Deepening the Exploration and Application of Blockchain in Financial Infrastructure
In 2023, the Central Financial Work Conference proposed that "five major articles" on technology and finance, green finance, inclusive finance, pension finance and digital finance should be done well. In January, 2024, General Secretary of the Supreme Leader proposed at the opening ceremony of the special seminar for leading cadres at the provincial and ministerial levels to promote high-quality financial development that we should establish and improve an independent, controllable, safe and efficient financial infrastructure system. In recent years, under the wave of digitalization and the rapid development of digital currency, the major financial infrastructures at home and abroad are actively trying to provide digital securities services by using blockchain technology to promote the digital development of financial markets. At present, China’s financial infrastructure exploration has been ahead of the international peers and has the level of international dialogue. In the next step, on the basis of previous exploration, we can further deepen the application, promote the high-quality development of finance and accelerate the construction of a financial power.
The necessity of exploring the application of blockchain in financial infrastructure
Exploring the application of blockchain can accelerate the digital transformation of financial infrastructure, meet the diversified needs of the market, compete for the right to speak internationally, and better safeguard financial security.
(1) Explore the path of digital transformation. Blockchain application is generally considered as a feasible way to promote the development of digital assets. It is a new way to promote the digital transformation of the financial market to explore the blockchain digital bond business and market institutions to build a blockchain system.
(2) Providing diversified market services. Compared with commercial institutions trying to build their own blockchain system, financial infrastructure provides a public platform for blockchain digital bonds, which is conducive to giving full play to professional advantages, meeting market diversification needs and saving market operating costs.
Iii. Improve the efficiency of cross-border bond business. In addition to free trade zone bonds, other offshore bond businesses have problems of self-issuance and multi-level custody. The financial infrastructure provides a public blockchain digital bond service platform, which can reduce the risk of self-issuance by market institutions, shorten the cross-border settlement cycle of overseas investors and improve business efficiency.
(4) Enhance international influence and voice. At present, major international financial infrastructures are actively exploring the application of blockchain technology and trying to carry out securities trading settlement business on the blockchain. China’s financial infrastructure can have equal rights in international dialogue and participate in potential international cooperation only if it has the corresponding supporting capacity through exploration and practice.
(5) Better safeguarding financial security. The application of blockchain technology can enhance the penetration of market information, strengthen penetration supervision and maintain financial security. Exploring blockchain digital bonds in financial infrastructure can make a good technical reserve for digital currency to apply to the bond market and enhance the autonomous and controllable ability of cross-border settlement system.
Practice of exploring the application of blockchain in China’s financial infrastructure
(1) Mainland China. China’s financial infrastructure, represented by the Central Clearing Company, began to explore and study blockchain technology in 2018, and is committed to providing safer, more efficient and diversified services to the market. Blockchain technology has been applied to credit asset circulation, corporate bond acceptance review and digital bond issuance.
In 2020, Yindeng Credit Assets Blockchain Platform uses the technical characteristics of blockchain technology, such as information traceability, information storage and multi-point collaboration, to meet the requirements of business development for asset penetration registration. By building a blockchain platform for credit assets, the scope of sharing effective information has been expanded, and mutual trust between banks has been further enhanced. Based on the characteristics of blockchain technology, such as tamper-proof, openness, transparency, safety and reliability, the enterprise bond blockchain platform realizes document storage and information traceability in all links, strengthens market credibility, and creates an open, transparent, digital and intelligent enterprise bond service platform for regulatory authorities and market institutions.
In 2021, the Central Clearing Company explored the use of blockchain to support the bond issuance business, formed a blockchain digital bond issuance business plan and system prototype, and used the technical advantages of blockchain encryption algorithm, privacy protection, identity recognition, smart contract, etc. to improve the transparency and efficiency of bond issuance business and help strengthen penetration supervision.
