Li Lihui, former president of the Bank of China: Advantages of using blockchain technology to build digital bills

By Li Lihui, member of the Financial and Economic Committee of the National People's Congress Li Lihui is a member of the Financial and Economic Committee of the National People's Congress and former president of the Bank of China. He has been a member of the Financial and Economic Committee of the National People's Congress since 2013.

Currently, blockchain has received attention from financial institutions. The International Monetary Fund (IMF) pointed out in its first digital currency report that blockchain "has the potential to change finance". The British government's "Distributed Ledger Technology: Beyond Blockchain" proposed to give priority to the application of blockchain technology in the traditional financial industry. The Bank of England is considering issuing digital currency. Nasdaq has established the private equity trading platform Linq with the help of blockchain. Banks such as Citi, HSBC, and Wells Fargo have joined the R3 blockchain alliance and set up their own research laboratories. Deloitte provides consulting and auditing with the help of the blockchain-based Rubix platform.

Bills are convenient payment and settlement tools and financing tools, and are also important monetary policy tools. In 2009, my country launched electronic bills, and paper bills and electronic bills are used in parallel. my country's bill business has developed rapidly and on a huge scale. The main defect of the current bills is that it is difficult to effectively control and prevent risks. Bills are counterfeited, "one bill is sold multiple times", and bills have become a financing arbitrage tool and a "cover" to evade financial supervision. The supervision of bill business is inefficient and costly.

The State Council’s “Plan for Promoting Inclusive Financial Development” clearly states:

"Financial infrastructure is an important pillar and platform for improving the operating efficiency and service quality of financial institutions. It helps improve the development environment of inclusive finance, promote the balanced distribution of financial resources, and guide various financial service entities to carry out inclusive financial services." The application of blockchain technology to build a new digital bill may form new technical advantages: lower cost, lower risk; complete data, transparent information; intelligent management and monitoring. This will enhance the service function of financial infrastructure and promote the development of inclusive finance.

It is recommended to speed up the research and development and trial implementation of digital bills: the People's Bank of China shall be responsible for the overall decision-making, organization of research and development, trial implementation, and promotion of digital bills; financial institutions and enterprises are encouraged to participate in the research and development and trial implementation of digital bills; at this stage, a pattern of coexistence of paper bills, electronic bills and digital bills should be formed first, and the market share of digital bills should be gradually increased through technical means; a digital bill exchange should be established to assume the core technical functions of digital bills; a digital bill database should be established, and a corporate credit rating application system and a bill product evaluation application system should be established; innovative financial supervision methods should be used to use new technologies to achieve full coverage and hard control of bill business supervision.

The role and defects of current bills

my country's Bills of Exchange Law stipulates that bills of exchange include bills of exchange, promissory notes and checks. Bills of exchange are divided into bank drafts and commercial drafts. They are bills issued by the drawer, entrusting the payee to unconditionally pay a certain amount to the payee or holder upon sight of the bill or on a specified date. Bills of exchange are a kind of securities and a credit instrument. The basic elements of bill business are that the drawer issues, unconditionally agrees to unconditionally pay a certain amount by himself or entrusts others to pay a certain amount, can be circulated and transferred, and the holder has the right to the corresponding assets of the bill.

The bills mentioned in this article refer specifically to commercial bills, including bank acceptance bills and commercial acceptance bills. The current forms of commercial bills include paper bills and electronic bills.

Bills are convenient payment settlement tools and financing tools. The acceptance of bills can facilitate payment and settlement for enterprises, meet the needs of short-term capital payment between enterprises, and help speed up capital turnover and commodity circulation. Bill endorsement transfer and bill discounting can provide enterprises with convenient and low-cost financing. Compared with general loans, bank acceptance bills have the advantages of bank credit, simple operation procedures and low financing costs. The development of bill business is positively correlated with the macro-economy. In 2014, my country issued a total of 22.1 trillion yuan in commercial bills, a 17-fold increase from 2001, and financial institutions discounted a total of 60.7 trillion yuan, a 33-fold increase from 2001. During the same period, my country's GDP increased nearly five times.

Bill business is driving the development of financial markets. In the secondary market of bill transactions, the rediscount business between financial institutions has accelerated the financing and adjustment of short-term funds and has become an important asset business of financial institutions, which is conducive to commercial banks to balance their balance sheets, rationally allocate funds, and improve asset returns. Financial derivatives based on bills, such as bill asset securitization, bill discount and rediscount options, bill rediscount interest rate swaps and term swaps, are likely to become new financial products. The transaction price of bills reflects not only the credit rating of the acceptor, but also directly reflects the supply and demand relationship in the capital market. It has a preliminary market price formation mechanism, which is conducive to the comprehensive promotion of interest rate marketization.

