the application prospects of blockchain in the fields of currency, securities and insurance.

The following content is compiled based on the on-site speech by Deputy Director Xu Zhifa.

With the evolution and improvement of blockchain technology, it has received widespread attention and application in a series of fields such as finance, medical care, logistics, and supply chain. So far, the financial field is the largest application field of blockchain and also a field that has received widespread attention. Trust, insurance, securities, and currency are the four pillars of the current financial system, and the currency-related field has received the most attention.

So as a general-purpose technology, what impact does blockchain have on the financial system and what are its application prospects in major fields?

Whether it is a large bank in a small market represented by Germany or a small bank in a large market represented by the United States, the current financial system is relatively reliable and stable. According to the industry definition, the modern financial system has five core elements. Blockchain originated from Bitcoin and came from finance. In turn, it has also brought a profound and lasting impact on finance, which can be summarized as 1 increase, 1 decrease and 3 innovations. Financial markets, financial intermediaries, financial instruments, etc. support the operation of the financial system. As a general-purpose technology, the arrival of blockchain has subtly changed this pattern.

Specifically, the two major innovations refer to the fact that blockchain, with its shared ledger, consensus mechanism, and smart contracts as its technical features, directly affects the two elements of the "five elements" of the financial system, namely, currency issuance and circulation and financial instruments, making traditional currency issuance and circulation electronic and digital, and realizing cross-border remote circulation on the Internet; as financial instruments, financial instruments are also called financial assets, and a series of financial assets such as various bonds, stocks, warrants, etc., have realized the point-to-point circulation of its asset rights and interests because of blockchain technology. The transfer of funds between savers and borrowers has undergone some changes.

Through the direct effect of blockchain on currency circulation and financial instruments, it indirectly brings about changes in the operation of the financial market. The improvement of the efficiency of financial market operation directly increases the scale of the financial market. At the same time, the dispersion of financial terminal functions decreases, which indirectly reduces the scale of the financial market. "Two major innovations plus one increase and one decrease" will bring great challenges to the existing system and regulatory mechanism. The existing system and mechanism must be continuously improved and innovated. Therefore, the fifth innovation is policy innovation or mechanism innovation.

This is a relatively conservative statement. We know that the innovation brought by blockchain is a subversive one. The current analysis is based on the superposition of the five elements of finance. If we look ahead boldly, there will most likely be further and more drastic changes. For example, in the future, currency circulation and financial instruments will be combined into one, financial assets will be money, and money will be a form of financial assets. Financial intermediaries will gradually disappear, and the financial market will prosper greatly. The traditional system and regulatory mechanism will be greatly weakened. In the future, a new financial system with digital currency and innovative financial markets as the core will be formed. This is just our inference, and we have to wait and see.

The entire financial system in our country has four pillars: currency, securities, insurance, and trust. Generally speaking, internationally, it is mainly currency or banking, securities, and insurance.

Digital currencies could become the third form of cash

First of all, from the perspective of finance and bank currency, digital currency may become the third type of cash besides paper money and metal tokens. The definition of Bitcoin is actually a kind of electronic cash. In recent years, virtual currencies such as Ripple and Litecoin have been unprecedentedly prosperous. Currently, there is a boom period of using blockchain to create coins.

Let's review it. From the perspective of the timeline of human history, we have gone through several obvious stages. From the perspective of the value attributes or asset attributes of currency, we have gone through three stages. From the earliest forms of physical currency, including shells, gold and silver, we gradually moved towards the modern credit currency model. Credit currency has a great impact on the world economy. Relying on the assets of banks and the credit endorsement of the government, it has achieved great circulation capacity and economic driving energy. Today, digital currency has entered the third generation in terms of asset attributes and value attributes.

From the perspective of circulation, it can be summarized into three stages, from point-to-point circulation to the issuance and circulation of credit currency represented by the centralized intermediary structure, and then to the point-to-point circulation of electronic currency. In summary, from the perspective of currency, it has gone through three stages, from value-based to credit-based, and today to algorithm-based. This algorithm-based is actually still questionable in the industry.

But in general, even if all the attempts of the existing 700 digital currencies or digital currencies fail, the development of digital currencies is irreplaceable. Now a series of measures can also be seen that since the current digital currencies have no intrinsic value and asset characteristics, and the blockchain also has some security issues, the development of digital currencies may still be limited to niche use for a long time. So to sum up, the real innovation in digital currencies is the blockchain technology. The blockchain can improve the existing payment and settlement system. Digital currencies will become a partial substitute for legal tender. This is a more cautious statement.

Blockchain will become a way to securitize assets

Regarding the second of the four pillars, securities. Securities in the financial sector are extremely active, and we believe that blockchain will become a way of asset securitization. The application of blockchain in the securities field can be summarized into three categories, which can be divided into two major categories.

The first category is a conservative application model based on the existing securities control system. It is a technical improvement on the existing direct financing method and does not change the existing rules of the game. It is divided into two categories. The first category is the electronicization of private securities, such as the US Nasdaq platform to achieve private equity management. The other is the transformation of the public securities trading platform. Overstock successfully issued $1.9 million in public shares using the TO platform.

Another controversial method or one that may have a profound impact in the future is direct financing, such as ICO. Companies raise funds from the public by issuing blockchain tokens and creating a new currency. This is a big breakthrough from securities assets to digital cryptocurrency. In 2016, the scale of ICO investment in the blockchain field reached 236 million US dollars, accounting for one-third of the total investment. From the perspective of securities, asset attributes have also developed from the earliest traditional model to today's private electronic and public trading platforms including ICO. From the perspective of circulation, it has also developed from point-to-point to centralized, decentralized, and point-to-point. In the future, the methods represented by ICO will bring about major changes in people's investment and financial management concepts, and may change the existing financing structure.

Blockchain may help build a smart insurance ecosystem

Blockchain may help build a smart insurance ecosystem. One way is through alliances. For example, Shanghai Insurance Exchange took the lead and the insurance industry began to cooperate in the blockchain field through alliances to build "insurance credit" and focus on transaction verification. Another way is insurance companies. Another way is that Internet companies enter this field and launch some new applications and new products, such as Waterdrop Mutual Aid, Tongxin Mutual Aid, etc. It focuses more on using some new technologies to provide direct insurance investment and financing.

Traditional mutual insurance is moving towards commercial insurance and blockchain autonomous insurance. The insurance blockchain market has huge potential and its development is unstoppable. The China Insurance Regulatory Commission actively supports Internet insurance and mutual insurance, and smart insurance companies may emerge in the future.

The last two suggestions. First, from the perspective of development, the public data of the central bank shows that in recent years, the proportion of direct financing in the market has been increasing, and the proportion of indirect financing through intermediaries has been decreasing. This is also related to measures such as the governance of underground banks, but overall, direct financing through the capital market replaces indirect financing, that is, financial disintermediation is the general trend. The development of Internet finance such as blockchain has further weakened the role of traditional financial intermediaries and exacerbated this trend.

The second point is safety. Finance is the lifeblood of the entire national economy. Safety, reliability and rock-solid stability are the will of a country. We must have both development and safety. Therefore, we must develop new technologies and new formats, and at the same time, we must keep pace with regulatory technologies, regulatory means, regulatory policies and regulatory measures.