At the beginning of 2022, 16 ministries and commissions jointly issued a document, listing the Central Clearing Company as a national blockchain innovation application pilot. In November of the same year, the Central Clearing Company launched the first self-controlled blockchain digital bond issuance public platform in China. The platform adopts alliance chain, implements centralized management, and co-builds and co-governs with market institutions; Independently developed in technology, it supports full-node, light-node and nodeless access, and supports inter-operation such as up-chain, down-chain, isomorphic chain and heterogeneous chain. Functionally support the whole process of bond issuance. By the end of 2023, it has successfully supported the issuance of bonds with a scale of 84.54 billion yuan, including financial bonds, corporate bonds and free trade zone bonds. The systematic application has filled the gap in domestic financial infrastructure supporting the issuance of offshore bonds and played an important role in promoting the integration and development of digital economy and real economy. And two representative institutions have realized cross-chain application and have the ability to support supervision; In the exploration and practice, the China Securities Clearing Corporation has summarized and formed two enterprise standards, namely, the China Bond Blockchain Digital Bond Issuance Platform Specification and the China Bond Blockchain Digital Bond Issuance Platform Interface Specification, one of which is the first standard in the field of blockchain digital bonds, realizing the replication and popularization of excellent experiences and practices; We have carried out research on issues such as blockchain supporting bond life cycle business and digital currency settlement of digital bonds.
(2) Hong Kong, China. Hong Kong is also actively exploring the blockchain digital bond business. In 2021, the Hong Kong Monetary Authority and the Bank for International Settlements cooperated to explore the innovative application of blockchain and carry out the simulation test of tokenized green bonds. In 2022, the Hong Kong Monetary Authority explored the use of blockchain technology to realize DVP settlement of bond tokens and cash tokens.
In 2023, the Hong Kong Monetary Authority supported the Hong Kong SAR Government to issue token-based green bonds, which was the first batch of token-based green bonds issued by the government in the world. After the issuance of token bonds, explore the use of blockchain to support secondary market trading and interest payment services. In August of the same year, the Hong Kong Monetary Authority issued a report entitled "Tokenization of the Hong Kong Bond Market", proposing to popularize the issuance of bonds in token form and promote their wide application.
Related Practice of Exploring Blockchain in Financial Infrastructure in Other Countries
(1) the United States. In 2020, the American Securities Depository and Clearing Corporation applied blockchain technology to verify the token stock business. The underlying platform of blockchain adopted private chain, which was jointly developed by several market institutions and technology companies, and was mainly used to verify the feasibility of blockchain technology supporting stock issuance, clearing and settlement. The token stock platform is parallel to the traditional stock settlement platform, using parallel account book mode, with the aim of providing users with diversified choices. Trading orders are initiated by market participants through customer nodes, processed on the token stock platform, and then transmitted to the traditional business system for settlement. Trading funds are in traditional currency, and trading records are subject to the traditional business system.
(2) Europe. 1. European Bank for Clearing. In 2021, the European Bank for Settlement led the joint market institutions to simulate and verify the use of the central bank digital currency to settle French government bonds in the blockchain. The underlying platform is a private chain, and the test scope includes bond issuance, transaction settlement, repurchase and interest payment. DVP settlement instruction is realized through the exchange of currency pass and securities pass. After the currency pass is issued, it is transferred to the wallets of participating members for settlement of securities transactions in the primary and secondary markets. Experiments show that DVP settlement based on the general card mode is as effective as the account-based mode.
2. Mingxun Bank. In order to cooperate with the German Digital Securities Law and support the digitalization of bonds, Mingxun Bank launched the blockchain digital bond platform plan, which is intended to cover the complete value chain of bonds, including issuance, custody, settlement and asset services. The platform includes four modules: one is the digital bond issuance module; The second is the central registration and custody module based on private chain; The third is the "decentralization" service module of private equity securities based on public chain, which has not been launched yet; The fourth is the information transmission channel module. In December, 2022, Germany’s Fuxing Credit Bank issued the first digital bond since the promulgation of the German Digital Securities Law through the platform of Mingxun Bank.
3. Swiss Exchange. The Swiss Exchange, in conjunction with the Swiss National Bank and the Bank for International Settlements, explores the use of different types of central bank currencies to settle digital securities on the blockchain platform. Swiss exchanges use both digital currency and traditional currencies for settlement tests. When digital currency is used for settlement, the securities buyer converts the traditional currency into digital currency, and after settlement, digital currency directly transfers it to the traditional currency account of the digital securities seller. When traditional currency is used for settlement, the blockchain securities settlement platform is interconnected with the Swiss central bank’s large payment system, that is, the large payment system is triggered after the chain securities are locked successfully, and the funds are transferred in the large payment system. After the transfer of funds is completed, the blockchain platform is triggered to transfer the securities from the seller to the buyer.
