Research on the application of blockchain technology in the field of bill P2P

Blockchain Bill Research Group

Recently, Beijing, Shanghai, Shenzhen and other places have suspended the registration of P2P companies. The main reason is that in recent years, P2P companies have frequently encountered risks and the number of P2P companies that have run away has increased significantly.

The suspension of registration of P2P enterprises fully demonstrates that my country's Internet finance and bill P2P enterprises are still in an immature state. The supervision of Internet finance enterprises is still in the exploratory stage. P2P enterprises need to win the trust of the people, the government and the regulatory authorities. Whether they can adopt a combination of technology and management. Combined with the article "The Time is Ripe for the Construction of China's Bill Exchange" published in the Shanghai Securities News on December 31, 2015, this article attempts to supervise and regulate the operation of P2P enterprises in the bill field through the bill exchange and blockchain technology.

1. Concepts related to bills, bill exchanges, bill P2P enterprises and blockchain

1. What is a bill?

1. Definition

The bills of exchange mentioned in this article specifically refer to the commercial bills defined in the "Bills of Exchange Law of the People's Republic of China", that is, the bills of exchange issued by the drawee, entrusting the payee to unconditionally pay a certain amount to the payee or holder upon sight or on a specified date.

2. Classification

Depending on the acceptor, commercial bills are divided into bank acceptance bills (the acceptor is a commercial bank) and commercial acceptance bills (the acceptor is a corporate legal person); in terms of the medium, they can be divided into paper commercial bills and electronic commercial bills.

3. Function

(1) Payment is the most basic function of commercial bills. It can promote the completion of commodity transactions and improve and enrich the payment and settlement methods between enterprises.

(2) Financing is the most important function of commercial bills. It can meet the financing needs of enterprises in the production and operation process and promote the development of the real economy.

(3) Adjustment is the most flexible function of commercial bills. It can adjust the asset-liability structure of commercial banks and meet the investment and credit issuance needs of commercial banks.

4. Problem

At present, there are mainly the following problems in the field of bill business. First, the authenticity of bills. There are still fake bills, cloned bills, altered bills and other forged bills in the market. Second, the timeliness of transfer of funds. It is mainly reflected in the fact that after the commercial bill expires, the acceptor fails to transfer the relevant funds to the holder's account in time. Third, the problem of illegal transactions mainly refers to the current illegal and irregular behaviors of some bill trading entities or intermediaries, such as selling one bill to multiple buyers, list transactions, bridge sales, carrying bills with banks, and renting accounts.

2. What is a bill exchange?

In theory, the bill exchange is a comprehensive financial service exchange with unified "Internet + bill trading" in the whole country, covering the full process of bill business products except acceptance business, including all media such as paper and electronic commercial bills, and taking business transactions and information integration as the ultimate goal. The bill exchange should become the business transaction center, risk prevention and control center, data collection center and research and rating center in the field of domestic bills, and become an important part of the electronicization of my country's money market finance.

Currently, there is a strong call in the industry to establish a bill exchange, and the time to build an exchange is ripe.

3. What is a bill P2P enterprise?

1. Definition of bill P2P enterprises

At present, there is no accurate definition of P2P enterprises in academia and industry. It generally refers to an "end-to-end" online lending platform that uses Internet technology to connect financing companies with the investment needs of the general public. Bill P2P enterprises are the concrete manifestation of Internet finance and are P2P online lending platforms for bill assets held by professional investment companies.

2. Operation model of bill P2P enterprises

The operation of bill P2P enterprises mainly involves five parties: financing enterprises, bill P2P enterprises, investors, bill custodian commercial banks and third-party payment companies. Among them, the financing enterprise is the original bill holder, using the bill as collateral to raise funds from investors through the bill P2P enterprise; the bill P2P enterprise designs corresponding financial products based on the pledged bills and sells them on the platform website; individual investors are the fund providers, and after registering on the Internet platform, they can subscribe to the bill financial products issued on the platform website; in this process, the inspection, custody and collection of the physical bills are generally operated by the commercial banks cooperating with the platform, and the funds are custodied by the third-party payment companies cooperating with the platform (investors' financial funds are directly transferred to third-party payment institutions, and the platform does not directly collect and pay funds).