Bills are also an important monetary policy tool of the central bank. The People's Bank of China uses bill rediscount and bill repurchase to adjust the money supply, guide market capital prices, and achieve the goal of macroeconomic regulation.

The main defect of the current bill business is that it is difficult to effectively control and prevent operational risks and moral risks, as well as the market risks and credit risks caused by them. The main problems found in the bill transaction process are the falsification of trade backgrounds, invalid bill authenticity certification, "one bill sold multiple times" for paper bills, and the arrival of electronic bill discounts and bill endorsements are not synchronized. Bill business supervision can only be carried out through on-site audits, lacking the means of rapid access and review of the entire process, resulting in low supervision efficiency and high costs.

The main problems found in the bill market are that bills have become financing arbitrage tools and "covers" for banks to evade regulation, creating excessive demand for virtual funds, pushing up market financing prices, causing excessive mismatch of assets and liabilities of financial institutions, and leading to the failure of banking capital supervision.
The above-mentioned defects may be overcome through digital bills based on blockchain technology.

Technical characteristics of blockchain

Blockchain originated from the technical application of Bitcoin in 2008. After continuous iterative evolution, it has five major technical features: decentralization, trustless, timestamp, asymmetric cryptography and smart contract.

1. Decentralization. Existing information technology systems all use central servers to achieve all information exchange and data storage. Blockchain, by building a distributed structure system and participant consensus protocol, forms a large-scale database system that does not require a central authority. All agreed participants participate in the recording and verification of data, which is then sent to each node through distributed transmission. Even if some nodes are attacked or damaged, it will not affect the integrity and information update of the entire database.

2. Trustlessness. The traditional Internet model uses trusted central nodes (such as housing registration systems) or payment platforms (such as Alipay) to match and verify information and accumulate trust, and therefore cannot achieve decentralized value transfer. Blockchain essentially solves the trust problem through mathematical methods. All rules are expressed in algorithmic programs. As long as you trust the common algorithmic programs, you can establish mutual trust and create credit.

3. Timestamp. All information (including data and code) generated in a certain period of time is packaged to generate blocks. The header of each next block contains the index information of the previous block, and the two blocks are connected to form a chain. The addition of blocks and chains forms a timestamp that can be fully verified and traced back to history. It can provide retrieval and search functions for each piece of data, and can trace the source and verify each piece with the help of the blockchain structure. Each participant stamps the timestamp when recording and generating blocks, forming data that cannot be tampered with or forged. This can prove originality and ownership.

4. Asymmetric encryption. The mathematical consensus mechanism of blockchain uses an asymmetric encryption algorithm, that is, a "key pair" is used in the encryption and decryption process. The two keys in the "key pair" have asymmetric characteristics: after encryption with one key, only the other key can decrypt it; after one key is made public, others cannot calculate the other key based on the public key. In the application scenario of blockchain, keys are used for decryption and verification. Asymmetric encryption makes it easier for participants to reach consensus and greatly reduces friction in value exchange.

5. Smart contracts. Blockchain can realize point-to-point value transfer. The introduction of programmability allows both parties to embed corresponding programming scripts when transferring value to form smart contracts, which is convenient for handling some specific transaction modes to avoid unpredictable transaction risks. This programmable script is essentially a list of many instructions. First, it realizes the targeting and screening of value exchange, that is, the restrictions on counterparties; second, it realizes the restrictions or conditionality in value exchange, that is, the various constraints in transactions; third, it realizes the specific use of value, and can execute constraints on the conditions for value re-transfer when sending value. Therefore, value exchange activities based on blockchain can be controlled by protocol in a programmatic way for the purpose, direction and various restrictions.

Advantages of using blockchain technology to build digital bills

The success of blockchain technology in Bitcoin has proved the feasibility of programmable digital currency to a certain extent. In view of the needs of improving security protection levels and reliability of trust relationships in the financial field, blockchain should have a wide range of applications in the financial field, and the core technology of blockchain should be used to build digital bills.
In the acceptance phase, the acceptor's acceptance of the bill is a guarantee for the drawer. The algorithm program can form a data block to complete the process of the acceptor granting credit to the drawer and the drawer designating the bank for opening an account. The "timestamp" can be used to prove the ownership of the bill and the guarantee responsibility of the bill acceptor, and the key of "asymmetric encryption" can be used to prevent cheating.