(3) Singapore. In 2016, the Monetary Authority of Singapore explored the use of blockchain for inter-bank market payment and securities clearing and settlement, and explored the DVP settlement of government bonds and Singapore dollars on the blockchain. Government bonds are digital securities, which are in a different chain from digital currency. Digital securities and digital currency are settled separately in two account books. In 2022, the Monetary Authority of Singapore established a pool of liquid assets on Ethereum, including digital Singapore government bonds, Japanese government bonds, Japanese yen and Singapore dollar, and conducted a simulation experiment on the real-time exchange of certified Japanese yen and Singapore dollar and the settlement of certified government bond transactions.
(4) Transnational cooperation. 1. Cooperation between European and Japanese central banks. In 2016, the European Central Bank and the Bank of Japan explored the simulation verification of blockchain technology in securities settlement business, and proposed two settlement modes. First, the settlement is made in the same account book, and the securities and funds are recorded in the same account book. Both parties to the transaction directly use encrypted signatures for transaction processing, and the transaction instructions are verified and confirmed through the consensus mechanism, and the transaction results are written into the account book. Second, different account books are used for settlement, securities and funds are recorded in different account books, and both parties to the transaction realize the information interaction between the two account books through digital signature and hash time locking contract. Hash time lock contract is used to ensure that the securities and funds are returned to the original holder if the necessary processes are not completed within the predetermined time. Comparatively speaking, the business risk under the same account book mode is relatively small.
2. Cooperation of Swiss-French Central Bank. In 2021, the Swiss National Bank, the French Central Bank and the Bank for International Settlements jointly launched a simulation test of digital currency settlement digital securities, aiming at using digital Swiss francs and digital euros to settle financial instruments such as stocks or bonds on the blockchain. The contents of the simulation test include: the issuance and redemption of the wholesale central bank digital currency; Issuing and redeeming securities on the traditional business platform, and mapping on the digital exchange platform under the Swiss Exchange; Realize DVP settlement of digital securities on the platform of digital exchange; PVP settlement between different digital currency is realized on the platform of digital exchange.
International comparison and enlightenment
(1) Comparative conclusion. Comparatively speaking, China’s financial infrastructure-related practices are ahead of international peers in business, technology, management and standards.
In terms of business, China has realized production application and value winding. The construction of China’s blockchain digital bond system does not change the business rules, making the application of new technologies compatible with the regulatory business rules; Participants and supporting bonds are rich, including state-owned commercial banks, joint-stock banks, city commercial banks and enterprises. The supported bonds cover corporate bonds, ordinary financial bonds, special financial bonds and free trade zone bonds, and the scale of bond issuance supported is higher than that of international peers.
In terms of technology, China adopts alliance chain design and self-built platform, and the technology is controllable. The construction of China’s blockchain digital bond system can support multiple access modes, reducing the participation cost of market institutions; Through cross-chain docking, the interaction efficiency of business data is improved; Outside the financial infrastructure, multiple full nodes are deployed to record multiple full account books, which enhances the robustness of the system; Independent research and development of data privacy protection function, centralized management consensus mechanism and separated access control have improved the security of the system.
In terms of management, the system operation is co-constructed and co-managed under centralized management. The alliance chain does not change the legal central confirmation attribute of financial infrastructure and the management authority of members’ access, but it efficiently realizes the formation of consensus in business processes through smart contracts. On the premise of observing alliance governance, market institutions carry out business innovation and provide useful feedback and cooperative supervision.
In terms of standards, two standards in the field of digital bonds have been issued, which have the basis for participating in the formulation of international rules. In the standard content, the digital bond is defined for the first time, the alliance governance standard of centralized management is put forward, the technical requirements and performance requirements of system construction are clarified, and the data standards of interaction between different systems are clarified. Promote business development through standard construction.
