Inclusive Club Feature | How Blockchains Contribute to the Development of Inclusive Finance?

In recent years, the research on the application of blockchain or distributed ledger technology (DLT) has made some progress and become a focus of attention of governments over the world.


In November 2020, China's central bank, the People's Bank of China (PBoC), unveiled the Notice on Issuing Financial Industry Standards to Promote Standardized Application of Blockchain Technology and the Standards for Assessing the Application of Blockchain Technology in the Financial Sector, requiring the establishment of a sound risk prevention and management mechanism for blockchain technology applications. Under the mechanism, external security assessments will be carried out on a regular basis to regulate the application of blockchain technology in the financial sector.


In May 2021, the Ministry of Industry and Information Technology (MIIT) and the Cyberspace Administration of China (CAC) issued the Guidance on Accelerating the Application and Industrial Development of Blockchain Technology. According to the Guidance, enterprises are expected to build blockchain-based supply chain management (SCM) platforms and integrate logistics, information flow, and capital flow to improve supply chain efficiency. New collaborative production systems and capacity sharing platforms will also be built through smart contracts and other technologies to strengthen supply chain synergy. Blockchain is encouraged to be used to breakdown data silos, make data collection, sharing, and analysis traceable, and to promote data sharing and value-added applications.


The distinctions between blockchain and DLT will not be elaborated here. A distributed ledger is a type of database that is shared, replicated, and synchronized among the members of a decentralized network. It records the transactions, such as the exchange of assets or data, among the participants in the network. Such a shared ledger enables all participants to reduce the time and costs incurred by acting on different ledgers.


Due to the recent crypto boom, many equate blockchain with cryptocurrencies. However, the three types of blockchain—public, consortium, and private chains—are DLT products but decentralized to different degrees. For applications that prioritize privacy protection, transaction facilitation, and internal regulation, private or consortium chains are more appropriate.


Blockchain is no equivalent to crypto speculation; it has a lot to offer to the real economy. So, how can blockchain empower the real economy and serve inclusive finance?


01 Building a Digital Identity


Trust and identity are the essentials of finance. How can people without access to traditional finance, especially those without bank accounts, have access to financial services? First and foremost, we need to solve the problem of identity authentication.


Traditional digital identity has many problems. For example, identity data are scattered in different organizations, bringing repeated authentication and difficulties in data sharing; it is costly for the traditional centralized model to gain user's trust, and with low fault tolerance the model is prone to a single point of failure; one's identity data are stored and utilized by other parties, thus causing deficient security and privacy concerns; and the traditional digital identity cannot apply to everyone. Blockchain-based digital identity can solve those problems to some extent. For example, distributed ledgers and blockchain-based identity encryption allow users to hold their private keys while their identity data are shared among multiple organizations. However, it remains to see whether this approach offers a good user experience. The biggest problem now is that if users hold their private keys, whether they should bear the liability once the private key is forgotten, lost, or stolen. Recently, the European Commission has proposed a framework for a European Digital Identity, urging member states to set up a digital identity file system and a digital identity wallet system for all EU citizens. A digital identity wallet enables its users to store and manage their identity data, link their national digital identities with driving licenses, diplomas, medical prescriptions, bank accounts, etc., access online banking, apply for loans, submit a tax return or to enroll at a European university where they need official identification. In this regard, blockchain is an adoptable technology approach.


02 Can the Flow of Data be Facilitated?


When a digital ID system is established, the interconnection of data is critical. As we know, many times the difficulty in financial institutions' credit-granting lies in insufficient data. If secure data access to peers or government departments is granted, it will be conducive to the development of the financial sector, especially of microfinance. However, it should be noted that blockchain itself is not for data storage and circulation. Given the current performance of blockchain, it can only directly store very limited data. Therefore, it is mainly database technology that supports data collection, verification, and storage via local devices or cloud, and the data hashed will be stored on the blockchain as a means of credit enhancement. Blockchain will not be of great innovative significance if it is only used for validation as a tool to enhance data credit or record circulation. A more interesting idea is to create a distributed data economy where the blockchain records its activities for accounting rather than data archiving and tracing. The medium of exchange could be central bank digital currencies or stablecoins. This of course needs to be supplemented by other means, such as secure multi-party computation and federated learning so that even without clearly defined ownership of data, the sharing of data can be accomplished by trading the right to use it. On March 31, Beijing Data Trading System was launched with the establishment of the Beijing International Big Data Exchange. It was introduced as a blockchain-based and privacy computing-supported full-chain trading service system. To figure out how important blockchain is to the system, we need the Exchange's further public disclosure. As the first platform to pilot the trading of“data invisible for security, available for controllable and quantifiable use”in China, it merits attention.


03 How to Promote Supply Chain Finance?


Blockchain and supply chain finance (SCF) are considered to be made for each other. As a complicated, dynamic whole, the supply chain is inclusive of many stakeholders such as independent enterprises including upstream and downstream manufacturers, logistics service providers, and distributors across countries, regions, and industries. With a prominent bullwhip effect, it interlocks its upstream and downstream so that any change will trigger bigger changes to the whole. In addition, it is a network chain system integrating business flow, logistics, information flow, and capital flow; one influences another.


The traceability and tamper-proof features of blockchain data guarantee that all data along the chain are authentic and traceable, forming an important basis for the development of SCF and other businesses. Moreover, blockchain technology delivers reliable transaction records, penetrable corporate credit of chain leader companies, and invoices that can be split to improve the financing conditions of micro, small and medium-sized enterprises at the end of the supply chain.


The blockchain-based platform for trade finance developed by the Digital Currency Institute (DCI) of PBoC and launched in September 2018 is a telling example. Since then, DCI has developed applications based on the platform for multiple scenarios including the scenario of cross-platform and cross-border trade financing with e-trade connect, a Hong Kong trade linkage platform launched in November 2020, tax filing for foreign payments under trade in services, multi-level financing for supply chain receivables, and supervision of international trade accounts. By the end of September 2020, a total of 50 banks have become the platform users and made over 50,000 transactions with more than 194 billion yuan.


However, in general, blockchain and distributed ledger have yet to be improved in terms of system performance and reliability. They are not fully developed in system stability, application security, business model, and privacy protection, to name but a few. In addition, no common technical standards and specialized audit and verification systems have been established across countries. At the moment, they are more suitable for commercialized business scenarios such as non-real-time validation, registration, and transfer with small transaction volumes and low information sensitivity, especially for transaction validation, with advantages in reducing reconciliation costs and improving information timeliness.

(The author is a senior financial journalist)