In the circulation link, the specific requirements and restrictions on bills in circulation, discounting, rediscount, rediscount, repurchase and other transactions can be formed into "smart contracts" by establishing predetermined rules and programming methods. While realizing point-to-point transactions, hard constraints can be enforced to effectively prevent moral risks and operational risks, and ensure the fairness of transactions and the authenticity of prices.

In the collection process, the due date of the bill is written into the code when it is accepted. The program control will automatically send a collection application from the holder to the acceptor when it is due. After the collection is completed, the third party will complete the information recording and generate data blocks according to the predetermined rules. Therefore, it can be directly linked to fund settlement, directly complete the value exchange, avoid overdue collection, prevent other operations during collection, and ensure that the account is consistent with the actual situation.

Compared with electronic invoices, digital invoices have advantages brought by the application of new technologies.

1. Lower costs and less risk. Reduce the overall cost of system construction and operation and maintenance in the traditional model, and avoid the problem of server crash or hacker control in the centralized model. Distributed databases have strong fault tolerance, and will not affect the operation of all participants due to errors in one or several nodes, nor will it affect the further storage and transaction updates of data. The data ledger recorded by each participant is both a sub-ledger and a general ledger, which can reduce the cost of repeated recording and storage of data in the centralized model.

2. Complete data and transparent information. Through the verifiability of timestamps, any value exchange can be tracked and queried, which makes it easy to access historical data, clearly display and control the circulation process of bills, and make it easy to exercise relevant rights and pursue them in the event of a legal dispute. Through the recording and accumulation of participant behavior data, a credit analysis and evaluation mechanism can be established to form an authoritative corporate credit record and restrict defaults. Through real-time review of bill status, risks in bill transactions can be effectively controlled to avoid problems such as repeated pledges or joint crimes under the existing model. At the same time, the shielding of trade secrets can be achieved through corresponding technologies.

3. Intelligent management and control. Through programmable smart contracts, bills can achieve specific restrictions and controls as agreed. For example, in the bill holding (double buyout) model, the agreed buyback date can be written into the smart contract in the form of code at the beginning of the transaction, and the bill will be automatically redeemed and bought out after maturity. Smart contracts are implemented through code, and bill transactions are no longer completely dependent on offline contracts for constraints, which can avoid defaults during execution to the greatest extent.

The application of blockchain technology also has certain hardware requirements. First, massive data storage requires huge space, second, data synchronization requires high-speed network, and third, the capacity of each node needs to meet standards and be balanced. Once the transaction volume generated per second exceeds the system's design capacity, or exceeds the capacity of the weakest node, the transaction will automatically enter the queue, which will bring a bad experience to users. The construction of digital bills using blockchain technology must also solve the problem of docking between the digital bill system and other platform systems (such as the ECDS electronic bill system), and the real-time docking between digital bills and physical currency in fund settlement.

my country's financial infrastructure is relatively developed, and large financial institutions have built ultra-high-speed, large-capacity, centralized information technology systems. We should consider how to make full use of existing scientific and technological resources to achieve seamless links between existing systems and innovative systems. In view of the hardware requirements of blockchain nodes for the massive data generated by digital bills, we can consider using blockchain timestamps, asymmetric encryption, smart contracts and other technologies to establish a digital bill system. Financial institutions can jointly form an "alliance chain" to achieve the goals of saving investment, ensuring transaction speed, and achieving compliance control.

It is recommended to speed up the development and trial implementation of digital invoices

In 2009, the People's Bank of China's electronic commercial draft system ECDS (Elecbronic Commercial Draft System) was launched. In the past few years, the electronic bill market has developed rapidly. The proportion of electronic bills in bank acceptance bills was only 8.3% in 2013, but it has reached 28.4% in the first half of 2015. The ECDS system still has some defects. For example, before the bill is due for payment, only the last hand of flow information can be queried, and the discount or rediscount business information handled by other banks cannot be queried. Small and medium-sized enterprises with a low degree of electronicization are not convenient to use electronic bills. The arrival of discount funds in the intermediary market is not synchronized with the electronic endorsement of enterprises (the discount funds are remitted to the accounts of intermediary enterprises instead of directly to the accounts of discount enterprises that issue electronic bill endorsements).

