The “investment-loan linkage” policy helps Chinese financial institutions invest in the blockchain industry

Introduction: The world's leading banks have begun to actively deploy, either by forming blockchain alliances to formulate industry standards; or by working with financial technology companies to develop core business blockchain applications; or by promoting applications in local areas internally and quickly implementing pilot projects. However, apart from a few domestic financial institutions such as Ping An of China joining the international blockchain alliance, few other financial institutions have joined.

In the United States, from the initial public offering (IPO) of computer service company Netscape to eBay's acquisition of PayPal, the largest mobile payment platform in the United States, no less than 450 "rising star" institutions have challenged the status of traditional banks, involving a variety of new businesses such as digital currency, wallets, and the Internet. Today, less than 5 challengers have survived and developed into independent entities.

In China, the bank payment "cake" has been divided since the birth of Alipay. So far, nearly 270 licensed payment institutions have been established. However, in recent years, banks have re-emphasized the importance of payment services and have launched e-payment, cloud flash payment and other services. Although p2p institutions have developed rapidly in recent years and diverted part of the bank's deposit and loan business, the p2p industry is currently facing a life-and-death test.

"A game-changer in the banking industry." McKinsey's research shows that blockchain technology is the core technology with the greatest potential to trigger the fifth wave of disruptive revolutions after steam engines, electricity, information and Internet technology.

Leading banks around the world have already begun to actively plan, either by forming blockchain alliances to formulate industry standards, or by working with financial technology companies to develop blockchain applications for core businesses, or by promoting applications in local areas internally and implementing pilot projects quickly. However, apart from a few domestic financial institutions such as Ping An of China that have joined the international blockchain alliance, few other financial institutions have joined.

"Foreign financial institutions have applied blockchain technology to business models, while domestic financial institutions are still in the theoretical exploration stage." Qu Xiangjun, global director partner of McKinsey, told the Economic Observer that major institutions have seen the disruptive changes that blockchain technology will bring to the business model and logic of banks in the future. If they do not actively participate in it, they will be in danger of being eliminated or marginalized.

Seize the first-mover advantage

The application of blockchain technology in the financial field will completely change the transaction process and record-keeping methods, thereby greatly reducing transaction costs and significantly improving efficiency. It is becoming the most popular topic in the global innovation field and is being enthusiastically sought after by venture capital funds. In 2015, venture capital funds invested in Bitcoin and blockchain-related start-ups around the world were approximately US$480 million, and in the first quarter of 2016, it reached US$160 million. Participants in the investment include not only Silicon Valley venture capital fund Andreessen Horowitz, but also international financial institutions such as Citi, Morgan, and Chase.

In addition to participating in venture capital, international financial institutions are also participating in the application of blockchain technology in other ways. More than 40 leading financial institutions including Citibank, BBVA, JPMorgan Chase, Morgan Stanley, and UBS have jointly established the R3CEV Alliance, which aims to promote the formulation of blockchain technology standards suitable for financial institutions and promote the implementation of technology. On May 25, China Ping An Financial Group has joined the financial innovation company R3, becoming the first member from China.

At the end of 2015, the Hyperledger project led by the Linux Foundation attracted many financial institutions including JPMorgan Chase, ABN AMRO and State Street Bank. This project created a cross-industry distributed ledger by facilitating the collaboration of underlying technology providers, blockchain innovation companies, technology implementers, and technology application parties in various industries. UBS, Citi, Deutsche Bank and Barclays have all established blockchain laboratories to conduct independent research and development or to test different application scenarios through cooperation with financial technology companies.

At the end of 2015, DBS Bank and Standard Chartered Bank announced that they would cooperate with technology company Ripple to apply blockchain technology to supply chain finance business, using smart contracts and point-to-point cross-border transaction technology to automate the process and improve security. If the supply chain finance process can be digitized through blockchain technology and its open, secure and tamper-proof characteristics can be used, the three parties believe that it will be able to significantly reduce fraud cases in the trade chain and save banks millions of dollars in risk losses. Currently, this cooperation project is seeking more banks to join the cooperation to test the application and implementation of this technology.

