Blockchain in China's Financial Industry

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Blockchain in China's Financial Industry

Blockchain use cases in China that have been developing and emerging over the past year include the use of blockchain for tax administration, trade financing for small businesses, loan support for small businesses, supply chain finance, insurance claims processing, financial services for cross-border logistics companies, digital identity verification for payments, accounting compliance, venture capital fundraising, and peer-to-peer currency transfers.

1: Tax Administration

  • China appears to be investing heavily in blockchain, as more than 500 blockchain projects have been registered with the government since March 2019.
  • One area of interest for the government is in relation to using blockchain at the country's tax bureaus. The tax bureaus can use blockchain to help with administrative tasks.
  • The State Administration of Taxation in Shenzhen is using electronic invoicing based on blockchain, according to data published in the past year.
  • The very first blockchain e-invoice issued in Shenzhen took place on August 10th, 2018. The State Administration of Taxation worked with tech giant, Tencent, to develop the invoicing technology.
  • Initially, only a handful of businesses were given access to the technology, as the first phase of the launch. However, an article published at the time of the launch said more businesses would gain access to the technology in the future.
  • "Blockchain invoice integrates traditional invoice and electronic invoice. Shenzhen Tax Service and Tencent, by jointly issuing the first blockchain invoice, integrated 'capital flow and invoice flow', combined the issuance of invoice with online payment, and broke barriers between invoice application, invoice issuance, reimbursement and tax payment."
  • "According to Cai Weige, General Manager of Tencent Blockchain, blockchain electronic invoice synchronize transaction, invoice issuance and reimbursement. For tax regulators and supervisors, this technological innovation enables full-process supervision and paperless intelligent tax management, making the process more controllable. Merchants can also increase their operation efficiency through blockchain electronic invoices, thus saving management costs. The innovation makes the issuance and use of invoices more convenient, more standardized, and enables online application and issuance of invoices. Docked with the financial software of enterprises, electronic invoice enables real-time reliable accounting and reimbursement, and it will also facilitate the process of tax returns."

2: Trade Financing for Small Business

  • In March 2020, it was reported that the Chinese government was setting aside $4.7 million in special funding for the development of a blockchain trade finance platform.
  • The money is to be dispersed over a three-year period and is intended to help spur adoption of the platform among businesses.
  • The platform is called the Bay Area Trade Finance Blockchain Platform (BATFBP).
  • The BATFBP allows businesses and banks to "store order, logistics and transaction data on the system to create new transaction efficiencies," while further providing regulators with "greater oversight and gives small and medium-sized enterprises (SMEs) access to more sophisticated financing tools."
  • This initiative is being led by the Public Bank of China's Digital Currency Research Lab.
  • According to McKinsey, one of the key benefits of this platform is that it will allow for lower interest rates and faster loan approval times.

3: Loan Support for Small Businesses

  • China Construction Bank is one of China's four major state-owned commercial banks. In December 2019, the company launched a blockchain platform designed to provide financing support for small businesses.
  • The platform provides assistance to small businesses with regard to selling their financial claims. These financial claims include things like "short-term notes receivable at a discount in return for immediate cash payments via the platform."
  • Using the platform, the bank can "buy financial claims from factoring companies that had previously purchased the assets from small businesses"
  • In addition to this buy-sell service, the platform will also facilitate other financial services, such as credit risk guarantees and receivables management.
  • According to insights published by CoinDesk, "many of the financial services could be used for export companies to gain short-term liquidity since they tend to go through a time-consuming process to receive the payments from their importers."
  • China Construction Bank is not the only bank using blockchain to assist small businesses. The Bank of China is also using blockchain for this purpose. In December 2019, the bank accounted that it had completed issuing around $2.8 billion in loan bonds for small businesses using blockchain.

4: Supply Chain Finance

  • The 'China Blockchain Finance Application and Development Research Report' analyzed 47 companies across 112 blockchain projects in China. The report found that 32.6% of the companies surveyed were developing blockchain technologies for supply chain financing.
  • Supply chain finance is an "optimization practice that aims to provide efficient financing of the value chain. The goal of both parties — buyer and seller — is to reduce working capital, and improve cash flow at a diminished cost by deploying the buyer’s credit rating. As such, SCF provides short-term credit which allows buyers to extend their payment terms, and enables suppliers to receive earlier payments."
  • In March 2020, it was reported that China Everbright Bank launched a blockchain supply chain finance solution, developed by Ant Financial (a division of Alibaba). The solution is called 'Duo Chain' and is essentially a "network services platform designed to handle supply-chain related financial transactions."
  • China Everbright Bank hopes that the security of supply chain financing will be improved as a result of implementing the blockchain solution, especially in regard to fraudulent transactions.
  • China Shipbuilding Industry Company and Shanghai Bank also collaborated to develop a blockchain supply chain finance platform, however, this initiative took place in 2018.