(2) Relevant enlightenment. First, both traditional currency and digital currency can support digital securities settlement business. When the traditional currency is used for settlement, the blockchain system and the traditional payment system are directly or indirectly docked, and the direct docking realizes value exchange, while the indirect docking only transmits capital information; When digital currency is used for settlement, the blockchain system and digital currency system are directly connected to realize value exchange.
Second, the operation of blockchain digital securities still needs centralized management. The system construction, intelligent contract writing, technological innovation, alliance governance, market cultivation, risk monitoring and conflict resolution of blockchain digital securities are inseparable from centralized management. In the process of business operation, centralized management helps to ensure the stable, standardized and efficient operation of business, is an important prerequisite for effective co-construction and co-governance, and can also reasonably weigh the privacy protection requirements of participants and transparent information sharing, which is an intensive and efficient model.
Third, blockchain digital securities services should be provided by financial infrastructure. Some market-oriented institutions in the world have established a blockchain digital securities service platform, and they cannot provide registration and custody services because they do not have financial infrastructure qualifications. After the issuance of securities, it is still necessary to register with the financial infrastructure institutions for custody. From the legal point of view, only financial infrastructure can provide the full life cycle service of digital securities.
Fourth, financial infrastructure has significant advantages in providing related services. Compared with ordinary commercial institutions, the blockchain digital securities system established by financial infrastructure has public attributes and more economies of scale; Providing centralized and unified registration and custody services for the market can avoid fragmented development; Rich experience in securities services, more professional; Not for profit, it participates in market construction as an independent third party, with high credibility and advantages in risk monitoring and dispute resolution.
Fifth, the blockchain system can be integrated with traditional business systems. The international financial infrastructure is actively exploring the application of blockchain technology in the areas of securities issuance and settlement. Many countries have proved that it is feasible for blockchain to support securities business, and blockchain systems can be effectively docked and integrated with traditional systems. In addition, innovative business functions can be explored in the blockchain system to provide a useful supplement to the traditional system.
Thoughts on deepening the application of blockchain in financial infrastructure
At present, the exploration of China’s financial infrastructure in the field of blockchain digital bonds has achieved initial results, but the blockchain system is still relatively independent, and the application business scenarios need to be enriched. In the future, we can further expand business scenarios, promote system interconnection and deepen exploration and application.
(1) Promote the docking between the blockchain system and the payment system. The digital bond system based on blockchain technology can be interconnected by systems such as cross-chain, on-chain and off-chain interoperability, and is compatible with traditional monetary payment methods and digital currency payment methods. From the existing practical experience, blockchain digital bonds can be settled in digital currency or in traditional currency. Comparatively speaking, using digital currency for settlement is more efficient. Next, we can consider expanding the application scenario of digital RMB to the field of digital bonds, and explore the use of digital currency to settle digital bonds under the regulatory framework.
(2) Realize the interoperability between the blockchain system and the traditional business system. In the early stage of the development of blockchain digital bonds, it is necessary to import the account information of market institutions from the traditional system into the blockchain system to support the development of digital bond business, and also to import the bond registration information of the blockchain system into the traditional business system to ensure the integrity of business data and support business statistics and supervision. In the future, the business operation and monitoring of the bond market will still be dominated by traditional business systems, with the blockchain digital bond system as an important supplement. Therefore, the blockchain digital bond system should realize interoperability with traditional business systems and maintain the vitality and vitality of sustainable development.
(3) Take the blockchain system as a test carrier for innovative business. The high-quality development of the bond market is inseparable from the exploration of innovative business. In order to maintain the security and stability of the traditional business system, innovative, exploratory and uncertain businesses can be tried first on the blockchain digital bond system. Blockchain system is a natural high-quality experimental field. On the one hand, under the distributed accounting mode, full account books can be deployed at multiple nodes, which makes it easy to recover data when the system is unstable. On the other hand, the blockchain system and market institutions discuss and build together, which naturally forms an alliance for joint exploration of innovative businesses.
(4) Take the blockchain system as an important backup of the traditional business system. Blockchain system provides more choices for ensuring business continuity. In extreme cases, when the traditional bond business system is unstable or temporarily unavailable, the blockchain digital bond system can be used as a backup system to ensure uninterrupted business. Blockchain system and traditional business system complement each other and develop together, which can better maintain the safe and stable operation of the bond market.
