The first application scenarios of blockchain in China will be the bill market and cross-border payments

Since we released the industry in-depth report "Blockchain: The Poetry and Distance of the Internet" in early April and continued to recommend it, blockchain has become one of the most recognized and clear directions in the market. At this stage, investors have basically reached a consensus on the industry prospects and development potential of blockchain, and are mainly entangled in how to choose the target. We believe that from the perspective of the evolution of the theme and the development of the industry, the blockchain theme will enter the next stage in the future, and companies with real products and cases are expected to stand out.

1. Theme Evolution Perspective

Judging from the market's reaction, the blockchain theme has gradually transitioned from a pure concept hype period to an industry falsification period. During the concept hype period, the emergence of event catalysts (such as Ping An joining R3, the convening of the International Blockchain Summit, and the joint discussion of the application prospects of blockchain technology by hundreds of central banks around the world) played an important role in the fermentation of the blockchain theme. However, we also observed that the market began to show signs of aesthetic fatigue, and the yield of event-induced stimuli gradually declined.

The transition from the concept hype period to the industry falsification period does not mean that the theme is cooling down, but it means that the market will say goodbye to short-sightedness. Against the backdrop of a long-term positive industrial landscape, companies that truly work hard in the industry will be able to distinguish the true from the false.

2. From the perspective of industrial development

From the general rule of technological innovation, the commercial value of innovative technology depends on the design of business model. Exploring customer needs and solving customer pain points are the key to the implementation of innovative technology, and the innovation of business model can often maximize the commercial value of technology. For blockchain technology, we first need to determine whether the technology is mature; secondly, when the technology is mature, which fields are expected to be the first to be commercialized and promoted in China.

For the first question, we admit that blockchain technology is not perfect, but it has been technically verified in certain specific application scenarios: 1) Payment field, especially cross-border payment. Typical company: Circle. Circle just received a $60 million Series D investment led by IDG and followed by Baidu on June 23, and announced that it would set up an independent company Circle China and form a local team. According to Circle's statement, it mainly provides C2C payment and transfer services with blockchain as the underlying core technology. Circle launched its first App at the end of 2014 and has attracted millions of users in 150 countries. At the end of last year, after opening a US dollar exchange service for US users, Circle is currently expanding to Europe. Through Circle, users can immediately exchange US dollars and pounds. It is particularly worth mentioning that Circle expects its transaction volume this year to exceed US$1 billion. 2) Clearing and settlement. Typical company: Chain. Nasdaq Exchange has completed its first private equity registration based on its blockchain technology, and announced in May that it will provide blockchain services to more than 100 market operators around the world as part of its newly launched Nasdaq Financial Framework. This indirectly reflects that its technology is basically mature.

Figure 1: Blockchain technology transforms cross-border payment processes Data source: Ripple official website, Essence Securities Research Center

For the second question, considering the maturity of blockchain technology, the pain points of the industry, the urgency of customer needs, and the room for improvement that blockchain technology brings to the industry, we believe that the first application scenarios to be implemented in China will be the bill market and cross-border payments.

Figure 3: Blockchain transforms securities clearing and settlement (data source: Deloitte, Essence Securities Research Center)

1) Bill market: According to feedback from industry surveys, in the bill market, both national policy orientations and industry participants (commercial banks) are very interested in blockchain technology. Due to the high degree of initialization of the bill market industry, the application of blockchain technology faces less resistance from vested interests, and is expected to become the first application scenario in the field of clearing and settlement. Since 2001, China's bill market has grown rapidly. Currently, about 20% of the total bills circulating in the market are small bills with a face value of less than 5 million yuan, and most of these small bills are issued by small and medium-sized enterprises. However, due to complicated business processes and high operating costs, banking and financial institutions are not very enthusiastic about handling small bill discounting business. By transforming the middle and back-end of banks through blockchain technology, it is expected to greatly improve the liquidity of these small bills, which will be a Pareto improvement for commercial banks, financing parties, and funding parties;

2) Cross-border payments: There is huge room for industry transformation and huge customer pain points. According to a McKinsey report, blockchain will be able to abandon the role of transit banks and achieve point-to-point fast and low-cost cross-border payments; from a global perspective, the application of blockchain technology in B2B cross-border payment and settlement services will reduce the cost of each transaction from approximately US$26 to US$15.