The exploration and practice of blockchain technology in the banking industry: the application situation of various banks

In the context of digital transformation, major countries around the world are accelerating the deployment of blockchain technology to seize the high ground for a new round of innovation and change.

1. Overview of blockchain technology

 

Technical characteristics

Blockchain technology is an integrated innovation of cryptography, consensus algorithms, P2P communication, smart contracts and other technologies, creating a new distributed infrastructure and computing paradigm. According to different node management modes, blockchains can be divided into three types: public chains, alliance chains and private chains. The alliance chain is the main form of enterprise-level applications.

Blockchain has the characteristics of decentralization, hard to tamper, traceability, and intelligence. It has natural advantages in promoting data sharing, optimizing business processes, reducing operating costs, improving synergy efficiency, and building a credible system. It has natural advantages in finance and intelligence. Many fields such as manufacturing and social welfare have extremely high application value, and are hailed as a “trust-creating machine” by the authoritative “Economist” journal.

development path

The development of blockchain can be divided into three stages: the blockchain 1.0 stage represented by Bitcoin, which mainly realizes the issuance and circulation of decentralized encrypted digital currency; the blockchain 2.0 stage represented by Ethereum, aims to In the creation of decentralized applications based on smart contracts to adapt to more complex and diverse application scenarios; in the blockchain 3.0 stage, the blockchain will be deeply integrated with other emerging technologies to achieve collaborative development.

In order to jointly promote the research and application of blockchain technology, multiple alliances have been established worldwide. At present, mainstream public chain platforms include Bitcoin, Ethereum, EOS, etc., and alliance chain platforms include HyperLedger Fabric, R3 Corda, etc.

2. The rapid evolution of blockchain technology

At present, blockchain technology as a whole is still in the early stage of development, facing problems and challenges such as performance efficiency, data storage, resource consumption, and network security. The industry is continuing to advance research in terms of scalability, cross-chain communication, and consensus mechanisms, and deeply integrate it with emerging technologies such as 5G and cloud computing. At the same time, relevant laws, regulations, and standards are gradually improving.

Technology maturity

According to the maturity curve of China’s ICT technology released by Gartner in 2020, blockchain technology is currently in the trough of the bubble burst and will reach its maturity within 2 to 5 years. According to the blockchain technology maturity report released by Gartner in 2019, for the 24 sub-field technologies involved in the blockchain, 14 technologies including blockchain management services and blockchain-as-a-service are in the embryonic stage of technology; Seven technologies including chain interoperability and consensus mechanisms are in a period of expected expansion; three technologies including distributed ledgers are in a trough period and are expected to enter a stable period within 5 years.

At the same time, Gartner comprehensively investigated the maturity of blockchain from a business perspective, covering nearly 40 industries including retail, supply chain, and education. The results show that the blockchain will greatly change the business model and even the industry structure of many industries in the next 5 to 10 years. At present, it is believed internationally that the blockchain in the banking sector is in the low period of bubble burst and will enter a period of steadily climbing recovery.

Frontier direction

Scalability: The existing blockchain technology cannot support massive real-time transaction scenarios, which restricts the development of blockchain to a certain extent. In terms of scalability, hot research directions include sharding technology, on-chain/off-chain expansion mechanisms, and software and hardware integration system architecture optimization.

Cross-chain interoperability: Blockchain has penetrated into multiple application fields, and it is imperative to open up value islands in various industries and realize a circulation system of different assets. Cross-chain technology is in its infancy and should focus on improving compatibility and efficiently supporting homogeneous and heterogeneous cross-chains. The technical route includes notary mechanism, side chain technology, hash locking technology, and distributed private key control technology.

Security: While the blockchain technology is widely used, the exposed security issues have also aroused great attention, covering the security design of algorithms, protocols, implementations, and systems at multiple levels. In the future, we should start with system architecture innovation, taking into account security, scalability, and decentralization, and build a system-level security system.

Consensus mechanism: The consensus mechanism is the key to the stable operation of the blockchain system, but the balance between consensus efficiency and security is a big problem. For example, although the PoW and PoS consensus algorithms of the public chain support large-scale node networks, they are mostly used in low-frequency transaction scenarios; the BFT-type algorithms of the alliance chain can reach 1,000-level TPS, and are currently only suitable for small-scale networks. At the same time, attention should be paid to the pluggability and configurability of the algorithm, and the consensus algorithm should be adaptively selected according to the needs of different scenarios.

Privacy protection: With the continuous development and wide application of blockchain technology, the privacy leakage problem it faces has become more and more prominent. In the future, we will mainly study on-demand network layer security protection mechanisms, transaction layer privacy protection based on cryptographic algorithms, and application layer privacy protection based on secure key technology.

Smart contracts: Smart contracts have issues such as privacy, security, performance, and unified standards. In the future, we will focus on improving computing capabilities, and develop high-availability, high-performance, and scalable cross-chain contract management to improve security and intelligence.

