Blockchain technology: a new blueprint for financial technology

It is considered to be the core technology with the greatest potential to trigger the fifth wave of disruptive revolutionary wave after steam engines, electricity, information and Internet technologies; The Wall Street Journal praised it as "the most important innovation in the financial field in 500 years"; Michael Bodson , CEO and chairman of Wall Street's clearing and settlement house, the Depository Trust and Clearing Corporation ( DTCC ) , described it as "a once-in-a-lifetime opportunity to modernize the post-trading environment."

It is blockchain technology. As if overnight, "blockchain technology" has become the most fashionable term in the technology and financial circles. Looking at both domestic and foreign financial professionals and scientists, they all favor it. Huang Butian, founder and chief architect of Yunxiang Blockchain, believes that blockchain is not only one of the core technologies in the current financial technology field, but is also expected to become a core technology of the fourth industrial revolution in the future.

As the underlying technology of Bitcoin, blockchain is not as controversial as Bitcoin, but is also being accepted and expanded to a greater extent. As Cai Weide, a scholar of the "Thousand Talents Plan" of the Organization Department of the CPC Central Committee and a professor at the School of Computer Science of Beijing University of Aeronautics and Astronautics, said, facing such an emerging technology as blockchain, "people from all walks of life have shown enthusiasm and interest in it" in the scientific and technological, legal and financial circles.

Creating a machine of trust

The blockchain originated from Satoshi Nakamoto's "Bitcoin" open source cryptographic protocol, and the most successful blockchain is also Bitcoin's blockchain. The reason why blockchain has attracted so much attention is that it has the characteristics of high transparency, immutability, and no need for middlemen.

Cai Wei-de told the China Science Daily reporter that Bitcoin technology aims to develop "digital currency" that is not controlled by any financial institution. Because of its special non-centralist tendency, the anonymous Satoshi Nakamoto disappeared soon after. But since then, the discussion on the blockchain technology underlying digital currency has never stopped. "Currently, blockchain technology mainly refers to the use of special algorithms and encryption methods to ensure the consistency, security and maintainability of the database in the network. At present, all nodes in the Internet can communicate with any other node fairly and freely, but this technology only solves the communication problem, not the credit problem. The application of blockchain technology just solves the credit problem." Cai Wei-de said.

How does blockchain solve the credit problem? "Blockchain can be simply understood as a decentralized, tamper-proof distributed ledger." Huang Butian explained that when a traditional ledger is wrong, it will not be completely erased, but a line may be drawn and a note may be made; the modern accounting system is built on a database system, and the cost of tampering with data is very low. However, each "node" on the blockchain network saves a complete ledger, so the cost of tampering with data will be very high, which is the basis for blockchain to solve the credit problem. The Economist made a vivid metaphor for blockchain: Simply put, it is "a machine that creates trust." Blockchain allows people to collaborate with each other without trusting each other and without a neutral central agency. It would be a big mistake to regard blockchain as just an open, transparent and trustworthy accounting system. " Alex Zhao " (net name), the author of the open source framework knot.js , believes that blockchain is far more than just an accounting system. This technology will make "decentralized automatic organization company" ( DAC ) possible. " DAC is something that can fundamentally subvert the organizational model of human society. I believe its impact on society will exceed that of the Industrial Revolution and become the most profound change that the Internet has brought to the world." Alex Zhao said: "Its (blockchain technology) is of great significance and has a wide range of uses. Once you realize it, you will be as excited as I am."

"According to Google search algorithm statistics, searches with blockchain technology as the keyword have continued to top the list since October 2015." Cai Wei De also pointed out that since 2015 , blockchain has continued to receive high attention from the financial fields of countries around the world, showing the broad application prospects of blockchain technology.

Advanced players have entered the market

In fact, in the past year, blockchain has become the most watched technology in the global innovation field and has been enthusiastically sought after by venture capital funds. In 2015 alone , the scale of venture capital invested in Bitcoin and blockchain-related start-ups worldwide reached approximately US$ 480 million, and in the first quarter of 2016 it reached US$ 160 million.

In addition to investment layout, leading financial institutions around the world have also made many big moves in promoting the application of blockchain technology. More than 40 leading financial institutions including Citibank, BBVA, JPMorgan Chase, Morgan Stanley, UBS, etc. have jointly established the R3CEV Alliance, which aims to promote the formulation of blockchain standards suitable for financial institutions and promote the implementation of technology. Recently, Ping An Group from China has joined the R3 Alliance.

