Li Lihui, former president of Bank of China: Blockchain investment has great potential, but new risks are hidden

On July 31, at the 6th Shanghai New Finance Annual Conference and the 3rd Internet Finance Bund Summit, Li Lihui, former president of the Bank of China and head of the Blockchain Research Working Group of the China Internet Finance Association, delivered a keynote speech entitled "Connecting Finance, Connecting the Future", elaborating on the current hot issues related to blockchain.

Abstract of Li Lihui’s speech:

Blockchain technology also has risks. The reliability of smart contracts must also be reviewed and certified by professional and authoritative experts to prevent loopholes in advance.

Due to the distributed and tamper-proof nature of blockchain, we cannot copy the security control measures under the existing database structure to deal with risk events such as hacker attacks. Our current data systems are all large-scale central data systems. Under such a system structure, we have taken some successful prevention and control measures.

I think these prevention and control measures based on big data centers cannot be simply transplanted to blockchain application scenarios. Therefore, we need to develop new risk control technologies and emergency measures based on new technical structures.

Progress of the working group's work: A list of key topics has been determined, and the first four key research topics have been launched, including research on the construction planning of a blockchain basic experimental platform, research on blockchain technology and digital identity recognition, research on blockchain technology and digital bills, and research on international regulatory policies for blockchain technology.

In the next step, the research working group will hold a special seminar to discuss the project results, especially the technical solutions proposed by the research team. After the solutions are relatively mature, member units will be organized to carry out application experiments.

The following is the transcript (edited by Zero One Finance, with some deletions):

In recent years, blockchain has rapidly become a hot word in technological innovation. Will blockchain, like the Internet, change finance, lifestyle, and business model? Will the application of blockchain in finance promote the further development of inclusive finance? This is a question that everyone is thinking about and exploring.

When people define the technical characteristics of blockchain, there are five characteristics: decentralization, trustlessness, smart contracts, asymmetric encryption, and timestamps. Among the five characteristics that people summarize for blockchain, there are two "decentralization" characters. But I think that for blockchain, it is actually inappropriate for us to use these two "decentralization" characters.

The first one is decentralization. Of course, it means decentralization, but it also means decentralization, dispersion and distribution. I changed the first word of the blockchain into "distributed".

In recent years, the development of blockchain technology has achieved some initial results and progress in the application of private chains and alliance chains. In these successful cases, they are not without a center, they still have a center, but it is distributed.

Blockchain originated from the application of Bitcoin, which only has one transaction per second or every few seconds. However, in our current financial application scenarios, the transaction volume required is very large. For example, the payment system China UnionPay has tens of thousands of payment transactions per second. So if we simply say that it is only a technology based on the application and scenario of Bitcoin, it is impossible to handle a large transaction volume through one node. So I think that changing "decentralization" to "distributed" may be more in line with the actual application of technology and financial scenarios.

The second is trustless. In fact, it is not trustless, but replacing the traditional trust model with technical and mathematical trust. So I want to change it to "trustless", which means that we do not need the traditional trust of the past, but we need to establish a trust relationship based on a new technical structure, which may be more accurate.

I would like to talk about a few topics:

1. Blockchain should be an application technology that meets the needs of market economy and modern lifestyle.

First of all, the blockchain smart contract function can be applied to the maintenance and execution of contractual relationships and contractual principles.

Our bill business supervision can only be carried out through on-site audits, lacking the means of full-process, rapid access and review, which is inefficient and costly. If we apply blockchain technology to build digital bills, it is possible to implement specific restrictions on business agreements through programmable smart contracts, introduce regulatory control nodes, and confirm transactions by all parties to the transaction to ensure the uniqueness of value exchange.

Secondly, the distributed, timestamping and asymmetric encryption functions of blockchain can be applied to information query, verification and protection.

The development of the Internet has greatly promoted the production and dissemination of information, but it is often difficult to prove the authenticity of shared information, confirm the ownership of proprietary information, and protect the security of private information.

The distributed function of blockchain can protect the integrity of data by building a distributed database system and a consensus protocol among participants.

The timestamp function of the blockchain can form data that is traceable, verifiable, tamper-proof, and cannot be forged by generating information blocks for a certain period of time and a data chain that connects the blocks. Each participant adds a timestamp when generating an information block to prove the originality and ownership.

The asymmetric encryption function of blockchain is conducive to protecting the privacy of information.

The second part is the starting stage and the development pattern of keeping pace with each other.

The International Monetary Fund pointed out in its first digital currency report that blockchain "has the potential to change finance." The trend of expanding the application of Bitcoin to other fields such as finance has already formed, but it is still in the starting stage. Participants are moving forward together, and it is difficult to determine the winner for the time being. Observers have the opportunity to follow up and may also catch up.

1. IT giants begin to make plans.

IBM participated in the investment of blockchain enterprises such as DAH, and jointly developed the HyperLedger project with the world's largest open source community Linux. On July 12, 2016, IBM established a blockchain innovation center in Singapore. We expect IBM to promote a series of technical pilots in the field of financial transactions in the next three years. Microsoft deployed blockchain basic tools on the cloud platform Azure and launched the world's first BaaS service.