Integration and development with emerging technologies

With the development of a new generation of information technology, the future blockchain is expected to be deeply integrated with emerging technologies such as 5G communications, cloud computing, artificial intelligence, and the Internet of Things, opening up new imagination. Blockchain and cloud computing are combined to create a BaaS (blockchain as a service) platform to realize flexible resource management and automated deployment and operation and maintenance, transform blockchain accounting and application development capabilities into programmable interfaces, and optimize blockchain business operations . 5G technology has the advantages of high transmission rate, wide network coverage, low communication delay and massive device access. It will meet the communication quality requirements of the distributed architecture of the blockchain and realize fast and secure point-to-point communication. Artificial intelligence can improve the level of intelligent application of blockchain data and create new business forms. The characteristics of blockchains that are difficult to tamper with and shared by multiple parties can improve the accuracy and comprehensiveness of the data required by artificial intelligence. The high-efficiency processing capability of big data technology for massive data helps to mine the value of blockchain data assets. The Internet of Things can collect information through sensor devices, which can enable the blockchain to reach the real world, and improve the breadth and reliability of data information on the chain.

3. Blockchain helps banking business innovation

There are many business pain points in the traditional financial industry that need to be solved urgently, including high trust costs, long business process chains, low system operation efficiency, high risk control costs, and high data security risks. The openness, transparency, and traceability of the blockchain are these problems. Provides solutions. The domestic banking industry started to explore in 2014, and the industry pattern of blockchain applications has been initially formed, and applications have been implemented in many fields such as trade finance and supply chain finance.

supply chain finance

Supply chain finance is a financing model in which banks connect core enterprises with upstream and downstream enterprises to provide flexible financial products and services. The current core enterprise credit transmission is usually limited to the first-tier suppliers. The upstream SMEs are facing financing difficulties and high financing difficulties due to the imperfect credit evaluation system; the business data among the many participants is distributed and stored, business flow, logistics, capital flow, and information flow Often not synchronized; the authenticity of transaction information is difficult to guarantee, and risk control costs are high.

With the help of blockchain technology to break information islands and share data in real time; at the same time, the authenticity of business data can be effectively improved based on the characteristics of blockchain’s traceability and difficult to tamper; based on the data on the chain, the credit penetration of upstream and downstream enterprises can be achieved, and the business can be reduced. Risks and financing costs; digital vouchers on the chain can be split and transferable to improve capital utilization.

Supply chain finance is the most typical and widely used blockchain application scenario in the banking industry, and many banks have explored and implemented it. For example, the ICBC “ICBC e-trust” online financing financial service platform supports the transfer, financing, and pledge of electronic vouchers for accounts payable by core enterprises, realizing multi-level credit transmission, and reducing financing costs for upstream and downstream enterprises.

Trade finance

Trade financing refers to the financing business carried out by banks based on the inventory, prepayments and accounts receivable of commodity transactions, and is divided into international and domestic trade financing. The main pain points include a long business process chain and cumbersome review procedures; transaction information such as logistics, document flow, and capital flow is not transparent, and verification costs are high; manual operations are many and time-consuming.

With the help of the blockchain, the separated parties in the original business process can be connected, and online processing based on smart contracts can be realized to improve business processing efficiency; through the sharing of information such as orders and logistics on the chain, the authenticity and authenticity of transaction data can be improved. Traceability, avoid double financing, reduce risks and costs.

Trade finance is also one of the typical scenarios for the application of blockchain in the banking industry, mainly led by regulatory agencies and large banks, and concentrated on domestic trade. For example, Bank of China, China CITIC Bank, China Minsheng Bank and other cooperative blockchain Foster Trading Platform (BCFT) mainly serve business scenarios such as pre-prices, post-assessment inquiries, and capital quotations.

Payment clearing

Payment and clearing business, especially cross-border payment business, highly relies on third-party institutions to solve the mutual trust problem of participants. The current cross-organization and cross-system transaction information forwarding and reconciliation process is complicated; it involves a lot of manual operations, which is low in efficiency and high in cost. For example, the SWIFT correspondent bank model usually takes several days to complete a cross-border remittance, and the cost is too high for small payments.

Based on the blockchain technology to build an inter-bank distributed payment and clearing platform, participating institutions can achieve secure mutual trust and real-time information sharing; partial network failure will not affect the normal operation of the system, and both parties can conduct round-the-clock point-to-point real-time transfers, thereby simplifying business processes , Reduce transaction costs and account processing error rate, and greatly improve payment efficiency.

The domestic banking industry has realized the exploration and landing of blockchain in cross-border and cross-bank payment and clearing businesses. For example, the first domestic blockchain financial institution reconciliation platform launched by WeBank and Shanghai Huarui Bank has processed more than 70 million transactions and maintained zero-fault operation.

asset Management

In the field of asset management, traditional asset management involves multiple parties, with long business processes and high transaction costs; the transparency of basic assets is not high and information is asymmetry; information confirmation in the transaction process is mostly through manual methods such as telephone and email, which is inefficient.