5: Insurance Claims Processing

  • According to the 'China Blockchain Finance Application and Development Research Report', around 11.6% of the companies surveyed said they are developing insurtech based on blockchain.
  • China's insurance industry sees blockchain as an opportunity to cut transaction-related costs, lessen the impact of credibility frictions, and improvise liquidity in regard to transferable assets and policies.
  • Around the start of 2019, AntFinancial launched an invoicing system that increased the speed at which health insurance claims can be processed. The system made this process more efficient through the use of consensus nodes.
  • Consensus nodes help to "instantaneously synchronize data and information flow" between hospitals and insurance companies.
  • As a result of this solution, insurance claims can be verified and processed within mere seconds.

6: Financial Services for Cross-Border Logistics Companies

  • OneConnect Financial Technology and China Merchants Port Group recently announced a partnership wherein they will develop a logistics platform based on blockchain.
  • "The platform will include information from Chinese custom services, port operators, logistics companies, financial institutions and export and import firms in one single system via shared databases on chain."
  • The platform help make financial services more accessible to logistics companies. Another goal of this platform is to provide more efficient logistics tracking while lowering costs.
  • "The system will have five databases to manage information about trade companies, goods, logistics, contracts, and documents and certificates. It could help government agencies to better supervise international trade and reduce processing time for financial institutions to provide export and import firms with trade finance services."

7: Digital Identity Verification for Payments

  • Online financial transactions require identity verification. This process consists of multiple steps that are a pain point for consumers as they need to be repeated for every new vendor/provider.
  • Blockchain provides a way for consumers and companies to make the verification process faster because it allows for identity verification to be reused across multiple different services/vendors in a way that is more secure.
  • In 2019, Ant Financial announced that it used blockchain technology to help manage online shopping traffic for Singles' Day in China. Singles' Day is held on November 11th in China and generates a lot of shopping behavior.
  • Ant Financial worked with online market places and e-wallet providers to track digital identities, along with providing a range of other blockchain benefits, such as product tracking and supply chain financing.
  • One industry insider involved in the initiative stated, "Ant Financial’s blockchain digital identity solution aims to help Chinese merchants operate on overseas e-commerce marketplaces and serve global shoppers more efficiently.
  • The blockchain allows merchants to "create and store digital identities which can then be quickly verified by overseas marketplaces they wish to sell on." This process speeds up approval processing from days to minutes.

8: Accounting Compliance

  • Overall, accounting is an area that has been slow to adopt digitization, largely due to the fact that it operates in an environment that is highly regulated when it comes to data requirements.
  • Despite this, blockchain is capable of simplifying compliance and making bookkeeping systems more efficient.
  • In April 2020, it was announced that China had launched the 'National Blockchain and Distributed Accounting Technology Standardization Technical Committee.' The goal of this committee is to set national standards in regard to blockchain technology.
  • This set of standards will "comprise basic standards, process and method standards, business and application standards, information security standards, and credible and interoperable standards" in hopes that these standards will spur blockchain adoption across industries.
  • It can be reasonably assumed that these standards will enable blockchain to be used in aspects of accounting that are currently being prevented due to regulation.

9: Venture Capital Fundraising

  • "Blockchain companies are accelerating the process [of venture capital fundraising] by raising funds with several alternatives. These include Initial Exchange Offerings (IEOs), Equity Token Offerings (ETO), and Security Token Offerings (STOs). STO is currently the most popular option because it’s legally protected."
  • Although these alternatives are currently illegal in China, there has been plenty of discussion in the past year surrounding China's desire to move to a digital yuan currency, as doing so would resolve a number of issues caused by traditional payment systems.
  • Weimin Guo, Chief Scientist of the Bank of China said that once China has developed this digital currency, the country will be "opening the doors to security token offerings (STOs).
  • Chinese officials verified that STOs would be allowed to launch under these conditions, with strict regulations in place.

10: Peer-to-Peer Currency Transfers

  • Traditional P2P transfer applications come with a number of issues. Some of these issues include geographical limitations on where money can be transferred, high costs associated with service fees, and cybersecurity issues. However, P2P services based on blockchain can serve as a solution for these issues.
  • In September 2019, it was reported that Bitcoin exchange, Hodl Hodl relaunched in China after working around some firewall blocks. The presence of this company serves to make P2P Bitcoin trades in China to become easier.
  • Statements from the company suggest that "there's a huge demand in [China] for P2P trading," and Hodl Hodl expects China to be one of their biggest markets.