Figure 1 Bill P2P Enterprise Operation Model

3. Main types of bill P2P enterprises

From the perspective of operating companies, bill P2P companies can be divided into two categories. One category is bank-affiliated bill P2P companies, which sell bill financial products through Internet channels such as online banking; the other category is non-bank-affiliated bill P2P companies, including platforms whose main business is the sale of bill financial products, or platforms that jointly operate bill financial products with e-commerce platforms.

At present, non-bank P2P bill enterprises account for the vast majority in terms of quantity. The issues described in this article are basically aimed at non-bank P2P bill enterprises.

4. Problems of P2P bill companies

(1) Credit issues of bill acceptors

The repayment funds for bill financial products come from the bill acceptor. The credit of the acceptor determines the possibility of repayment of bill financial products, especially under commercial acceptance bills. However, most non-bank bill P2P companies often lack sufficient channels, time and manpower to understand the credit status of the acceptor. They cannot connect to the central bank's credit reporting system like commercial banks, or conduct on-site investigations to understand the credit status of the acceptor. The lack of sufficient credit records for bill acceptors may lead to high credit risks for bill financial products.

(2) Issues regarding bills and capital flows

From the perspective of investors, the main problem of bill P2P companies is the lack of transparency in information, which is mainly reflected in aspects such as the subject matter of the bills and the flow of funds.

First, the bill assets of bill P2P enterprises are questionable. In the operation mode of bill P2P enterprises, the custodian bank only bears the responsibility of bill verification, custody and collection, and does not guarantee whether the bill financial management can be redeemed when it matures. The matching between the financial plan and the bill assets is completed by the P2P enterprise itself, lacking corresponding constraints and supervision. Investors have no way of knowing whether there may be a mismatch between the financial plan and the actual bill assets, whether there may be a bill that is resold multiple times on the platform, and whether there may be a new financial plan to make up for the original losses.

Second, the flow of funds of bill P2P enterprises is questionable. The funds of bill P2P enterprises are generally settled through third-party payment channels. Investors still cannot know whether the collected funds of bill financial management plans have really arrived, whether there is new borrowing to repay old debts, whether the funds have been misappropriated, etc.

(3) Trust issues in bill P2P companies

Trust is the basis of any value transfer, transaction, and payment in the world. Information asymmetry in Internet finance and P2P bill companies has led to investors' doubts about P2P companies. The collapse or disappearance of a large number of P2P companies has led to a further change in the attitudes of investors, governments, and regulators towards this field.

4. What is blockchain technology?

A recent article in the Chinese version of Forbes magazine said: "Haven't you heard of blockchain? You may know very little about Internet finance."

1. The principle of blockchain technology - Byzantine Generals Problem

Blockchain technology originated from an ancient mathematical problem: the Byzantine Generals Problem. During the Eastern Roman Empire, several generals who could only rely on messengers to pass information to besiege a castle, how could they prevent being deceived by traitors and making wrong decisions? Mathematicians designed an algorithm that allows generals to add their own signatures after receiving the information from the previous general and then forward it to generals other than themselves. In the chain circulation of information, the generals can reach a consensus without finding traitors, ensuring the correctness of information and decisions.

2. The concept of blockchain technology

Blockchain refers to a technical solution that collectively maintains a reliable database in a decentralized and trustless manner. This technical solution allows any number of nodes participating in the system to calculate and record all information exchanges within the system over a period of time into a data block through cryptographic algorithms, and generate a fingerprint of the data block for linking (chain) the next data block and verification. All participating nodes in the system jointly determine whether the record is true.

