Blockchain is rapidly developing in the financial industry, and the clearing field will be an important breakthrough.

What kind of sparks will appear when blockchain meets finance?

All kinds of speculation may fail to accurately describe the tremendous changes that this technology will bring to the financial industry and other industries.

In fact, when the International Monetary Fund (IMF) asserts that blockchain "has the potential to change finance", when some people imagine that blockchain technology will profoundly change human society like double-entry bookkeeping and the joint-stock system, and when the Federal Reserve sets up a working group to conduct a "comprehensive analysis" of the use of blockchain technology, a disruptive change to the financial industry is gradually becoming a reality.

In China, blockchain is also rapidly transforming from "virtual" to "real". The financial industry has become the forefront of blockchain deployment.

Financial industry chasing block

The characteristics of "decentralization" and "trust" that cannot be tampered with have enabled many financial institutions to capture the potential value of blockchain. Financial institutions represented by ICBC, Ping An, CMB, and UnionPay have all explored innovations in the blockchain field.

Don Tapscott, the "father of digital economics", once asserted that blockchain is a technology that will disrupt currency, business and the world. Among them, the disruption of blockchain to the financial industry is particularly noteworthy.

As one of the first batch of pilot private banks, Shanghai Huarui Bank is ready to take the first step in the use of blockchain for cross-border fund settlement. Fang Xiaoen, general manager of the innovation department of Huarui Bank, said: "We are studying the use of Ripple technology to conduct cross-border fund settlement on the blockchain with the agent bank.

Ripple technology is a typical application of blockchain technology. In the case of information asymmetry, blockchain can establish node trust through a consensus mechanism created by encryption algorithms based on Internet big data, without the need for mutual guarantee of trust or third-party issuance of credit certificates. Therefore, blockchain is also called "the machine of trust" by The Economist magazine.

"For the financial industry, blockchain first creates a peer-to-peer credit. Through encryption and programming, it creates a credit that ordinary people can achieve, which will have an impact on traditional centralized institutions," said Li Bo from the Research Bureau of the Central Bank. Blockchain is a distributed application system that is jointly participated by different nodes and pursues strong data consistency. It is mainly presented as an open ledger service, with "decentralization", "trust" that cannot be tampered with, and smart contracts based on programming as its notable features.

Precisely because of this, many Chinese financial institutions have quickly captured the potential value therein. Financial institutions represented by ICBC, Ping An, CMB, UnionPay, etc. have begun to explore innovations in the blockchain field.

In 2015, R3, an international financial innovation company, initiated an alliance of more than 40 internationally renowned banks, dedicated to researching and discovering the application of blockchain technology in the financial industry. The world's top financial institutions, including Barclays, Credit Suisse, Morgan Stanley, Goldman Sachs, HSBC, ING, etc., are all involved. This year, Ping An of China and China Merchants Bank also announced that they would join the organization.

In early 2016, the China Blockchain Research Alliance was established in Beijing, with members including Wanxiang Holdings, Xiamen International Financial Technology Co., Ltd., China Insurance Asset Management Association, Baoshang Bank and other institutions. Wanxiang Holdings also initiated the establishment of Chinaledger, led by Bai Shuo, former vice president and CTO of the Shanghai Stock Exchange, focusing on the research and development of basic blockchain technologies and protocols.

After that, the "Golden Alliance" initiated by WeBank and more than 20 banks and securities companies was established in Shenzhen. The "Lujiazui Blockchain Financial Development Alliance" was also established in Shanghai. So far, the development of blockchain in China has formed a "Beijing, Shanghai, and Shenzhen" tripartite situation. At the same time, ICBC, which has strong R&D capabilities, has also included blockchain technology in the company's "13th Five-Year Plan" information technology plan.

Recently, China UnionPay launched a points conversion platform based on blockchain. "Its feature is that all bank points do not need to be converted into points on the platform. The platform only provides point-to-point matching transactions. Banks can automatically exchange points without worrying about customer loss." Yan Xiangxiang, the project leader of China UnionPay, told reporters.

The small exchange of points highlights the admiration of the blockchain's credible distributed system in the financial technology field. Yan Xiangxiang said that due to the use of blockchain technology, all parties in the transaction are distributed equal nodes, which is authentic and credible, thus eliminating the concerns of various banks. In addition, the biggest disadvantage of the traditional "centralized platform" is that the platform often acts as a trader and there are transactions similar to capital pools. The P2P illegal platforms that have been repeatedly exposed are typical examples of this. The use of blockchain technology can completely block this possibility.

At present, many small banks have chosen to join the platform to redeem points.

Reconstructing the liquidation business model

Blockchain technology can achieve real-time matching of information flow and capital flow, which will completely subvert the entire financial industry. An important breakthrough in its application in the financial industry is the clearing field.

The clearing field will be an important breakthrough in the application of blockchain technology in the financial industry.

In fact, a fierce competition in the field of international clearing has quietly begun.