Blockchain technology enables all participants to share business information in a timely and efficient manner to improve asset credibility; enhance transaction transparency and traceability, which is conducive to investors to grasp and monitor asset usage, and further control risks; realize the line through smart contracts Shanghai Chemical and intelligent business processes improve the efficiency of issuance and liquidation.

Asset management is also an application field for the early exploration of blockchain technology in the domestic banking industry. A typical case is the ABS solution of China Merchants Bank, which provides investor decision-making, risk monitoring and post-investment management services.

Other areas

The banking industry is actively exploring the application of blockchain technology in more scenarios, including various non-banking businesses. In the future, it will further deepen and extend its use in digital finance, Internet of Things, intelligent manufacturing, supply chain management, digital asset transactions, etc. Applications in each field.

Digital assets: By building a blockchain-based financial infrastructure, various assets can be easily integrated into digital assets on the chain. While improving the security of assets and transaction data, smart contracts are used to automatically complete transaction processing, which is safer and faster . For example, the Shanghai Stock Exchange took the lead in using blockchain technology to create a digital bill trading platform, effectively reducing the intermediate links of bill transactions.

Social people’s livelihood: The open, transparent, and non-tamperable characteristics of the blockchain make it a unique advantage in the use and management of funds. For example, the Industrial and Commercial Bank of China and the Xiongan New District Management Committee launched a blockchain platform for the management of requisition and demolition funds to realize the chain of the original files of requisition and demolition and the penetrating and full-process management of fund allocation; China Construction Bank uses blockchain technology to help housing leasing and housing Financial closed-loop construction, the “housing chain” on-chain housing has reached 40,000 sets.

Credit reporting management: The current credit reporting system has problems such as insufficient data collection and lagging updates. Based on blockchain technology, it can effectively integrate user data from different channels and promote data flow. In addition, the open and transparent characteristics of the blockchain can be used to strengthen real-time monitoring and provide technical guarantees for anti-fraud and anti-money laundering.

Mortgage verification: In the verification of collateral in the loan business, the entire process requires the cooperation of multiple parties such as banks, appraisal agencies, and housing management bureaus, and the processing chain is long. Using the real-time information sharing feature of blockchain technology can effectively reduce costs and improve efficiency.

4. ABC blockchain application exploration

The Agricultural Bank of China started the research and application exploration of blockchain technology in 2015, and has built a bank-level blockchain technology platform, and used Internet e-commerce financing, digital points, pensions, supply chain financing, dual-rights mortgage loans, and entrepot trade. , Intelligent equipment management has achieved application landing in multiple business areas.

Agricultural Bank of China’s blockchain-based agriculture-related Internet e-commerce financing system is the first domestic banking industry to apply blockchain technology to the e-commerce supply chain finance field, in order to solve the long-term lack of collateral and credit data faced by “agriculture, rural areas and farmers” customers. The financing difficulties caused by this provide ideas. ABC’s digital credit products for online finance based on blockchain technology promote the exploration of multi-party cooperation in online financial services and create a business model for cross-industry cooperation. The launch of the pension block chain application system in cooperation between the Agricultural Bank of China and Taiping Pension Insurance Company marks the landing of the first pension alliance chain application in China. The Guizhou Branch of Agricultural Bank of China cooperated with the local People’s Bank of the local People’s Bank of the two-right mortgage transaction system, and cooperated with other banks, the Bureau of Land and Resources, and the Bureau of Agriculture and Animal Husbandry to form an alliance chain to provide farmers with a “one-stop” convenient financial service for the registration and review of land management rights mortgages. ABC’s new online supply chain financing product “e-account” is forward-looking in banking products, filling the gap in the multi-level circulation scenario of the independent service supply chain. The “Cross-border e-chain”, a blockchain product for re-export trade launched by the Agricultural Bank of China Shanghai Branch, opens up the flow of goods, capital, and documents, makes business processes online, realizes multi-party collaboration, enhances mutual trust in data, and effectively prevents duplicate financing and Repeat payment.

In the future, the Agricultural Bank of China will continue to promote the construction of the blockchain technology system to further empower business development. On the one hand, promote the construction of a BaaS platform, provide a one-stop fast self-building, deployment, development, and operation and maintenance of the blockchain network and application service platform, and create a high-security, high-reliability, and high-performance blockchain based on ABC’s own business The ecological supporting service platform escorts the rapid implementation of innovative applications in more business scenarios. On the other hand, strengthen interoperability research based on cross-chain technology, open up value islands in different application fields, improve the efficiency of information circulation with various institutions, and strive to create a richer business ecosystem.

5. Concluding remarks

At this stage, the innovation of blockchain technology is evolving rapidly, and its application prospects in the financial industry are broad, and the application ecosystem is gradually taking shape. However, it is necessary to realize that the blockchain still faces risks and challenges in terms of compliance, technological maturity, and operating mode. It is necessary to strengthen cooperation with the industry, accelerate the development of technology and application standards, and establish and improve the industry regulatory system.

In the future, ABC will further expand and deepen the application of blockchain technology, actively participate in the formulation of industry standards, give full play to the transformative role of blockchain technology, and fully assist the digital transformation of the banking industry.

 

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