A research report released by McKinsey in May believes that the security, transparency and immutability of blockchain will make the trust model between financial systems no longer rely on intermediaries in the future, and many banking businesses will be "decentralized" to achieve real-time digital transactions. Therefore, in the five major financial scenarios of virtual currency, cross-border payment and settlement, bill and supply chain finance, securities issuance and trading, and customer credit investigation and anti-fraud, blockchain will be able to produce the most direct and effective applications.

At present, the most successful scenario for the application of blockchain technology is virtual currency represented by Bitcoin. Now, there are hundreds of applications built on digital currency blockchain software. Abroad, some digital assets based on blockchain technology are being developed, created and tested. For example, Nasdaq's smart stocks do not require exchanges, clearing companies, or even brokerage companies. Currently, six companies are testing automatic trading and automatic settlement on them. The smart bonds tested by UBS Group do not require the existing huge system to facilitate transactions. Point-to-point transactions can be completed by smart contracts set up by computers. "In theory, a very rich set of services and products can be created around the open source system of blockchain. Bitcoin is just the tip of the iceberg of the huge application space of blockchain." Cai Wei said.

Governments and central banks are also flocking to blockchain. Cai Wei-de said that in January this year , the chief scientist of the United Kingdom listed blockchain as a national strategy of the United Kingdom on behalf of the British government. "This is a very surprising and very important thing. Generally speaking, only those undertakings that can bring great economic vitality and greatly improve productivity can rise to national strategies. The British government chose blockchain because it believes that blockchain technology can drive cooperation among all walks of life, from top to bottom. They believe that 'this matter has been scientifically proven'." The attitude of the British government and the central bank to blockchain is firm. On June 16 , Mark Carney, governor of the Bank of England , announced in a speech that the Bank of England will open up cooperation and start using blockchain technology to explore its application in clearing and settlement. In addition, the Bank of England is also considering setting up an accelerator to develop a large number of researchers to explore the potential of blockchain technology. "The Bank of England's move is a huge change in the financial field. The implementation of blockchain technology will bring new and comprehensive regulatory technologies and recreate a digital society." Cai Wei-de said that at the same time, a new type of law - computational law will also appear in time.

"In a recent McKinsey survey of senior executives from global financial institutions, 50% of the executives believed that blockchain technology will have a substantial breakthrough within eight months at the earliest and three years at the latest. For commercial banks, it is particularly important to master and apply these new technologies in a short period of time," said Han Feng, global deputy director and partner of McKinsey. Further challenges remain
However, just as blockchain was "taking over" the financial sector with great momentum, the virtual currency Ethereum was attacked on June 17 , and 60 million U.S. dollars worth of Ether from the world's largest crowdfunding project The DAO was transferred, sparking a huge discussion in the industry about blockchain technology.

Cai Wei-de analyzed that this attack was caused by a protocol vulnerability in The DAO , not a security problem in blockchain technology itself, and it does not mean that the revolutionary technological progress of blockchain has come to an end. " The DAO uses a public blockchain instead of a private blockchain, which means that anyone in the world can read it, anyone can send transactions and transactions can be effectively confirmed, and anyone can participate in the consensus process. This is the first taboo. In addition, The DAO uses a 'smart contract', which in my opinion is neither smart nor a contract."

Cai Wei-de pointed out that The DAO incident will become a watershed in the application of blockchain technology. Private blockchains with high throughput, privacy, strong reliability and real-time systems will become the focus of various application developments - the Bank of England adopts private blockchains. In addition, "blockchains must be the third generation before they can be used by financial institutions. They must be very high-speed and must support all aspects of supervision." Cai Wei-de reminded. Rob Platnick, chief technical architect of DTCC, also pointed out that although the potential and opportunities of blockchain technology are exciting, there are still certain limitations, and blockchain technology will not be widely adopted in the short term. "Blockchain technology is still immature and lacks proof. They are inherently limited in scale and lack the underlying infrastructure to be seamlessly integrated into the existing financial market environment." Rob Platnick said that the blockchain craze among large banks and service providers will eventually become a reality, and a series of technology development booms will create "blockchain isolated mazes."

Therefore, Platnick called for extensive industry-wide cooperation to develop and restructure the existing core processes of the financial industry and replace them with blockchain. Standards Australia also supports the establishment of a global standard for the development of blockchain, and it calls on the International Organization for Standardization ( ISO ) to establish a global standard for blockchain technology. Once the standard is issued, the development of blockchain technology in the financial industry may be on the fast track to the future.