"In addition to factors such as distribution and trust, blockchain also realizes real-time connection of information flow and capital flow in the financial field. This will change many existing business models." Gong Ming, the founder of "Blockchain Pencil", highly praises this.

Blockchain technology runs all day, with real-time settlement and transaction-by-transaction delivery. The transaction is settled at the end of the settlement, and all nodes jointly maintain the ledger and share the ledger information. Therefore, it has outstanding applications in the integrated system of digital asset registration, issuance, trading, payment, settlement, and clearing.

According to Wu Daqi, a consultant to the Shanghai Municipal People's Government and deputy director of the Standing Committee of the Pudong New Area People's Congress, "the application of blockchain technology in the registration system and cross-border payment fields has been studied and the report will be submitted to the relevant departments."

Wu Sijin, director of the Blockchain Center of the Internet Finance Research Institute of the China Electronic Commerce Association, has long been researching the technical applications of blockchain exchanges. He believes that digital assets such as equity, debt, bills, warehouse receipts, etc. "written" on the blockchain will help improve their credit, facilitate cross-regional and cross-market transactions and financing, and improve resource allocation efficiency.

"For example, for securities clearing and trading, the use of blockchain technology can complete it in one step. Compared with the current separation of trading, clearing, and custody, this will undoubtedly be a huge improvement in efficiency in theory," Wu Sijin emphasized.

According to PwC statistics, the global OTC market (over-the-counter market) has caused sellers direct losses of up to $27 billion due to liquidation failures. Sun Lilin, founder of Juzhen Finance, who came from UnionPay, believes that efficiency losses exist not only in the exchange field, but also in traditional interbank clearing, and blockchain has obvious advantages in this field.

From the perspective of issuance, trading and clearing, Sun Lilin believes that the most valuable area of ​​blockchain technology is still clearing and reconciliation, and it has great potential in improving reconciliation efficiency and reducing costs. In September, Juzhen Finance, founded by Sun Lilin, received RMB 150 million in financing from Wanxiang Holdings and other institutions, which is also the largest financing in China's blockchain industry to date.

In addition, China Securities Depository and Clearing Corporation and Shanghai Clearing House have also publicly announced that they have begun to study how blockchain technology can improve the existing system. At the second blockchain summit, Li Ruiyong, deputy general manager of Shanghai Clearing House, expressed his willingness to actively participate in the development of blockchain technology and jointly deepen the research and application of blockchain technology.

In the field of international clearing, competition is even more intense.

Huarui Bank is also cooperating with Ripple to reduce costs and improve efficiency for customers.

For traditional cross-border remittances, banks require customers to go to branches to fill out a remittance application form. The bank charges a remittance fee of 0.1% (minimum 50 yuan, maximum 1,000 yuan). At the same time, customers are also required to pay the bank a "SWIFT telecommunications fee" ranging from RMB 80 to RMB 150. It takes one to three working days for the recipient to receive the money.

"Huarui Bank is using the blockchain distributed ledger technology provided by Ripple to settle funds directly with its correspondent banks on the blockchain, shortening the settlement time and eliminating the need to pay telecommunications fees. For example, according to traditional cross-border remittances, a customer who remits $5,000 to the United States needs to pay a handling fee of 50 yuan and a telecommunications fee of 150 yuan, a total of 200 yuan. Huarui Bank hopes that customers only need to pay a handling fee of 50 yuan and 0 yuan in telecommunications fees, and the recipient can receive the money within one minute. The cost is reduced by 75%, and the arrival time is shortened from T+N to quasi-real time." Fang Xiaoen, general manager of the innovation department of Huarui Bank, said that the technology is being developed at an accelerated pace.

"Blockchain technology can achieve real-time matching of information flow and capital flow. This will be a historic breakthrough and will completely subvert the entire financial industry," Gong Ming believes.

The compromise between technology and reality

“Distribution is a better explanation of the combination of blockchain and finance than decentralization. In the current environment, decentralization is unrealistic, and a multi-center distributed system is more suitable for the current financial situation in China.”

Despite its disruptive potential, blockchain technology has many friction points with the existing environment. Only when it is rooted in the existing financial industry soil can this advanced technology take root and sprout.

"Blockchain technology must be combined with real-world rules." Yang Tao, director of the China Blockchain Research Alliance and assistant director of the Institute of Finance of the Chinese Academy of Social Sciences, believes that "blockchain must find its own 'bloodline' roots in the mainstream economic and social framework."

The "running-in" problem emphasized by Yang Tao is particularly prominent in the financial field, which is characterized by "centralization".

The contradiction between the "traditional centralization" of finance and the "decentralization" of blockchain has always been obvious. After "decentralization", how can the interests of each financial institution be protected? If this problem is not solved, the application of blockchain in the financial field will be out of the question and will remain at the stage of "paper talk".

"Decentralization" was once the industry's consensus on the characteristic of blockchain. However, with the rise of the voice of financial institutions, it was quickly replaced by "distribution". The "distributed system" of blockchain technology replaced "decentralization" and became the first choice in the development of this technology.

