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Harnessing blockchain technology for more gains

By Di Gang | China Daily | Updated: 2020-04-24 09:45
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A pedestrian walks past the headquarters of the People's Bank of China, the central bank, in Beijing on Feb 3. [Photo/Agencies]

It has been over a decade since Satoshi Nakamoto put forward the concept of bitcoin in 2008. As the underlying technology of bitcoin, blockchain has become better known by more people, and it is bringing new perspectives to many industries while being applied to many business scenarios.

Blockchain is a ledger where transactions of cybercurrencies, such as bitcoin, are recorded.

It works like a chain of digital "blocks" that contain records of transactions. Each such block is connected to those before and behind it, making it difficult to tamper with because a hacker would need to change the block containing that record and all those linked to it to avoid detection.

Blockchains are kept in "peer-to-peer" networks that are continually updated and kept in synchronization. It would require huge amounts of computing power to access every instance of a certain blockchain and alter all its blocks at the same time. A network of tech-savvy users known as miners pour their computing power into maintaining the blockchain and verifying its transactions, ensuring that someone cannot spend the same coin again after paying for something with it.

The records on a blockchain are secured through cryptography. Participants have their own private keys that act as personal digital signatures. Each bitcoin is digitally signed each time it travels from one owner to the next.

In the financial sector, blockchain became one of the hottest topics on Wall Street in the first half of 2015. Afterward, many government departments, international organizations and think tanks studied and analyzed the phenomenon. There is a view that blockchain may become the key technology of the next generation in financial infrastructure.

However, some still think blockchain may constitute bubbles or work like Ponzi schemes. Regardless of the range of opinions, blockchain has indeed brought shocks to the financial industry, and it is leading a research momentum that cannot be ignored in financial and regulatory technology.

It should be emphasized that technology itself is neutral, and there is no necessary link between technology and any specific application scenarios. The application scenario of blockchain is not limited to digital currency, and the application of digital currency can be completely independent of blockchain.

Blockchain is divided into the public chain and license chain. The former represented by bitcoin is usually an anonymous system, while financial scenarios require users to have real names, asset registration, and meet regulatory requirements.

Meanwhile, limitations of the public chain on some technical features are too extreme, which inevitably affects the improvement of performance and data privacy protection. Therefore, the application of the public chain in financial scenarios is inherently inadequate.

We are now witnessing the emergence of the "license chain". The license chain usually refers to the blockchain with role definition and authority management. According to the differences of accounting nodes, the license chain can be further divided into the alliance chain and private chain.

Because the scope of using the private chain is very limited, when we say "license chain", we usually refer to the alliance chain. Sometimes blockchain is also called "distributed ledger", which weakens the technical characteristics of "block" and "chain", focusing more on the application scenarios.

The financial sector has always held a positive and open attitude toward the application of new technologies. Based on the characteristics of the financial industry, the main technical obstacles that constrain blockchain's broad use are: performance bottlenecks, privacy protection and security governance, cross-chain interoperability, system operation and maintenance as well as business continuity management.

1. Performance bottlenecks: Financial transactions are often massive, high-frequency and usually require high-consistency data, which require higher performing technology.

2. Privacy protection and security governance: Financial security is related to national security, and financial supervision requires stricter privacy protection and information security. Although blockchain has adopted a large number of modern and mature cryptographic algorithms in its design, it still cannot ensure absolute security.

3. Cross-chain interoperability: Financial services are interwoven, linked and coordinated. Cross-institutional and cross-market innovation and supervision require good interaction and interoperability of supporting technologies. At present, blockchain projects are developed by different teams based on various ideas and methods. These projects are independent and closed systems, akin to "isolated information islands".

4. System operation and maintenance/Business continuity management: Blockchain nodes are of high-redundancy and distributed under the control of different entities, which is an advantage for the security and robustness of the system, but a huge challenge for the system operation and maintenance and business continuity management.

Up to now, the applications of blockchain in financial services developed slowly, mainly due to difficulties transferring assets onto chains.

How can we allow digital assets on chains to accurately reflect the value of physical assets? How can we ensure the authenticity of the source in the process of chain building? After putting assets on chains, how can we ensure real-time consistency between accounts on and off the chains? Thus it is more difficult to transfer financial services onto chains.

Since 2017, the application exploration of blockchain has gradually focused on data exchange, information sharing, registration and certificate keeping.

Through these projects, when more assets and data are moving onto chains, financial services based on blockchain can come naturally. Therefore, although presently some cases are not as disruptive as described, they are the indispensable bases and the only way of improving blockchain application projects.

In the field of supply-chain financing, there are many participants, and the process is complicated with irregular data, low transparency of transaction background and high costs for bank verification. Avoiding forgery or falsification of trade history is very important.

Through blockchain, a company's upstream and downstream activities such as financing, purchases, sales, deposits, loans and guarantees can be integrated into a complete transaction, achieving the integration of information, logistics and capital flow.

It can effectively promote more market trust and promote industry cooperation, reduce risk and fight fraud. At the same time, it can effectively reduce business operation costs, lower trade financing costs, improve transaction efficiency and promote the expansion of global trade financing markets.

Blockchain has less effect on bureaucratic and monopolistic companies. For the collaborative business model, which needs equally authorized organizational structure, it is often difficult to reach a unified consensus on structural design. For example, cross-ministerial networks usually involve many departments, and it is difficult to determine who is at the center, and where the central database should be placed.

Blockchain provides an opportunity for more direct communications. Meanwhile, front-end system development costs can be reduced, and business processes are also optimized.

Of course, it doesn't mean that everything will be fine with blockchain, but at least it provides a protocol that makes large-scale, cross-departmental and cross-field collaboration possible.

During the past three years, blockchain technology has attracted great attention, but has also generated bubbles and brought about "irrational prosperity". However, with the collapse of bubbles and the failure of some fake blockchain projects, understanding of the industry is becoming more rational, objective and pragmatic.

Blockchain technology should serve the real economy. In the initial stage of a gradual development process, some small and delicate closed-loop application scenarios may be more suitable for blockchain technology, and that will be more practical and likely to succeed. Accumulating many successful closed-loop scenarios will promote the maturation of fully opened scenarios.

As a leading country of technological innovation and application in the world, China has the capacity to lead the development of blockchain technology in terms of market scale, technology research and development and talent reserve.

Through continuous pragmatic evolution and innovative development, the next step in blockchain technology is to deeply integrate it with the internet of things, serve the real economy and provide a new driving force for the digital economy.

The author is deputy head of Digital Currency Institute, People's Bank of China, the central bank.

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