(5) Explore the integrated bookkeeping system of "pass card+account". Traditional bonds adopt an account system, with customers as the basic unit, and establish a corresponding relationship between relevant bond elements and holders. Blockchain digital bonds adopt a pass system, with a pass as the basic unit, and relevant records are encrypted and cannot be tampered with. The account system is more efficient in query, and the general certificate system has more advantages in information transparency and tamper prevention. Blockchain digital bonds can consider merging two bookkeeping modes, adopting a pass system for bookkeeping within the blockchain system and setting up an account system in the user inquiry function.
(VI) Promoting the unified and standardized development of the market through the construction of a standard system. Blockchain digital bonds are in the exploratory and experimental stage at home and abroad, and the related technical terms, business logic, technical platform and so on lack normative standards. As a system provider and centralized management institution, financial infrastructure should be summarized and refined in the exploration and practice, promote the establishment of relevant standard systems, promote the unified and standardized development of the market, and lay the foundation for participating in the international rules and regulations.
(7) Take the blockchain system as a starting point for maintaining national financial security. Exploring the use of digital currency for blockchain digital bonds in cross-border settlement scenarios may provide a new cross-border settlement model, which is conducive to breaking the restriction of existing cross-border RMB settlement by other information transmission channels, exploring the establishment of a safe and convenient channel for cross-border RMB application, and better safeguarding national financial security.
Using blockchain to promote the interconnection of international financial infrastructure
At the opening ceremony of the seminar on promoting high-quality financial development for leading cadres at the provincial and ministerial levels, General Secretary of the Supreme Leader proposed that it is necessary to strengthen the interconnection of domestic and foreign financial markets, improve the facilitation level of cross-border investment and financing, actively participate in the reform of international financial supervision, and keep the bottom line of financial security under open conditions. Interconnection between domestic and foreign financial infrastructure is an important technical support to realize the interconnection of financial markets. Constructing an autonomous and controllable settlement system for cross-border securities transactions is conducive to coordinating financial development and financial security.
In order to prevent financial sanctions in the field of cross-border payment, China’s central bank, together with the Central Bank of the United Arab Emirates, the Bank of Thailand and the Hong Kong Monetary Authority, used blockchain technology to carry out the digital currency Bridge project of multilateral central banks, built a new self-controlled cross-border payment infrastructure, and successfully completed the real currency swap in the chain.
The digital currency Bridge project of the multilateral central bank has achieved self-control at the level of "funds", but at the level of "bonds", it is necessary to build an international central securities depository system (ICSD) with self-control. At present, ICSD is mainly established by individual national financial infrastructure, with strong sovereign will, and there are many uncontrollable factors for other participating countries, which is not conducive to the interconnection of international financial infrastructure. From the perspective of maintaining the security of financial openness, we can consider using blockchain technology to build a distributed ICSD with multilateral cooperation, common governance and sharing, and political neutrality.
Distributed ICSD is a set of cooperative mechanism for synchronous bookkeeping of registered custodians in various countries. Under the condition of not amending the laws of various countries, through blockchain technology, the account books of registered custodians in various countries are guaranteed to be consistent, the cross-border transaction settlement of securities is realized, and the opening level of the capital market is improved. The specific implementation method is: the registration and custody institutions of all countries access the international interconnection platform in the form of consensus nodes, so as to realize the docking between the internal registration and custody systems of all countries and the international interconnection platform. During the settlement of cross-border securities transactions, the registration custodian institution of the business initiating country sends a request to the international interconnection platform in the form of standard messages, and the international interconnection platform completes instruction processing and synchronously updates the account books of all consensus nodes, and at the same time feeds back the response results to the initiating system, which conducts internal data processing (see figure).
Under the background of the rapid development of digital currency and the successful practice of digital currency Bridge of the Central Bank, we can also consider connecting the international interconnection platform with the cross-border payment system in digital currency, so as to realize the closed loop of cross-border financial security in terms of "vouchers" and "loans", and jointly promote financial opening and safeguard financial security.
(Author Tang Bin is a doctoral student at the China Institute of Finance, Southwestern University of Finance and Economics; Chen Sen is an expert in China Bond R&D Center of the Central Clearing Company)
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