How does blockchain transform China's financial landscape?

At present, China's main activity in the field of blockchain is the establishment of the China Distributed General Ledger Foundation Agreement Alliance ( ChinaLedger Alliance) , a non-profit organization focused on the development of blockchain applications. The alliance is still in the process of specific preparation, but its purpose is to develop and transform existing blockchain technology to meet the needs of Chinese companies and set standards for the entire industry to ensure that the technology complies with China's specific legal environment.

In 2008 , Satoshi Nakamoto brought Bitcoin to the world. The new cryptocurrency was originally designed to allow individuals to make electronic cash payments directly to each other without going through banks. Eight years later, blockchain, the core technology behind Bitcoin, has been touted by the banking industry as being able to fundamentally improve the financial system. Rather than making banks redundant, blockchain is likely to make them better. So how will blockchain transform the financial landscape in China and the world?

In this regard, at the New Champions Annual Meeting in Tianjin, UBS Group released a white paper: "Creating a Trust Engine: How Blockchain Will Transform Finance and the World". Axel Lehmann , member of the UBS Group Executive Committee and Chief Operating Officer of UBS Group , and Qian Yujun, head of UBS China, were interviewed by China Business News.

Qian Yujun said that at this stage, China's main activity in the blockchain field is the establishment of the China Distributed General Ledger Foundation Agreement Alliance ( ChinaLedger Alliance), a non-profit organization focused on the development of blockchain applications. The alliance is still in the process of specific preparation, but its purpose is to develop and transform existing blockchain technology to meet the needs of Chinese companies and set standards for the entire industry to ensure that the technology complies with China's specific legal environment. In addition, in early 2016 , the People's Bank of China publicly stated that it would investigate digital currencies in response to Chinese investors' interest in Bitcoin and other cryptocurrencies.

As for the challenges that blockchain may face in China, Qian Yujun pointed out, "Not only is there a regulatory challenge in China, but compliance, data security, KYC (know your customer), anti-money laundering, etc. are all major barriers faced by the traditional financial industry. Therefore, transactions under the blockchain framework still need to solve the above problems."

Transforming the financial landscape

Blockchain can be used to provide essential services that are critical to any financial system, often better and more efficiently than the tools we use today.

"For example, blockchain technology creates a viable, decentralized transaction record - a distributed ledger, which allows a single, incorruptible master database to be replaced by a large number of proprietary databases. This has the potential to greatly simplify the existing financial system and reduce costs while making it more secure and reliable. Blockchain technology can also be used to create digital currencies with unforgeable cash properties, which can retain the advantages of digital networks while providing a direct and clear value transfer mechanism." The white paper points out.

The blockchain provides a way to establish and use identity that is far superior to the methods we currently use. By providing a unique, unforgeable, encrypted pseudonym that can be associated with any number of verified identities, individuals within a blockchain network can verify their identity while maintaining privacy.

In addition, Axel Lehmann said that by providing items with unique, unforgeable identities and unalterable ownership records, blockchain can greatly simplify the direct transfer process of tangible assets and improve trust in their sources. At the same time, adding full programming capabilities to the blockchain can create "smart contracts." "This allows us to not only better record financial agreements, but also realize the automatic execution and self-implementation of these agreements."

With the help of the above elements, Axel Lehmann said it is possible to reshape the existing financial infrastructure and adopt new business models, thereby fundamentally improving some of the core functions of the financial infrastructure.

In terms of the practical application of blockchain, the white paper points out that blockchain can enable nearly real-time settlement of most types of financial transactions, thereby eliminating counterparty risk, releasing capital, and significantly reducing transaction costs. Blockchain can also achieve a split model at the data and service levels, allowing individuals to actually become managers of their own accounts.

Furthermore, the financial system that serves individuals based on blockchain will likely be very different from the systems used today.

UBS pointed out that the future "smart wallet" - people will use this application to connect to the blockchain-based financial system in the future. For example, the "smart wallet" can be built into a personal, freely programmable portfolio manager-style application. These applications can trade on behalf of users, even browse the news, and make trading decisions autonomously based on market trends.

China explores blockchain

As blockchain sets off a wave of innovation abroad, China is not far behind.

"China has always actively embraced emerging technologies and combined them with the actual situation of domestic enterprises." Qian Yujun said that the China Distributed Ledger Infrastructure Protocol Alliance was led by research and development company Wanxiang Blockchain Laboratory and drew on the R3CEV distributed ledger and Linux Foundation 's Hyperledger project structure. It is seen as China's response to the rapidly developing blockchain ecosystem.

At the end of 2015 , Wanxiang Blockchain Lab held the Global Blockchain Summit in Shanghai, successfully focusing global attention on the opportunities that this technology brings to China.

As for how Chinese regulators are responding to the development of blockchain, UBS said that since the Wanxiang Blockchain Experiment held the Global Blockchain Summit in Shanghai last year, Chinese regulators have become increasingly interested in blockchain. Like the UK and many other Western countries, regulators seem to be open to the competitive advantages that blockchain brings to the local financial market. Since then, Chinese regulators have begun to participate in domestic blockchain-related activities to deepen their understanding and engage in dialogue with local and international blockchain projects. The launch of the ChinaLedger Alliance is also due to the growing interest of regulators and the entire financial system in blockchain. At the same time, the People's Bank of China has publicly stated that it is investigating digital currencies.

At present, what stage of development are China’s blockchain startups at?

Qian Yujun told the reporter of China Business News that, so far, China's venture capital for blockchain technology has mainly flowed to international companies. But China's local blockchain startups are emerging, and the most promising ones are PDX and Xindi . PDX is a blockchain and smart contract startup focused on promoting privacy-protected transactions. Xindi uses blockchain to streamline the commercial paper issuance process.

At the same time, many established Western startups are also turning their attention to China and will soon expand their business to China. In order to cope with the disruptive innovation force of blockchain in the future, UBS's Crypto2.0 Pathfinder Program is conducting commercial analysis and verification of technology applications in investment banking, wealth management, corporate banking and retail industries.

"We have explored more than 20 application cases in the innovation laboratory and are currently 'nurturing' the most promising projects." Axel Lehmann told the reporter of "China Business Daily" that blockchain may be to the financial industry as the Internet is to the communications industry - it will open the door to a new financial model, which is currently called Crypto Finance ( Crypto Finance ) or Finance 2.0 .

UBS’s blockchain technology experiments include smart bond experiments and “multi-purpose settlement coin” experiments.

Regarding the development of “smart bonds”, “we have created an application on the Ethereum platform that can restructure the bond issuance, interest calculation, coupon payment and maturity processes.” Axel Lehmann said.

In this model, there is no need for pre-trade and post-trade intermediaries, as the software on the blockchain is specifically set up to automatically handle the flow of information and funds between issuers and buyers. The trial also requires the establishment of a virtual key for " BondCoin " to facilitate the transfer of value between parties. The key is not used as a new virtual currency, but is linked to real-world currency and connected to the central bank account. The experiment also verified that blockchain-based clearing and settlement will be faster, more efficient and more transparent, while reducing settlement risks and operating costs.

In addition, with regard to the "multi-purpose settlement currency", the goal of the experiment is to form a virtual currency in the blockchain that is pegged to actual legal currency, and use this virtual currency to settle transactions implemented on financial platforms based on this technology.

In a future scenario, UBS may have its own blockchain platform to issue currency, another bank may have a blockchain-based stock trading platform, and the multi-purpose settlement currency can be used for settlement between these platforms. This will help to narrow the gap between asset classes and the gap between blockchain and the real world, thereby achieving a series of benefits observed in the smart bond experiment.