2. Financial institutions gather and set off.

The R3 Blockchain Alliance is the world's largest distributed ledger technology alliance, with more than 50 members, including Citi and HSBC. In May this year, Ping An of China announced that it had officially joined R3. In January, the China Blockchain Research Alliance was established; in May, the Financial Blockchain Cooperation Alliance was established, bringing together 31 members including WeBank, Ping An Bank, China Merchants Bank, Hang Seng Electronics, JD Finance, Tencent, Huawei, Silver Chain Technology, Shenzhen Financial Information Service Association, etc.

3. Government agencies are testing the waters. The application of blockchain technology has begun to gain attention from governments of various countries. Some have already tested the waters, while others are still undecided.

On June 7 this year, the World Bank co-hosted a blockchain conference at the Federal Reserve's Washington headquarters, with representatives from 90 central banks attending. China also participated, with Director Liao from the Shanghai Bureau attending the conference to discuss the application prospects of blockchain and digital currency technology.

4. The investment prospects are cautiously optimistic.

Initial investments in blockchain focused on Bitcoin and infrastructure companies. In recent years, more attention has been paid to blockchain startups. Since 2013, 21 Inc and Coinbase, two leading blockchain computer companies, have received $121 million and $105 million in investments, respectively.

Currently, Circle, a US-based blockchain cross-border payment company, has users from 150 countries and an annual transaction volume of nearly $1 billion. In 2015, it received investments from Goldman Sachs and IDG Capital. In 2016, IDG Capital invested another $60 million in Circle, along with a Chinese consortium including Baidu and CICC.

The investment prospects of blockchain should be said to be cautiously optimistic, and there should be considerable room for development in the future.

3. New technologies bring new risks.

The application of blockchain technology seems to make complex economic life simpler. For example, applying blockchain technology to cross-border remittances can save time and facilitate payments. Smart securities can be generated through smart contracts, and the issuance, trading, and clearing of smart securities can be carried out on the blockchain, making transactions simple and direct. In the fields of luxury goods traceability, distributed exchanges, the Internet of Things and supply chain, and healthcare, the application of blockchain technology is likely to become a reality.

At the same time, the potential risks of blockchain technology applications have also begun to be exposed.

In May this year, TheDAO, a crowdfunding project that had just completed the world's largest crowdfunding record and raised US$150 million, was attacked by hackers on June 17 this year, and Ethereum worth US$60 million was hijacked, which attracted widespread attention.

Unchangeable and irreversible is a feature of blockchain technology. However, in the case of TheDAO, they finally solved the problem by hard forking and resetting the time to before the attack, so that the hijacked funds could be returned to the initial investors' accounts.

This shows that blockchain technology also has risks. The reliability of smart contracts must also be subject to professional and authoritative review and certification to prevent loopholes in advance.

In the early stages of blockchain technology application development, the hacker attack on TheDAO is not a bad thing in my opinion. We can get some important lessons from it. I summarize it into two aspects:

1. New technologies open up new applications, but they also bring new risks.

When applying high-tech, we must be careful to prevent the risks of technology monopoly and technical operation. If someone monopolizes some high-end technologies such as smart contract programming in the blockchain, and your technology is not as good as others, he may set some traps in it. Or because your technical level is not high enough, there are some loopholes when you set up the programming, which may form technical loopholes that may be exploited by attacks and theft afterwards.

Therefore, we must build a technical firewall that can prevent moral risks. In the application of blockchain technology in different scenarios, we must conduct in-depth analysis and authoritative certification of the security, stability, and reliability of core programming such as smart contracts, timestamps, and keys.

2. New technologies have new characteristics, and risk management must adapt to new technological structures.

Due to the distributed and tamper-proof nature of blockchain, we cannot copy the security control measures under the existing database structure to deal with risk events such as hacker attacks. Our current data systems are all large-scale central data systems. Under such a system structure, we have taken some successful prevention and control measures.

I think these prevention and control measures based on big data centers cannot be simply transplanted to blockchain application scenarios. Therefore, we need to develop new risk control technologies and emergency measures based on new technical structures.

The last point is to pool everyone’s strength and serve everyone.

On June 15, the China Internet Finance Association established a blockchain research working group. The working group members come from banks, securities, insurance and traditional financial institutions, emerging Internet financial companies, financial infrastructure institutions and research institutes, including well-known experts and scholars from the industry and research institutes, experts from the "Thousand Talents Plan" of the Organization Department of the CPC Central Committee, and experts with special allowances from the State Council.

The working group works under the direct leadership of the China Internet Finance Association, with the aim of "pooling everyone's strength and wisdom to serve everyone."

The working group focuses on: organizing research on the technical difficulties, business scenarios, risk management, and industry standards of blockchain applications in the financial field; following up on the development of blockchain technology at home and abroad and its application innovation in the financial field; and paying close attention to the financial risks and regulatory issues brought about by innovation.

The main work objectives of the working group are to build a blockchain research network, plan and build a blockchain basic experimental platform, produce high-level research results, and cultivate high-level, compound professional talents.

Progress of the working group's work: A list of key topics has been determined, and the first four key research topics have been launched, including research on the construction planning of a blockchain basic experimental platform, research on blockchain technology and digital identity recognition, research on blockchain technology and digital bills, and research on international regulatory policies for blockchain technology.

In the next step, the research working group will hold a special seminar to discuss the project results, especially the technical solutions proposed by the research team. After the solutions are relatively mature, member units will be organized to carry out application experiments.

We sincerely hope to receive your strong support and help. We hope that everyone will work together to promote technological innovations that are currently very popular in China but are still somewhat unfamiliar in reality, but may change the world in the future.