Cao Tong: Self-finance is a deep application of blockchain technology

Cao Tong is the Vice Chairman and Academic Committee Member of the Global Shared Finance 100 Forum (GSF100), and Chairman of Xiamen International Financial Technology Co., Ltd.

At present, the impact of blockchain technology on the entire financial industry is still at the shallow application level. With the continuous deepening of practice and application, the emergence of self-finance may become a new proposition.

Let me talk about the logical relationship between blockchain and the banking industry, as well as the impact that blockchain may have on the banking industry in the next step.

Bitcoin is the first very successful financial application of blockchain technology. Since its launch 7 years ago, Bitcoin has not been maintained by anyone, but it has never been down, which is indeed a miracle. At present, major international banks are generally paying attention to blockchain. One important manifestation is that dozens of top banks in the world (including HSBC, Deutsche Bank, etc.) have joined a blockchain alliance led by financial technology company R3. The alliance was announced in September 2015 and mainly focuses on proof-of-concept trials and the formulation of blockchain technology standards. Our domestic research on blockchain has also begun. Today, the birth of the China Blockchain Research Alliance will become a landmark event in history and have milestone significance.

First, let’s clarify some basic concepts.

First, the concept of blockchain . What is blockchain? For example, in a typical Bitcoin application, A wants to send money to B, which generates a transmission. This transmission protocol can be expressed in blocks. In traditional finance, this transmission protocol is one-way, with information directly transmitted to the bank, the bank enters the backend host, and the bank's backend host enters the central bank's clearing system. But in the blockchain network, information can enter several downloaded protocol entities at the same time. In other words, such a remittance record is not recorded in one center, but in the accounts of several participating entities at the same time. The participating entities can be 100 or 100 million people. Therefore, at this time, when A transfers money to B, the meaning of "money" has actually changed greatly.

Second, about public blockchain and private blockchain . Different from the one-way nature of the current banking system, the blockchain world is actually divided into public blockchain and private blockchain. The so-called public blockchain is like Bitcoin, which is completely unrestricted. Anyone who wants to join only needs to download the software and approve its protocol to become a part of the blockchain and the record subject of every participant's account in the blockchain. However, private blockchain still needs to obtain permission, such as the blockchain technology of the banking system, which requires the review of every participant. Therefore, public blockchain and private blockchain have two different meanings.

Based on the above basic concepts, I will talk about the impact of blockchain technology on the banking industry.

First, it is possible that currency will return to the era of physical currency .

Looking back at the history of currency, strictly speaking, the emergence of credit currency has only a 40-year history. In the long history of mankind, most of the currency form has been physical currency, which has three forms: the first is directly in the form of precious metals such as gold and silver; the second is like China's copper coins, the basis behind which is still gold; the third is the early paper money, the basis behind which is still gold.

Credit currency was created after the Jamaica Agreement in 1976. The main content of the Jamaica Agreement was to determine the double decoupling, that is, the decoupling of global currencies from the US dollar and the decoupling of the US dollar from gold. Corresponding to the Jamaica Agreement is the Bretton Woods system in 1944. The Bretton Woods system is based on gold and implements a "double peg" system: the US dollar is pegged to gold, and the currencies of various countries are pegged to the US dollar. Therefore, the real credit currency, which relies on government credit and is not linked to any metal or physical object, has only a 40-year history.

Analyzing from the short 40-year history of credit currency, is there an inevitable connection between human economic activities and credit activities? This is a very questionable proposition. In other words, under certain marginal conditions, the government and society may return to the era of physical currency. However, today, this physical currency has evolved into virtual physical currency. Bitcoin is a very typical virtual physical currency.

One of the important reasons why physical currency is dying out is that its self-creation mechanism has problems and it has no way to innovate itself. For example, if global development requires an additional $1 billion in currency, and gold mining lags behind, it will produce a deflationary effect. But if a physical currency has both scarcity and self-creativity, it may grow into a real currency. Therefore, in this sense, Bitcoin has just started, because Bitcoin's currency creation mechanism still has problems. Although Bitcoin has solved the scarcity problem, it has not solved the creativity problem. When these two problems are solved, it is possible to return to the era of physical currency.

Second, based on blockchain technology, the birth of self-finance is entirely possible .

At present, the impact of blockchain technology on the entire financial industry is still at the shallow application level. With the continuous deepening of practice and application, the emergence of self-finance may become a new proposition.