It is recommended that while strengthening the supervision of paper bill business and further improving the functions of the electronic bill system, we should speed up the research and development and trial implementation of digital bills.

First, the People's Bank of China will be responsible for the overall decision-making, organization of research and development, trial implementation, and promotion of digital bills.

Second, financial institutions and enterprises such as state-owned commercial banks, joint-stock commercial banks, city commercial banks, rural commercial banks, bill exchanges, and funds clearing institutions are encouraged to participate in the research and development and trial of digital bills.

Third, at this stage, a pattern of coexistence of paper bills, electronic bills and digital bills should be formed first, and paper bills and electronic bills should be converted into digital bills through technical means, gradually increasing the market share of digital bills.

Fourth, prepare to establish a digital bill exchange, assume the core functions of digital bills, be responsible for formulating business norms and technical standards recognized by all parties, and be responsible for the operation and maintenance of the system.

Fifth, establish a digital bill database, and through data mining, establish a credit rating application system for bill transactions and intermediaries, and a bill product evaluation application system to provide product information, supply and demand information, credit default information, and risk information, and promote product and product portfolio innovation.

Sixth, innovate financial regulatory methods. The bill business regulatory agency can review regulatory information in real time through timestamps and databases, establish unified market rules and order through smart contracts, and establish common constraint codes through programming to execute regulatory rules, so as to achieve full coverage and hard control of bill business supervision.

The application of blockchain technology in the financial industry must establish standards for interoperability between heterogeneous multi-source data interfaces among financial institutions, adapt to and be compatible with various financial business application scenarios, and improve the efficiency of mid- and back-end operations. This will further improve my country's financial infrastructure.

Digital bills are a type of financial business application scenario built on the basis of basic service agreements. Once digital bills are successfully used, the digital bill infrastructure based on blockchain technology will be able to be expanded to other financial products, including bonds, equities, foreign exchange, paper gold, etc., broadening the application areas of blockchain technology.
Other people’s experience:

Israeli company Wave uses blockchain technology to transform international shipping

Paper will soon be a thing of the past in the world of finance. Electronic payments, e-wallets and smartphone-based payment systems like Apple Pay have become a must-have at local malls. But Israeli startup Wave is trying to bring about a digital revolution in the transportation industry, similar to the transformation experienced by the banking and finance industries.
The shipping model used by shippers today dates back to the early days of international trade in the 17th century, and it hasn’t changed much since then. For example, when a wholesaler places an order with a manufacturer in China, the entire transaction—sale, transportation, and delivery—is documented in a bill of lading. The bill of lading is a document that the shipper receives to prove that the goods have been shipped and that he or she owns the goods as they travel by sea. Once the goods arrive at their destination, the shipper sends the original bill of lading to the consignee, who then picks up the goods, usually by overnight courier. If it were just a transaction between the shipper and the consignee, there might be an encrypted electronic version of the bill of lading that the consignee could print out. But every international shipment involves multiple parties, from banks to insurance companies to government customs inspections. The bank usually loans the goods to pay for them, and then repays the loan when the goods are sold (while pledging the goods to the bank for payment). If anything goes wrong with the goods traveling by sea, the insurance company is responsible (also pledging the goods to the insurance company), and the customs inspection department needs to inspect the goods to make sure they match the documents.

The more people involved, the greater the potential for confusion, loss and fraud, which could lead to endless legal disputes, with each party accusing the other of blunders in handling the bills of lading. There have been many attempts to change the status quo, but none have panned out.

This is where blockchain comes in handy. In blockchain, all payments or documents must be agreed upon by all parties, and any changes made during the process can be detected immediately. Unlike electronic documents such as PDFs that can be copied countless times, documents agreed upon by blockchain are unique because they require electronic "signatures" from all parties involved. Sending bills of lading in this way eliminates all security and data concerns and the lengthy bill of lading delivery process.

Wave CEO Gadi Ruschin said that what connects all shippers, banks, freight forwarders, traders and other entities in the international trade supply chain is a peer-to-peer and fully distributed network. Through distributed technology, all communications between the above parties can be carried out directly without the help of a specific central entity. Currently, Wave is focusing on the development of bill of lading solutions. Although the technology can be used for other documents such as contracts and mortgages, and even payments, these documents may contain management issues because data blockchain technology is still to be regulated in the laws of many regions. However, Wave's bill of lading solution does not create similar problems.