"Distributed can better explain the combination of blockchain and finance than decentralized. In the current environment, decentralization is unrealistic, and a multi-center distributed system is more suitable for the current financial situation in China." Sun Lilin's judgment is pragmatic and sharp.

In blockchain technology, the multi-center model in which each node is equal and can play an important role is the consortium chain model.

As a senior lawyer familiar with all kinds of bank financing transactions, Sun Ming's views are more representative: "Since the basic property rights relationship of a completely decentralized public chain is difficult to determine, the financial system cannot choose it as a technical application, and the alliance chain would be a better choice for the financial industry." In Sun Ming's view, the alliance chain can determine the ownership of each node, prove that it is controlled by a financial institution, and clarify the legal liability.

Li Linhui, former president of the Bank of China, also believes that the application of blockchain technology in private chains and alliance chains has made initial progress in recent years, but this does not mean that there is no center. There is still a center, it is just distributed.

Ma Zhitao, Chief Information Officer of WeBank, believes that many blockchain systems are multi-center systems rather than "decentralized", and distribution should become a feature of blockchain. Therefore, consortium chains are more suitable for domestic financial institutions.

As the first Internet bank in China, WeBank’s main business, Weilidai, has borrowed blockchain technology to promote joint loans. Currently, the loan business is developing smoothly and has reached a scale of 120 billion yuan.

"This business is more in line with the alliance chain technology in the blockchain, which can allow each joint bank to become each node in the blockchain, and use the technology that cannot be tampered with and is jointly maintained and operated to promote more banks to participate." Ma Zhitao said that what will be stored on the alliance chain between institutions will be the ledger or a copy of the ledger of transactions between institutions. At the same time, using the blockchain characteristics of distributed ledgers and smart contracts, peers can effectively reduce the cost of clearing and reconciliation, improve timeliness, and simplify and speed up transactions between various decentralized financial institutions.

Institutional rules need to be followed up

Obstacles such as real business, systems, and technical rules stand in the way, resulting in the fact that most financial projects that use blockchain technology are still non-core projects and have not yet touched on traditional core projects.

"Logically, blockchain technology can improve the efficiency of issuance, trading, clearing, settlement and custody in the securities field. However, in terms of current laws, these parts are relatively independent links. For example, the Securities Law distinguishes between securities registration and settlement institutions and exchanges, and also defines their functions. At the same time, the use of blockchain assets for distributed registration, transfer, and ownership, and how to finally connect them to real funds is also a major pain point." Wu Sijin said.

In addition, China's capital market laws, regulations, administrative rules and business rules empower various entities with regulatory functions to exercise their regulatory functions in accordance with the law and specific operational privileges.

"For example, the judicial department has the privilege to freeze transactions of designated accounts in accordance with the law. The regulatory authorities have the privilege to 'see through' the opening, trading and holding data of all accounts in accordance with the law. The exchange has the privilege to 'suspend trading' of specific trading products, 'suspend trading' of specific markets, cancel 'obviously unfair' transactions, and forcibly close and reduce positions that meet specific risk control warning standards in accordance with the law. Registration and settlement institutions have the privilege to suspend or refuse settlement of specific concluded transactions in accordance with the law." When talking about this, Bai Shuo knew everything like the back of his hand.

These "centralized" management logics are testing the feasibility of blockchain implementation.

From the perspective of financial supervision, the main problem at present is that countries are not yet ready for the large-scale application of blockchain technology in finance. Liao Min, director of the Shanghai Banking Regulatory Bureau, wrote an article pointing out that in the face of the challenges of financial technology, not only must the regulatory concept be adjusted and innovated, but the regulatory framework has also been impacted by a series of problems, the most prominent of which comes from blockchain.

From a technical perspective, Bai Shuo believes that the layering of blockchain protocols is not mature and is still in a state of fighting each other. It is far less unified than the Internet and requires cooperation among major technical schools. "At present, the Golden Alliance and Chinaledger are cooperating to strive to form a relatively unified technical standard in China," Bai Shuo revealed.

However, it is worth noting that the Ministry of Industry and Information Technology has made gratifying progress in formulating blockchain industry standards. In July, the Ministry of Industry and Information Technology's Information and Software Service Department issued a "Letter on Organizing Research on the Development Trend of Blockchain Technology and Applications", and on October 18, it guided the establishment of the "China Blockchain Technology and Industry Development Forum" and released the first official "Blockchain White Paper".

The White Paper provides the progress of blockchain standardization in China. In April 2017, the standard verification work was launched and qualified provinces, cities and industries were selected to carry out pilot work on standard application promotion for the verified standards. In addition, the mechanism and model for implementing the standards will be explored in a timely manner. In October 2017, the standard improvement period will begin, and the Ministry of Industry and Information Technology will make deeper improvements to the standards based on industry development trends and pilot situations. (Shanghai Securities News/Sun Zhong, Chen Yu)