Chinese institutions are just starting out

"Although 80 to 90 percent of Bitcoin transactions are in China, most people in China do manual labor, with more people mining and fewer people doing technical work," said Qu Xiangjun. Chinese institutions are still in the theoretical research stage for blockchain technology.

In addition to Ping An of China joining the R3CEV Alliance, the China Distributed Ledger Foundation Agreement Alliance (China Ledger Alliance), which was established in April 2016 under the leadership of Wanxiang Blockchain Lab, indicates that China will also join this global blockchain competition to promote the application of blockchain technology in various countries and fields around the world. The alliance is composed of commodity exchanges, property exchanges and financial asset exchanges in 11 regions, and the China Securities Association Internet Securities Committee under the China Securities Regulatory Commission serves as a project consultant. The main task is to jointly study blockchain technology, starting from over-the-counter transactions, combining Chinese policies and regulations with the unique business logic of China's financial industry, and developing blockchain technology underlying protocols that conform to China's policies, national standards, business logic and usage habits.

According to Economic Observer, under the joint efforts of multiple driving forces, many state-owned banks, joint-stock banks and securities companies have formed teams to promote the application research of blockchain technology and actively negotiate cooperation and investment matters with blockchain technology companies at home and abroad. For example, Huarui Bank, one of the first private banks established in China, has taken the lead in signing a strategic cooperation agreement with Ripple to jointly use the Ripple protocol to create a distributed payment and clearing solution.

Although the start is obviously slower than that of international leading financial institutions, Chinese financial institutions have started to pay attention to and research blockchain. Han Feng, global deputy director and partner of McKinsey, believes that for many domestic banks, the innovation DNA is not very strong. Traditional banks have very different trial and error concepts from Internet companies. It is difficult to accommodate the experience of trial and error, and it is an international theory of steady development. Therefore, it is not easy for domestic banks to innovate and transform the research and application of blockchain technology. Moreover, many blockchain technologies are currently at the level of theoretical exploration and have not been put into practical application.

Fortunately, the policies from regulatory agencies may provide the possibility for China's banking industry to explore blockchain technology. On April 21, the China Banking Regulatory Commission, the Ministry of Science and Technology, and the People's Bank of China jointly issued the "Guiding Opinions on Supporting Banking Financial Institutions to Increase Innovation Efforts to Carry out Pilot Projects of Investment and Loan Linkage for Science and Technology Enterprises". Five pilot areas including Beijing Zhongguancun National Independent Innovation Demonstration Zone and 10 banks including China Development Bank, Bank of China, and Hengfeng Bank became the first batch of pilot areas and pilot banks. This provides a policy basis for pilot banks to explore blockchain technology investment in pilot areas. What is "investment and loan linkage"?

Investment-loan linkage refers to a financing model in which banking financial institutions combine "credit allocation" with "equity investment" of subsidiaries with investment functions established by the group, and through relevant institutional arrangements, use investment income to offset credit risks, achieve a match between credit risks and returns of science and technology enterprises, and provide continuous financial support for science and technology enterprises .

However, in recent years, the technology of Internet financial application has affected China's financial market to a certain extent. A person from a city commercial bank told Economic Observer that the domestic banking industry is not backward in the Internet and mobile Internet. It is hard to say how much change the blockchain can bring. It is too early to draw a conclusion. In addition, finance, especially the banking industry, does not need innovation, but stability. Financial innovation, how many scammers use your name to do evil?

A middle-level person from a financial regulatory agency told the Economic Observer reporter that banks are using technology to improve the efficiency of the financial system, while Internet companies are also engaging in regulatory arbitrage. Banks have been at the forefront of technology for many years, while the so-called Internet finance or fintech in China is mostly wandering in the regulatory vacuum, engaging in regulatory arbitrage.

It should be said that the application of blockchain in the banking industry is in the early stages of development globally and still faces a series of technology and model choices. McKinsey believes that in the future, three forces including blockchain financial technology companies, large banks and regulators will greatly affect the application direction and standards of blockchain in the banking industry, among which supervision will become a dominant force in the application of blockchain technology.