Now we simply divide finance into direct finance and indirect finance. This division actually distinguishes the concepts of direct and indirect from the perspective of whether money is created. However, if we look at it from the perspective of services and non-monetary creation, modern finance is actually achieved through intermediaries. The emergence of the Internet has made it possible to de-intermediate and truly direct finance. Of course, this possibility is not complete. The main reason is that the underlying layer of Internet finance is still growing on the original financial foundation and cannot be independent. Therefore, the underlying issues such as security, transparency, and indestructibility have not been truly broken through.

Blockchain technology provides a possibility for breaking through these problems. In fact, private blockchain is very similar to a form of self-finance, and public blockchain is more like the support and guarantee of the underlying private blockchain. Of course, the emergence of self-finance, in addition to being based on blockchain technology, requires another factor, that is, the third-partyization of financial management technology. When the widespread application of blockchain technology and the third-partyization of financial management technology are generally presented, when these two are combined, self-finance becomes a possibility. Each of us here may open a bank by ourselves, and all entities with assets and cash flow may become a bank.

Third, the concept of banking will be reconstructed .

What exactly is a bank? This question is becoming increasingly difficult to answer. At present, the most essential function of a bank is still account management and clearing. For example, bank deposits, loans, and remittances. In the era of Internet finance, deposits and loans have been increasingly deconstructed from banks. At present, the remittance level, that is, the account level, has not been deconstructed, but there is also a trend. For example, the emergence of virtual accounts such as third-party payment is actually deconstructing the account management function of banks at a shallow level. Despite this, in the Internet era, the account management function of banks has not been truly deconstructed. But in the blockchain era, once many of the concepts mentioned above are implemented, the account management function of banks will be deconstructed. Once deconstructed, the deposit, loan, wealth management, and asset management functions of banks will have nowhere to go. From this perspective, the concept of a bank has become difficult to define. I think that at least one concept is valid, and we will see the disappearance of universal banks and the emergence of functional combination banks become a reality.

Fourth, what will the R3 organization do?

Regarding the logic of blockchain technology deduction, from the perspective of storage, in the past, banks had a host system for storage, and gradually the concept of private cloud emerged. For example, the current Internet banks are all private cloud concepts. Private cloud will eventually transition to public cloud, but public cloud is still a centralized cloud, not a decentralized cloud. It is still a combination of several servers in a center. This public cloud will gradually evolve into a private block cloud, which is a decentralized cloud, and the private block cloud will further evolve into a public block cloud. This progressive evolution process is difficult to stop. In other words, after a banking organization is established, it is almost impossible to use this blockchain technology to strengthen its existing position. So, in this sense, any existing financial industry alliance that focuses on blockchain research must be in line with the times and unstoppable.

Finally, blockchain technology has given rise to new issues in financial regulation.

Once blockchain technology is widely used in the financial industry, the de-financialization of supervision will emerge. The Federal Reserve was born in 1914, and the central bank system became a common choice after World War II. With the Basel Accord as a symbol, the relationship between assets and capital emerged, the management of financial leverage ratio emerged, and the financial leverage ratio was used as the main tool to control micro and macro financial risks. If we look forward 10 years later, when blockchain technology is widely used in the financial industry, it will be difficult for the central bank to become the main organizational structure for financial regulation.

From a macro-financial perspective, in the era of self-finance, the money creation mechanism has been completely changed. The emergence of the central bank is based on the perspective of base money supply and money creation. If there is no money creation, there will be no central bank. In the era of self-finance, is there still money creation? What is the meaning of money at that time? Is it to create money or to create credit? What does the central bank need to regulate? These propositions are all here. After a hundred years of interpretation, how should these functions of the central bank be redefined? These will become new propositions.

From the perspective of micro-finance, it is clear that we are now on the edge of a commercial financial era. If blockchain technology takes another half step forward, finance and business will be difficult to distinguish. This era has surpassed the boundaries of separate supervision and mixed supervision. If we discuss the reform of the financial regulatory system today without looking at it from this perspective, it will be difficult to grasp the theme of the era because we have not grasped the main contradiction. Separation and mixed operations are propositions of the last era (the last century), but my country is still 20 years behind foreign countries. In this era, the concept and system of supervision will become a new proposition, which needs to be accurately grasped.