In simple terms, blockchain technology is a technology that allows everyone to participate in bookkeeping. In the past, one (or a group of) centralized servers were generally used to keep accounts. But in a blockchain system, everyone in the system can participate in bookkeeping. When data is updated once within a certain period of time, the system will judge the person who keeps the account the fastest and best during this period, write the recorded content into the account book, and send the account book content to all other people in the system for backup.

3. The structure of blockchain

The blockchain is composed of blocks connected end to end. Each block includes information or data within a period of time and is timestamped. They are connected together according to the index (hash value) of the previous block to eventually form a blockchain.

Figure 2: The structure of a blockchain

4. Characteristics of blockchain

(1) Providing a reliable architecture for system data

There is no centralized organization in the blockchain structure. Each node is only a part of the system, and each node has equal rights. If a network hacker destroys or tampers with the information of some nodes, it will have no impact on the overall system and data. The more nodes there are, the safer it is.

(2) Providing smart carriers for asset exchange

Blockchain has the characteristics of programmability, and with a series of auxiliary methods, it can ensure the security and reliability of transactions of assets, especially financial assets. For example: the proof-of-work mechanism, tampering with the data on the blockchain requires more than 51% of the computing power of the entire network; the smart contract mechanism, replacing the contract with a program, and the network automatically executes the contract once the agreed conditions are met; the Internet transparency mechanism, the account is open to the whole network but the account name is hidden, and the transaction is irreversible; the Internet consensus mechanism, through the consensus of each node to ensure the correctness of the transaction, etc.

(3) Establishing trust relationships for Internet finance

Blockchain allows transaction parties to establish a trust relationship through pure mathematics without the need for mutual trust between people. The cost of establishing a trust relationship is extremely low, and weak trust relationships can be established into strong trust connections through algorithms, thereby facilitating value exchange activities, even financial exchange activities.

(4) It is an integrated financial solution. The application scope of blockchain in the financial field is very wide. Through the public ledger, it can realize applications including customer identity recognition, asset registration, asset trading, payment settlement, etc. Through the big data system, it can record, transmit, store, analyze and apply various types of data information, and realize the seamless connection between the physical world and the digital world, and the real world and the virtual world.

5. Application of blockchain technology

Bitcoin is the best example of the application of blockchain technology. In the Bitcoin world, a block is generated every 10 minutes and recorded in the ledger of each server and each computer. The block records the changes in assets of all Bitcoin accounts within these 10 minutes.

As of August 29, 2015, there were 372,016 blocks on the Bitcoin blockchain, with a total capacity of 40GB and a total computing power of 400PFLOPS.

2. P2P bill solution based on blockchain technology

1. Objectives of the Program

1. Improve the transparency of bill P2P enterprises

For regulators and investors, the transparency of bill P2P companies in terms of the connection between bills and financial plans, the flow of financial funds, etc. Regulators and investors have no way of knowing whether bill P2P companies sell multiple bills, fabricate bills, whether financial funds are transferred to the bill holder's account, whether funds are misappropriated, or used to repay debts.

The adoption of blockchain technology can make relevant information such as bills, funds, and financial plans transparent, which is conducive to protecting the rights of investors and also conducive to regulators exercising their industry supervision functions.

2. Establish a trust mechanism for P2P bill enterprises

Due to the many opaque factors in the operation of bill financial products by bill P2P companies, coupled with the occurrence of risk exposure and running away of some bill P2P companies, the public, government and regulatory authorities will inevitably lose trust in the industry.

The use of blockchain technology to disclose various types of relevant information such as bill management and the introduction of third-party ratings will help publicize the risk information of bill management products, ensure the safety of bills, funds, and financial management plans, and rebuild the confidence of the public, government, and regulatory authorities in bill P2P companies.

