Blockchain investment looks good

In recent years, blockchain has become one of the few important hot spots in the financial industry. Blockchain is a digital distributed ledger technology based on computer networks. Since the ledger is shared by multiple parties, it becomes almost impossible to tamper with. Asset ownership is immediately transferred to the new owner after identity verification and verification. Transaction execution and settlement are completed almost instantly. Since 2015, the total amount invested in blockchain-related startups has reached a record-breaking $1 billion. This underlying technology of Bitcoin may change the way we trade stocks, make payments, and get paid in the future.

People are familiar with Bitcoin through payment or trading speculation. For example, Bitcoin can be used to buy Starbucks coffee, Dell computers, book air tickets and hotels, etc. However, a recent approval document from the U.S. Securities and Exchange Commission (SEC) has made the market re-examine Bitcoin. The technology behind Bitcoin is expected to expand to a broader financial field, which has made Bitcoin suddenly "high-end".

The SEC recently formally approved online retailer Overstock.com's plan to issue shares on the Internet using blockchain technology.

Overstock.com and its CEO Patrick Byrne have developed a new technology for issuing financial securities using blockchain. In fact, Overstock.com has previously used blockchain to issue private bonds, and this time it has simply upgraded to issuing public securities.

In a filing with the SEC, Overstock.com said it plans to issue up to $500 million in stock and other securities using blockchain technology.

Boosting financial innovation

To understand what "blockchain" technology is, we need to start with Bitcoin. "Blockchain" is actually the underlying technology of digital currencies such as Bitcoin.

In an interview with the International Financial News, Xu Mingxing, founder and CEO of bitcoin startup OKCoin, said: "Blockchain is the foundation of bitcoin. It is a time-ordered, tamper-proof ledger that achieves 'decentralized' trust through a distributed consensus algorithm."

Xiao Lei, chief researcher of Golden Wallet, told the reporter of International Finance News: "Simply put, 'blockchain' provides a complete set of transaction and payment solutions. Transactions conducted using this software will make the entire transaction and payment faster, cheaper, safer, and easier to operate. Previously, this technology mainly referred to the Bitcoin market. Bitcoin and 'blockchain' are like Apple phones and the iOS operating system. This technology has laid the foundation for the safe and efficient global dissemination of Bitcoin."

Now, these advantages of "blockchain" extend beyond just Bitcoin.

Xiao Lei pointed out: "The use of 'blockchain' technology has gradually upgraded from the Bitcoin market and is increasingly being applied to the financial sector."

Currently, dozens of financial institutions, including Nasdaq, NYSE, and Citibank, are carrying out "blockchain" financial innovation. In addition to the financial industry, blockchain technology can also be applied to Internet business, government public information, electronic evidence, data security and other fields.

Byrne believes that the impact of the new technology of issuing financial securities using "blockchain" on the capital market is equivalent to the huge impact that the Internet has on consumers today, because it can provide a safe, transparent, reliable and automated tracking method for any user who meets the query conditions. Thanks to the accuracy of this technology, this trading method can eliminate many middlemen. At the same time, the emergence of this technology can also avoid some existing market loopholes, such as market manipulation. "We want to make the market uncontrollable." Byrne said frankly.

Overstock.com has developed a new technology for issuing financial securities with the help of its subsidiary blockchain trading platform T.com. Overstock.com also plans to provide this technology as a service to other companies. In other words, other companies can also issue stocks through this technology in the future. In addition to issuing private bonds and stocks, T.com will also provide some tools to help companies borrow and lend stocks through "blockchain" technology.

Overstock.com even plans to turn T.com into a specialized company designed to help other companies manage financial securities through "blockchain" technology.

In fact, before Overstock.com, the Nasdaq-OMX Group, the largest exchange in the United States, was also exploring the application of "blockchain". The group was one of the first institutions to try blockchain technology on its private stock system.

Xiao Lei pointed out that when Nasdaq handles such stock transactions, it usually needs to go through a lot of informal systems, including lawyers manually verifying electronic forms. Nasdaq uses "blockchain" technology to replace its paper certificate system.

By putting the information of every equity transaction of every company on the blockchain, it will be clear at a glance how much the company has raised and how much its valuation is. Transactions become very open and transparent, solving the original problem of information asymmetry and making investment decisions simpler and more efficient.

Xu Mingxing pointed out: "All signs show that 'blockchain' technology is being recognized by the market and applied in practice."

