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June 23, 2016

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Home » Business » Finance

A primer for those with mental block on blockchain

By Leng Cheng | June 23, 2016, Thursday | Print Edition

THE recent bitcoin hype leads one to ask: what is blockchain?

Finance institutions are flocking into the new technology that powers the virtual currency bitcoin and is able to support a “distributed database” that runs on many computers and needs no central authority.

But the technology is so new that many finance industry executives cannot explain what exactly it is or what it actually does.

Even at an early stage in blockchain development, professionals are clamoring for training in the new technology. Banks, stock exchanges, insurers and government bureaus want to know how blockchain may benefit them and don’t want to be left behind.

Financial institutions do suffer some anxiety, amid talk that blockchain is a potentially “disruptive” force that could reduce the role of banks and other intermediaries, and change the way trading in financial instruments is cleared and settled. In reality, it seems that blockchain offers “transparent, indelible and tamper-proof” technology that can eliminate false disclosures.

More than 20 percent of traditional financial services will be replaced by business provided by fintech companies, consultants PwC China estimated in a recent report. It suggested that blockchain might be a game changer.

“It will impact financial infrastructure service providers like Society for Worldwide Interbank Financial Telecommunication (SWIFT),” said Wang Jianping, a partner with PwC China. “It will solve cross-border payment and trading problems among banks.”

Apparently, China doesn’t want to lag behind in the race to embrace blockchain.

The National Internet Finance Association of China last week created a research team to study blockchain, appointing Li Lihui, former president of the Bank of China, as team leader. That was viewed as a step forward in the use of cutting-edge technology in the nation’s financial reform.

In May, Ping An Group, China’s second-largest insurer, became the first Chinese member of a global consortium led by fintech firm R3. R3 is a group of more than 40 of the world’s biggest banks and other financial institutions, such as Barclays and Goldman Sachs, who are working together on using the technology that underpins the digital currency bitcoin.

On the purely domestic front, the China Ledger Alliance was established in April by 11 Chinese regional commodity exchanges, equity exchanges and financial asset exchanges to research blockchain.

And last month, the Blockchain Finance Alliance was set up in Shenzhen, with 25 members who included JD Finance, Tencent’s online lending service WeBank, and world’s leading networking gear maker Huawei Technologies Co.

In the US, Overstock.com, an online retailer of discounted goods, has won approval from the US Securities and Exchange Commission to issue a US$5 million “cryptobond” on a blockchain-based securities trading platform.

Chinese online companies in new realms like peer-to-peer lending and equity-based crowd funding aren’t far behind. Antshare, an equity-registration platform, is backed up by blockchain technology.

Though each coin has two sides, blockchain technology has its limitations.

“Technically speaking, one has to load the whole network of a database, which is sometimes as heavy as 40 gigabytes, to enable the blockchain technology,” said PwC’s Wang. “That will occupy too many resources in the financial system and drag behind the efficiency.”

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