3. Reduce the regulatory costs of P2P bill companies

At present, the cost of supervising bill P2P enterprises is very high, especially for those that have established "bill pools" or "fund pools". First, the system is imperfect. It is not clear how to supervise bill P2P enterprises and how multiple regulatory departments coordinate. Second, bills are difficult to verify. Bill P2P enterprises are small in scale and large in number. It is difficult for regulatory departments to verify one by one whether their bills are entrusted or whether they sell multiple bills. Third, funds are difficult to track. Bill P2P enterprises often do other financial business while doing bills, and the flow of funds is difficult to track. Fourth, data is difficult to obtain. Bill P2P enterprises often act independently and establish their own business systems. There is no unified data standard or business specification. It is difficult for regulatory departments to grasp the business development status of bill P2P enterprises in a timely manner.

Blockchain technology can effectively reduce the regulatory costs for bill P2P companies. The bill exchange will uniformly establish a P2P trading platform. As part of the blockchain, the regulatory authorities will obtain the public ledger of bill P2P transactions in real time. By analyzing the public ledger, they can obtain the bill financial plan issuance information, fund transfer information, bill custody information, bill rating information, etc. of each bill P2P company, providing low-cost, high-efficiency, and reliable regulatory data for P2P industry supervision in real time.

4. Promote the development of services for the real economy

Standardized development of bill P2P enterprises can quickly realize bill transactions, provide the necessary funds for real enterprises with financing needs, provide convenient and reliable profit returns for investors, and provide reliable financial guarantees for the orderly and healthy development of the macro-economy, which is a beneficial supplement to the existing banking system.

By adopting blockchain technology and building a P2P bill trading platform based on a bill exchange, we can enforce industry self-discipline through technical means, ensure the security of funds, reduce regulatory costs, and help further promote the development of the real economy.

2. Overall Approach

The bill exchange designs and develops a P2P bill trading platform based on blockchain technology, incorporating investors, bill holding companies, bill P2P companies, commercial banks and regulators into the P2P bill trading platform.

1. Digitize bill assets and establish a bill custody mechanism.

By introducing a custodian bank into bill P2P transactions and having the custodian bank publish information on bill custody, collection, and fund recovery, we can ensure that the bill assets traded by bill P2P companies are authentic and valid, and that the bill collection and fund recovery are timely, accurate, and reliable.

2. The expert group conducts centralized review and establishes a credit rating mechanism.

Give full play to the leading role of the bill exchange, select a third-party external expert group to review the credit status of the bill acceptor or holder, assess the credit rating of the transaction bills, publicize the credit risks of bill financial products, and provide conditions for the healthy and orderly development of bill P2P enterprises.

3. Innovate P2P transaction methods and establish a block transaction model

The blockchain technology is used to process the rating, custody, registration, subscription, transfer, and settlement of P2P bills in a closed loop. Most of the nodes can be automatically authenticated, which can promptly and effectively promote the completion of P2P bill transactions, ensuring the security of bills and funds while greatly improving transaction efficiency.

4. Be open and transparent throughout the process and establish a trust mechanism for investment and financing

Realize real-time monitoring and information release of the target bills, transaction funds, collection funds, and financial plans of bill P2P enterprises, further standardize the operation of bill P2P enterprises, establish the trust of investors and regulators in bill P2P enterprises, and provide conditions for the further development of bill P2P enterprises.

(III) System architecture

The P2P bill trading platform can adopt a decentralized three-layer blockchain model. The first layer is the underlying technology layer (i.e. blockchain), which records the general ledger of P2P bill transactions; the second layer is the protocol layer, which is mainly software for running P2P bill transactions, ratings, and custody; the third layer is the application layer, which is mainly digital bills and funds.

Figure 3: Overall architecture model of P2P bill trading platform

4. Participants and roles

1. Bill Exchange. It is the soul of the bill P2P trading platform, responsible for registering bill financial management plans, formulating bill P2P trading rules, custody rules, registration rules, fund transfer rules, blockchain data rules, etc., responsible for developing relevant systems of the bill P2P trading platform, and responsible for organizing commercial banks to participate in bill P2P rating and custody, etc. Receive information such as bill custody, financial plan purchase, transfer, and fund transfer.

It has roles such as bill rating, bill custody, financial plan registration, financial plan purchase, financial plan transfer, and fund transfer.