Capital is pouring in

In the view of industry insiders, the future possibilities of "blockchain" are immeasurable, and many areas of application remain to be developed.

Xiao Lei pointed out that "blockchain" will subvert the original regulatory model.

In the traditional market model, the most effective market structure is nothing more than "effective supervision" and "market freedom", but no matter what kind of economics, it is difficult to fully integrate supervision and the market, and it is impossible to self-regulate. Therefore, in people's inherent market logic, supervision is supervision and the market is the market. With the complexity, randomness and high frequency of financial transactions, to achieve the effectiveness of supervision and make information and data more transparent, stronger technology and greater cost investment are often required. However, even if taxpayers are willing to pay to build a larger regulatory agency, they cannot change the characteristics of regulatory technology and methods that are increasingly lagging and less effective.

"Once blockchain technology matures and begins to be fully applied, the market's demand for regulation will drop significantly, the cost of regulation will drop rapidly, and the disclosure of information and data will be more thorough, greatly reducing information asymmetry and transaction insecurity in the market," Xiao Lei predicted.

In addition, Xiao Lei believes that "Blockchain technology can bring online business upgrades to almost all financial and commercial enterprises, and while all kinds of transactions are in progress, all processes and details are open and shared. The trust between the two parties will soar, ensuring the controllability and security of the transaction. It can be said that blockchain technology is the best tool for realizing the "sharing economy" and "sharing finance."

Xu Mingxing believes: "In addition to equity transactions, blockchain can also be used in ownership proof, audit services, clearing and settlement, electronic evidence, data security and other aspects."

Goldman Sachs is also very optimistic about the future application of "blockchain" technology. Goldman Sachs believes that "blockchain" technology can completely change the traditional payment system and can be used in a large number of things including issuing securities and smart contracts. Compared with the traditional trading system, "blockchain" technology can make transactions faster and at a lower cost.

Goldman Sachs analyst Robert D. Boroujerdi said in a report that "blockchain" is a new tool for cutting costs, challenging the profit pools of those middlemen, and is expected to make these centralized institutions obsolete. Boroujerdi also highlighted some application cases of blockchain technology in the report, ranging from payment systems to banks' back-office (such as accounting, personnel, settlement, etc.) and regulatory paperwork, to notarization for alternative assets (such as artworks), voting systems or vehicle registration, and can also be used to provide records of academic certificates.

These imaginations have already attracted a lot of capital.

Blythe Masters, the former global head of commodities at JPMorgan Chase & Co. who has recently been dubbed the “Queen of Wall Street,” is also raising funds for her blockchain startup, Digital Asset Holdings.

At the same time, a public patent application document shows that Goldman Sachs has developed its own "super bitcoin" for a settlement system - a digital cryptocurrency called SETLCoin, which is used to trade stocks, bonds and other assets. Although this currency is not bitcoin, the "blockchain" technology behind it is exactly the same. In the middle of this year, Goldman Sachs also led a $50 million investment in Boston Bitcoin financial services company Circle Internet Financial with IDG Capital. Circle Internet Financial is a startup company that uses technology-supported bitcoin to improve consumer payment methods.

In September this year, Barclays, Spain's BBVA, Commonwealth Bank of Australia, Credit Suisse Group, JPMorgan Chase, State Street, Goldman Sachs, Royal Bank of Scotland Group and UBS have reached a cooperation to develop industry standards and protocols for the use of blockchain technology in the banking industry.

In addition, this year, the US Bitcoin startup 21INC received a huge investment of US$160 million led by Qualcomm; the "blockchain" payment startup Align Commerce received a US$12.5 million investment led by KPCB, a well-known Silicon Valley venture capital firm; and the blockchain infrastructure startup Chain announced that it had received US$30 million in venture capital from multiple institutions including Visa, Nasdaq, and Citibank.

Large financial institutions and IT companies are placing increasingly larger bets on blockchain technology. In addition to overseas investments, Citibank, UBS, Deloitte, IBM, and JPMorgan Chase have also established internal business platforms that apply blockchain technology or registered related patents.

Xu Mingxing emphasized: "As a new technology, 'blockchain' has huge application prospects. Wall Street tycoons regard the research and development and application of 'blockchain' technology as an investment. If it succeeds, it will be a huge return on capital."

Are Chinese companies falling behind?

Unfortunately, there are few Chinese institutions in the field of "blockchain".

