Zou Chun: Where is the blockchain most likely to break through when encountering obstacles in the financial sector?

Author: Zou Chun, Researcher at Pudong Innovation Institute

Melanie Swan proposed a three-stage conception of the application prospects of blockchain in "Blockchain - Blueprint for the New Economy". The application of blockchain version 1.0 is digital currency, such as payment, transfer, remittance, etc.; the application of blockchain version 2.0 is financial contracts, such as stocks, bonds, loans, financial derivatives and other more extensive non-monetary applications; finally it will evolve to stage 3.0, and be applied in society, government, culture, art and health. The development process of any new technology is not only related to the realization of the technology itself, but also subject to the game competition relationship of various stakeholders in the system, and will be subject to resistance from the existing system. Although the core function of blockchain technology is value transfer and is naturally applied in the financial field, its decentralized and autonomous characteristics determine that the resistance from the traditional financial field will be very strong. Relatively speaking, the resistance to application in the field of social life will be smaller. Therefore, the author believes that the application and development of blockchain technology will not proceed step by step according to the three stages envisioned by Melanie Swan, but it is very likely to achieve a breakthrough in the field of social life.

Recently, I have repeatedly encountered such a scene: a group of people listened to an expert with a bewildered look on their faces, describing something called "blockchain" with words such as "decentralization", "immutable", "disruptive", "data ledger", and "miner". Blockchain technology has become one of the most popular topics in the global innovation field, and has even become a hot topic in stock speculation, but most non-professionals still find this technology very mysterious and are skeptical of the experts' prediction that it can completely subvert the traditional financial industry. It is necessary for us to explain blockchain technology in a popular way.

"The Internet has realized the dissemination of information, and blockchain will realize the transfer of value." Wang Wei, chairman of the China Financial Museum, succinctly pointed out the core function of blockchain - value transfer. Let's take a look at the traditional way of value transfer. When we pay for shopping, we either hand the banknotes to the cashier, or swipe the bank card, Alipay, or WeChat, and the value transfer is completed smoothly. But if you think about it carefully, you will find that all the current payment methods are supported by a huge system to ensure that the other party trusts that your payment is valuable. The banknotes you pay are scientifically called non-convertible banknotes, which are banknotes issued by the government that cannot be exchanged for gold or silver. The other party believes that its value comes from the authority and credibility of the government. You can pay by swiping a bank card, Alipay or WeChat because there are corresponding banks or third-party payment institutions to guarantee that the string of numbers in your account corresponds to the real value. Without the guarantee of these institutions, your banknotes will become a piece of waste paper, and the numbers in your account will only be a string of numbers. In order to complete the payment, you must put the real gold and silver in front of the other party. Is there a way to complete the value transfer without handing over the bulky gold and silver face to face, or without the credit guarantee of the intermediary institution? Yes! That is blockchain technology. You can think of it as a diligent porter delivering your gold to the other party's wallet, just like you can think of email as a pigeon delivering your letter to the other party's mailbox. Of course, the porter and the gold here are both virtual. So the question is, even if it is real gold, the other party will worry about adulteration. How can you make the other party believe the value of virtual gold without a third-party guarantee?

Distributed accounting! This is how you convince the other party that the "virtual gold" you passed on is valuable. Imagine that you have a ledger that not only has its own transaction records, but also records all transactions in the system in chronological order. The entire system is an N×N distributed ledger, and everyone has the transaction records of everyone in the system.

First, how does this system prevent fraud? For example, you only have 10 taels of "virtual gold" in your account, and you now pay me 100 taels of "virtual gold", but my account book has records of all your transactions. After checking, I found that you only have 10 taels of "virtual gold" left, so I know that 90 taels of the 100 taels of "virtual gold" you gave me are fake. This situation has a special term called "duplicate payment", and blockchain technology can effectively prevent this situation.

Second, how does this system record each transaction in everyone's ledger? Taking the Bitcoin system as an example, the person who completes the bookkeeping is called a "miner". After completing a bookkeeping, he can earn 50 bitcoins. These 50 bitcoins are not transferred from other nodes, but "newly dug from the gold mine". All individuals in the system can come to bookkeeping, but the qualification for each bookkeeping is determined by the computing power competition. This problem is called the "consistency problem". Through the allocation and reward mechanism, the blockchain can technically achieve the consistency of all ledgers in the system. It can be seen that due to the existence of multiple ledgers, the cost of tampering in this system is very high. From the practice of the Bitcoin system running for seven years, it is actually impossible to tamper with records on the blockchain.