2. Bill P2P Enterprises. They are the main participants in the bill P2P trading platform, responsible for designing and selling bill financial management plans, providing and transmitting information related to acceptors, bills and financial management plans; responsible for transferring relevant funds. Receive bill rating, custody and other information.

It has roles such as bill rating, bill custody, financial plan registration, financial plan purchase, financial plan transfer, and fund transfer.

3. Commercial banks. They are the physical custody and credit support of the bill P2P trading platform, responsible for providing bill custody and bill rating services; they can purchase or transfer related bill financial products and make corresponding fund transfers. They receive information on the purchase, transfer and fund transfer of financial plans.

It has roles such as bill rating, bill custody, financial plan registration, financial plan purchase, financial plan transfer, and fund transfer.

4. Investors and bill-holding enterprises. They are the main traders and asset providers of the bill P2P trading platform. They can sell the bills they hold, purchase or transfer related financial products in the system, and make corresponding fund transfers. They receive registration information for financial products.

It has roles such as financial plan registration, financial plan purchase, financial plan transfer, and fund transfer.

5. Regulators (Central Bank, China Banking Regulatory Commission, China Securities Regulatory Commission, etc.). They are the regulators of the bill P2P trading platform, responsible for receiving all kinds of information throughout the entire process, and have roles such as bill rating, bill custody, financial plan registration, financial plan purchase, financial plan transfer, and fund transfer.

3. Related processes and modules

1. Business Process

1. Submit application. The bill-holding enterprise submits the unexpired bills to be transferred to the bill P2P enterprise, and the two parties sign the contract offline;

2. Information submission. The bill P2P enterprise submits rating and registration custody requirements to the bill exchange, and submits bill details, bill custody, financial planning, and other information required for the transaction;

3. Bill rating. The bill exchange initiates the rating and registration custody process simultaneously through the bill P2P trading platform using blockchain technology. Commercial banks rate or custody the bills to be transferred in the trading platform according to their respective roles.

4. Bill custody

(1) For paper bills: After the custodian bank verifies the authenticity of the bill and completes the custody procedures, it will publish the bill custody information to all users on the bill P2P trading platform.

(2) For electronic bills: After completing the custody procedures, the custodian bank will publish the bill custody information to all role users in the bill P2P trading platform.

5. Note Rating

(1) For bank acceptance bills. After the bill exchange publishes the bill acceptance bank information on the bill P2P trading platform, the system automatically compares the "blacklist" of acceptance banks of various commercial banks, automatically counts the number of acceptance banks included in the blacklist, and automatically generates a rating based on the exchange rules. The rating results are published to all role users on the bill P2P trading platform.

(2) For commercial acceptance bills, the Bill Exchange will require the P2P bill companies to provide the basic information, financial data, and production and operation status of the acceptor (or bill holder) based on the rating template of the Bill Exchange; or the Bill Exchange will require the lending bank to provide relevant credit information and post-loan information based on the financing situation of the acceptor (or bill holder).

The bill exchange will select credit experts in the region to form a jury based on the region where the acceptor (or bill holder) is located, and conduct credit rating through anonymous review on the bill P2P trading platform. The review results of each expert will be published within the jury. The system will automatically calculate the credit rating of the acceptor (or bill holder) according to the exchange's rating rules, and the rating results will be published to all role users on the bill P2P trading platform.

6. Financial plan registration

After the bill custody and rating are completed, the bill exchange will automatically generate a unique number for the financial management plan through the system, and write the custody information, rating information, and financial management plan information into the bill block, and publish it to all role users in the bill P2P trading platform.

7. Financial management subscription. The bill P2P enterprise publishes financial management plans (including bill rating information) to all investment role customers. After fully understanding the investment risks, the investor signs a smart contract (the smart contract is uniformly formulated by the bill exchange through pre-set codes), transfers funds to the bill P2P enterprise, and simultaneously publishes transfer and subscription information to all role customers.