The People's Bank of China issued two notices on preventing Bitcoin risks between the end of 2013 and the beginning of 2014. In December 2013, the People's Bank of China announced on its website that Bitcoin is an "illegal currency" in China. The central bank has jointly issued a "Notice on Preventing Bitcoin Risks" with four ministries and commissions, requiring all financial institutions and payment institutions not to conduct Bitcoin-related businesses, and reminding the public not to participate in speculation.

In mid-March 2014, the central bank issued a "Notice on Further Strengthening Bitcoin Risk Prevention" to all branches, requiring all banks and third-party payment institutions to close all trading accounts of more than a dozen domestic Bitcoin platforms. This means that it is illegal for financial institutions to open trading accounts for Bitcoin website platforms. Unless it is a cash transaction, Bitcoin investors cannot make bank transfers or third-party payments for transactions in China.

In the "China Financial Stability Report 2014", the central bank made clear its regulatory attitude towards digital currencies represented by Bitcoin. The report pointed out that Bitcoin is not a real currency. The central bank pointed out that Bitcoin has no national credit support, no legal tender and no compulsory nature; there is an upper limit to its scale, and it is difficult to adapt to the needs of economic development; there is a lack of a central regulatory mechanism, and it is easy to be over-hyped, resulting in drastic price fluctuations, and it cannot become a pricing currency and a means of circulation; it has a strong substitutability and is difficult to be fixed as a general equivalent.

The central bank is worried that online Bitcoin trading platforms are prone to price manipulation and false transactions; Bitcoin prices lack reasonable support and can easily become a tool for speculation; Bitcoin transactions are highly concealed, anonymous, and not subject to geographical restrictions, facilitating illegal and criminal activities such as drug and gun trafficking and money laundering.

Although the regulatory environment restricts Bitcoin from playing a monetary role, Bitcoin trading in China is extremely hot. China's market share of the global Bitcoin trading market has exceeded 50%, and the trading volume of many trading platforms such as OKCoin remains high. Xu Mingxing told reporters: "OKCoin's core business is the global spot and contract trading business of Bitcoin. OKCoin is currently the largest Bitcoin trading platform in China, and it is also one of the best Bitcoin trading platforms in the world."

On December 24, the exchange rate of Bitcoin against the US dollar was 455.00, and the exchange rate of Bitcoin against the RMB was 3006.98. In about 4 months, the price of Bitcoin has doubled.

Xiao Lei told the International Financial News reporter: "The focus on blockchain technology has directly led to the global financial market's renewed pursuit of Bitcoin."

Daniel Masters, co-founder of a bitcoin hedge fund, predicts that a variety of factors will drive bitcoin prices to continue to rise in 2016, including more and more large companies and regulators supporting bitcoin payments and bitcoin's underlying technology, the "blockchain," attracting more and more interest and investment.

Xiao Lei pointed out: "If 'blockchain' technology is separated from Bitcoin, how to show its due value and how to integrate with the current mainstream 'centralized' trading market will seem to require a longer period of exploration. Bitcoin and 'blockchain' technology may not be separated for the time being, but they must be separated eventually."

"Before the world completes the historical evolution of 'denationalization', the logic of Bitcoin is still very sensitive, so 'blockchain' technology is the best place to start. Countries pay attention to and study 'blockchain' technology based on Bitcoin, first of all from the perspective of 'using it for my own benefit', rather than really accepting Bitcoin's monetary attributes." He emphasized, "For example, China has launched the RMB Cross-Border Payment System (CIPS) for its own financial security and the need for RMB internationalization. 'Blockchain' technology just meets the needs of information security and financial security, and may become the final form of presentation of such needs."

Zhang Shousong, founder of Bitcoin trading site Btctrade, said: "Blockchain is a technology and an innovation. Whether it can be well developed in China depends more on the field in which it is developed. At present, the country encourages entrepreneurship and innovation. As long as blockchain is applied in legal and compliant fields and improves efficiency, it will definitely have great development."

It is gratifying that more and more Chinese companies are noticing the value of blockchain technology. China Wanxiang Holdings Co., Ltd. previously stated at the world's first blockchain technology summit that it will set up a special blockchain technology investment fund to invest in various projects related to blockchain business applications around the world. The fund may be as high as US$50 million.

Xu Mingxing pointed out that OKCoin is the core component of the OK Fintech Group's financial layout. The group will use "blockchain" to make different technical attempts and launch new products and services.