Blockchain is a sophisticated system that relies entirely on technology to achieve value transfer. From the perspective of efficiency alone, the application of blockchain technology in currency transfer, securities trading, etc. will undoubtedly greatly reduce transaction costs and shorten transaction time. Then from the perspective of its impact on the interests of all parties in the financial system, blockchain technology is likely to damage the interests of many parties. The first is the interests of the regulatory layer. In the blockchain system, each node is equal and there is no center, or each node is the center, with all transaction records of the entire system, and the regulator has lost its authoritative status. For example, Bitcoin poses a profound challenge to the authoritative status of the central bank's currency issuance, weakening the central bank's ability to regulate the economy through monetary policy. Therefore, the monetary authorities of most countries have a negative attitude towards Bitcoin. The second is that the business of traditional financial institutions will be greatly reduced and their status will be seriously weakened. For example, in traditional securities trading, after the securities owner issues a trading order, the order must first pass through the securities broker and asset custodian, and finally reach the exchange before it can be executed. Accordingly, the brokerage business of investment banks and the asset custody business of commercial banks have been generated. However, blockchain technology directly realizes automatic matching through smart contracts, and automatically realizes settlement and clearing through a distributed digital registration system, and no longer needs investment banks and commercial banks to act as intermediaries. At present, traditional financial institutions such as Citibank, UBS, and JPMorgan Chase seem to be very active in embracing blockchain, but their main purpose is to use blockchain technology to improve the automation and operating efficiency of internal systems, and they are very cautious about the application of blockchain in the entire financial network. The third is that there are hidden dangers in the security of accounts on the blockchain. Although the records on the blockchain cannot be tampered with and can be traced, they cannot prevent theft and fraud. When theft and fraud occur on the blockchain, it is theoretically easier to track and recover, but due to the current lack of supervision, there is no real-name account system and relevant laws and regulations like those in the traditional financial system, and the actual security of blockchain accounts is very low. In 2014, Mt. Gox, the world's largest Bitcoin trading platform, was helpless in the face of a huge theft of Bitcoins, and finally went bankrupt, and traders on the platform suffered huge losses.

In comparison, the application of blockchain technology in the field of social life will face much less resistance. In these fields, some intermediaries are public or public, not for profit, and some do not involve value transfer, but only record and share information. Therefore, these institutions are more likely to accept the weakening of their own central position in order to improve the efficiency of the entire system. Every small move of blockchain technology in the financial field has attracted widespread attention, but except for Bitcoin, most of the current applications are still in the stage of technology development and standard setting. However, at the same time, blockchain has been quietly put into practice in some areas of social life.

First, credit investigation. 91 Credit uses distributed technology solutions to connect P2P company databases. Each company does not need to upload data to the central database to achieve information interconnection and interoperability, avoiding borrowers from multiple places at the same time. Since the product was launched in September 2015, more than 200 companies have signed contracts. Although blockchain credit investigation cannot currently solve the problem of data source quality, it has achieved efficient sharing of credit information. Through continuous accumulation, credit information will be more comprehensive, the quality will gradually improve, and the credit profile of borrowers will be clearer. Similarly, blockchain applications in information sharing include anti-money laundering, etc. These applications do not involve the transfer of value, but only use blockchain technology to improve the efficiency of information recording and sharing.

Second, charitable donations. In July, Ant Financial officially announced that it would launch blockchain business and would first apply it to Alipay's charity donation platform, with the goal of recording the life cycle of each payment on the blockchain. The introduction of blockchain technology allows users to trace any changes and flows of donations, solving the trust crisis faced by traditional charities. Another example is Bitgive. Although Bitcoin has been denied by monetary authorities in many countries, cross-border donation activities with the help of Bitcoin are encouraged. Bitgive obtained the US 501 (c) (3) charity certification in August 2014. The organization built a transparent donation platform based on blockchain technology and realized cross-border small donations, which is extremely costly under the traditional system (the cross-border cost of $1 is close to $10) and is completely impossible to achieve. Since all parties involved in charitable donations are for public welfare purposes, it is easier to reach cooperation.

Third, brand anti-counterfeiting. Traditional brand anti-counterfeiting methods are generally identification codes on products plus a centralized query system in the backend of the enterprise. The forgeability of the identification code and the tamperability of the backend query system make it impossible to fundamentally eliminate counterfeit goods. Vechain implants chips into products, and various dynamic information of the products corresponding to the chips will be placed in a globally unified distributed ledger chain system, completely solving the problem of counterfeit goods caused by the original information island. The system has now entered the internal testing stage. Similarly, the application of blockchain in information anti-counterfeiting also includes academic certification, gem identification, food safety, etc.

Blockchain technology originated from the science and technology circle. Technical experts are easily intoxicated by the perfection of the technology itself, but often ignore the tense game competition and cooperation encountered in the real application of technology. The fundamental attributes of blockchain decentralization and weakening of intermediaries make its application in the financial field encounter strong resistance. In comparison, its application in the field of social life will be much more relaxed, more likely to form a win-win situation, and easier to be promoted with the cooperation of all parties.