8. Transfer of financial management funds. After the bill financial management plan is sold, the bill P2P enterprise will transfer the funds to the bill holder's account and simultaneously release the sale completion and fund transfer information to all role users.

9. Share transfer. Investors can transfer their shares before the expiration of the bill investment plan. The transferee shall submit a transfer application on the bill P2P trading platform. After the new investor confirms, the transfer of funds is completed. The transfer application, investment confirmation, fund transfer and other processes shall be released to all customers.

10. Bill collection. When bills mature, the custodian bank will issue a collection order. The custodian bank will issue the collection information on the bill P2P trading platform and notify all users.

11. Fund transfer. After the bill collection funds are collected, the custodian bank will transfer the funds to the P2P enterprise, and the P2P enterprise will transfer the funds to the investor's account according to the investment share. All users will be notified of the entire fund transfer process.

2. System Implementation

1. The first layer: blocks and public ledgers

(1) Block

The block content of the bill P2P includes:

a. Time information: the time when the blockchain is completed;

b. Address information: address information of the previous block;

c. Bill information: It is the main component of the bill block, including bill number, amount and other face information, rating information, custody information, registration information (corresponding bill financial plan), collection information and bill status information;

d. Account information: information on the balance and fund balance of each account's bill financial management plan;

Figure 4: Single block diagram

(2) Public ledger

After the initial block of the bill P2P is formed, the system will continuously add new blocks to it in chronological order and eventually form a blockchain. Each complete system node (various role users connected to the bill P2P trading platform) can have a complete blockchain backup information, that is, a public ledger.

2. Second layer: rules and smart contracts

The bill exchange uses blockchain technology to build relevant systems for bills P2P, and implements business rules such as bill custody, rating, registration, subscription, transfer, collection, and settlement by writing codes, and realizes the signing of smart contracts to truly realize the full transaction and supervision of bills P2P.

3. The third layer: funds and digital bills

The top layer of the bill P2P system is the ultimate goal of the system operation, namely funds and digital bills.

4. How to promote the use of blockchain in bill P2P transactions

1. Accelerate the establishment of a bill exchange

In the bill P2P transaction designed by blockchain, the bill exchange is the rule maker of the entire transaction process, and is also the creator and maintainer of the bill P2P transaction system. Accelerating the establishment of the bill exchange and building the bill P2P transaction system is of great significance for standardizing the operation of the P2P field, enhancing the public's trust in the bill P2P business, and improving the self-discipline in the Internet financial field.

2. Actively promote blockchain applications

As a new technical means, the blockchain is mainly used in the virtual currency market represented by Bitcoin. At present, more and more people in the global technology field are paying attention to blockchain technology, and there are endless ideas about the application of blockchain, such as in the notarization field, in the medical field, in the mobile payment field, etc. Actively promoting the application of blockchain in the field of P2P bills can accumulate experience for the comprehensive promotion of blockchain technology and provide basic conditions for creating a financial market with convenient transactions, data security and advanced regulatory means.

(III) Establishing a company first and then conducting a trial

In view of the fact that blockchain technology is relatively mature and has a wide range of applications, relevant departments may consider setting up relevant legal entities to specialize in the research and promotion of blockchain technology. In the early stage, they can focus on areas with great social impact and close to the public, such as trying to apply it in the field of P2P bills, and providing corresponding technical support for the platform design and development of bill exchanges.

V. Conclusion

The bill exchange combined with blockchain technology can effectively solve the current difficulties in the bill P2P field, provide reliable technical support for effective and low-cost supervision, build a new trading platform for bill business innovation, and make a beneficial attempt for the sustainable and healthy development of my country's Internet finance.

References:

1. "The Current Situation and Development Suggestions of Internet Bill Financial Management Business", Wang Hongxia, Zeng Yicun, Wang Wuchao, Journal of Shanghai Finance University, No. 3, 2015;

2. Blockchain: A Blueprint for the New Economy and an Introduction, Melanie Swann, New Star Press, January 2016.