Blockchain accelerates digital transformation of commercial banks in China

Although the application of blockchain in Chinese financial industry has taken many detours, its low-cost and high-efficiency of distributed bookkeeping indicates that, as long as it is used in compliance and reasonable, it will be a weapon for digital transformation in the financial industry.

Summary

As a technological means with far-reaching impact on the future, blockchain technology is accelerating its penetration into China’s banking industry, and various Chinese commercial banking institutions are also racing to join the new track of blockchain technology.

Regulatory and institutional push

In 2020 annual work plans issued recently by various Chinese financial regulatory authorities, blockchain has also frequently appeared as a future regulatory technology (RegTech) star. For example, Beijing Financial Technology Innovation Supervision Pilot Launch Conference announced that it will focus on application of blockchain and other cutting-edge technologies in future regulatory scenarios; besides, the release of the year-round work highlights of the Shanghai Free Trade Zone Lingang New Area mentioned that the “sandbox supervision” model led by new technologies such as blockchain will be explored.

In fact, since 2019, regulators in China have begun to build a basic rules system for fintech supervision, and promote the deep integration and coordinated development of finance and technology. The People’s Bank of China previously issued the FinTech Development Plan (2019-2021). According to industry insiders, the introduction of the first top-level design document for financial technology alone has important guiding significance for the future development of the banking industry. The promotion and application of blockchain technology in the financial field will effectively enhance the efficiency of financial supervision and the efficiency of financial activities.

Since then, CBRC has also issued the “Guiding Opinions on Promoting the Supply Chain Financial Services Real Economy”, encouraging banks and insurance institutions to embed new technologies such as the Internet of Things and blockchain in the transaction link, implementing remote monitoring of logistics and inventory products, and improving smart risk control level.

As for commercial banks in China, statistics from the Zero One Think Tank show that from 2016 to December 2019, a total of 15 banks in China have applied for blockchain technology-related patents, and the total number of patent applications has reached 433, surging more than 38 times compared with eleven cases four years ago. According to statistics, in 2019 alone, the blockchain industry applied for 284 blockchain patents, and a total of 9 banks applied for blockchain-related patents, of which WeBank ranked first with 229 patents, accounting for 81% of newly added patents in 2019; ICBC ranked the second, with 35 applications in 2019, accounting for 12% of the total; the number of patent applications for the remaining 7 banks was less than 10.

Relying on its quantitative advantage, WeBank has a leading position in business distribution. Its blockchain patents cover digital assets, supply chain financial services, payment settlement services, credit reporting and remittance services, while Bank of China’s blockchain patents cover digital assets, credit services, credit reporting, cross-border payments, fund custody, and foreign exchange settlement and sales services. ICBC’s blockchain patents are mainly focused on digital assets and supply chain financial services. People in the industry believe that by combining the existing banking API architecture with emerging blockchain technology, banks can create an efficient and highly autonomous digital ecosystem, adjust their operating models, and establish relationships with customers in new ways, promoting seamless connection between traditional products and digital businesses, and the creation of new digital asset products based on blockchain technology.

China Economic Times reporters sorted out the announcements of major banks and found that following the establishment of the first wholly-owned fintech subsidiary by the Construction Bank, other banks including Industrial and Commercial Bank of China, the Bank of Beijing, and the Bank of China successively established their fintech subsidiaries during the year, reaching 10 companies in total. The Bank of China, ICBC, and China Construction Bank have successively launched intelligent outlets that deeply integrate 5G elements and living scenes. ICBC has released the ECOS smart banking ecosystem to promote the cross-border, cross-industry, and cross-border transformation of the banking industry. ICBC, Ping An, CZ Bank, Jiangsu, WeBank, and Suning announced 14 blockchain services; CCB released “BCTrade 2.0 Blockchain Trade Finance Platform”; Ping An’s business technology cloud platform for financial institutions – OneConnect was successfully listed on the New York Stock Exchange. The banking industry has deeply integrated financial technology, stimulated the supply-side output capability of traditional finance, and improved the level of service to the real economy.

Not only that, many commercial banks in China also indicated that they will use 2020 as a new starting point, accelerate the pace of exploring new applications of blockchain, and use blockchain to help the digital transformation process. Ping An Bank stated that it hopes to promote the deep integration of the blockchain and the Internet of Things, solve the pain points under the traditional supply chain financial model, and promote the supply chain finance to show new vitality. Relevant person in charge of China Construction Bank’s technology subsidiary said that CCB’s application in the blockchain field has four major advantages: rich industry application practice, complete financial service capabilities, leading data governance experience, and successful implementation experience in the government field, and in the future, the blockchain innovation business will be vigorously developed in three aspects: trade finance, real estate leasing, and housing provident fund data platforms.

Facing many challenges

Nevertheless, the application of blockchain technology is still in the exploration stage as a whole. At present, there are no typical application scenarios. Only individual cases have been piloted, and many challenges are faced in future applications. There are defects and limitations in blockchain technology. The security of user privacy needs to be strengthened, and the difficulty of financial supervision has increased significantly. The decentralized nature makes the blockchain a decentralized and balanced node system, which greatly reduces the pertinence and effectiveness of financial supervision. If it is said that the regulators are facing massive data, then the regulators under the blockchain technology will be faced with “astronomical” data. While there is a lack of accurate portals to search and use these data, the way how a centralized institution handles decentralized data, the ability of regulators to deal with risks and the effectiveness of regulatory tools are extremely difficult tests.

Liang Bin, deputy general manager of the Banking and Finance Department of Jiangsu Bank, pointed out that, there are still various problems in the implementation of the blockchain: First, standards, especially for small and medium-sized commercial banks. In order for the blockchain industry to shift to deeper applications, the formulation of technical standards is a top priority. If institutions continue to build new “island” solutions on different standards, it will lead to countless, compromised, complex, closed solutions based on different standards. Without industry standards, interoperability between financial institutions is not possible.

The second is the application scenario. Blockchain is not an independent and centralized system, and its characteristics need to be achieved under the condition of multi-party participation and win-win cooperation. While seeking various types of business scenarios suitable for the blockchain, banks also need to solve the problem of how to expand the “friend circle” and allow more partners to join their own business scenarios to generate business efficiency. In addition, although blockchain technology has many benefits to the banking industry, its characteristics are still different from the main business of banks in practical applications.

The third problem is technological upgrading. There are still some inevitable technical problems in the construction of the blockchain. It is recommended that the entire industry participate in joint research and solution. For example, the problem of transaction throughput, that is, because the consensus algorithm needs to consume a lot of resources, as the number of institutions linked by the alliance increases, the transaction processing performance will continue to decline. Solutions are now discussed with partners to break performance bottlenecks.

There are also deployment issues and ledger migration issues of the alliance chain. If these issues are not resolved, there will be many hidden dangers.

The Chief Information Officer of the China Banking Association Gao Feng also publicly stated that, on the whole, the blockchain is still in its first stage of development, and that it needs to be further improved in terms of security, standards and supervision. Gao Feng said that in the short term, blockchain is a double-edged sword for the operation and income of the financial industry.

“Some people say that the blockchain is doing too much, and the bank’s intermediary business income may be gone; in the future, when the blockchain is more developed, and payment comes the first; others said that in the future, accounting firms may be gone because of the related projects of listed companies are chained, there would be no need for auditing and notarization of the firm. Therefore, the blockchain is a double-edged sword in the near future. But in the long run, commercial banks still need to develop the blockchain, which not only improves efficiency, but also creates some possibility.”

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