China’s second largest bank will carry out a $3 billion bond issue on the block. The minimum ticket to invest is 100 dollars.
Banks are becoming more and more involved in the world of the blockchain. The latest example is the China Construction Bank. China’s second largest bank is going to carry out a bond issue of 3 billion dollars on the block chain. This type of operation is not an isolated case, since other major banks, including Société Générale, through its internal start-up Forge, have already carried out operations of this type. This Chinese operation is of particular interest to the crypto ecosystem since the bonds will be able to be purchased in Bitcoin, in addition to dollars. This is news that further democratizes the incursion of crypto money into traditional finance. “We believe this will be the beginning of crypto 2.0 – the true institutionalization of digital assets,” said Henry Chong, CEO of Fusang, the Malaysian exchange on which the bonds will be available.
Definition of the blockchain
Blockchain is a technology that allows information to be stored and transmitted transparently, securely and without a central control body. It resembles a large database that contains the history of all the exchanges made between its users since its creation. The blockchain can be used in three ways: for the transfer of assets (currency, securities, shares…), for better traceability of assets and products, and for the automatic execution of contracts (“smart contracts”).
The great particularity of the blockchain is its decentralized architecture, i.e., it is not hosted by a single server but by a part of the users. There is no intermediary so that everyone can check the validity of the chain himself. The information contained in the blocks (transactions, property titles, contracts, etc.) is protected by cryptographic processes that prevent users from modifying it afterwards.
Applications of the blockchain
Blockchain technology is still young but some applications are already operational. One of the most widespread is food traceability. Carrefour is one of the precursors with its QR code affixed on several types of food (chicken, tomato, egg…) which allows to know everything about the origin of the product (origin, name of the producer, date of packaging…). Automatically triggering an indemnity is an application that insurers are very interested in. This is made possible via smart contracts, stand-alone programs that run automatically following predefined conditions. For example, Axa makes it possible to compensate passengers for a delayed flight. Finance has also made good progress in the field of blockchains, particularly in the field of “security tokens”, financial securities that are digitized and registered on the blockchain. For the issuer of the token, there are only advantages: fewer intermediaries, almost immediate execution and settlement, and a cheaper process. The video game world has found a use case in the blockchain: digitizing the features. Thanks to a token system, players actually own their items (and no longer the editor) and can buy, sell and exchange them at their leisure. There are many others, such as securing commercial transactions in trade finance or disintermediation in advertising.
The bitcoin blockchain
Bitcoin is the best-known use case of blockchain. It was created in 2008 by an unknown person whose pseudonym is Satoshi Nakamoto. It designates both a secure and anonymous payment protocol and a crypto money. Anyone can access this blockchain (it is public, therefore open to all) and therefore use bitcoins. To do this, all you have to do is create a virtual wallet, which can be downloaded from the application stores. The crypto wallet allows you to buy goods and services and can be exchanged for other currencies.
Some platforms offer the conversion of dollars, euros or yuans into Bitcoins. This is the case of Paymium, a French company that allows bitcoins to be exchanged for euros. Bitcoin has a very volatile exchange rate. It can increase or decrease by 20% in only two days. This volatility is linked to the strong speculation around this currency and the absence of a regulatory authority. At the beginning of December 2017, the price of Bitcoin exceeded $15,000 for the first time. It increased by more than 1000% over the year 2017. Faced with this surge, the Autorité des marchés financiers (AMF) and the Autorité de contrôle prudentiel et de résolution (ACPR) warned investors about the risks associated with the purchase of bitcoin. “This valuation may collapse in the same way. Buying/selling and investing in bitcoin is currently done outside of any regulated market. Investors are therefore exposed to very high risks of loss in the event of a downward correction and have no guarantee or protection of the capital invested”, the two regulators state in a statement. The latter would be increasingly solicited by investors in this respect. via their call centers. In Japan, Bitcoin was recognized as a legal means of payment on April 1, 2017. The capitalization of the first crypto currency reached 191 billion dollars in November 2017.
The Ethereum blockchain
The Ethereum blockchain has become as popular as Bitcoin. Created in 2014, Ethereum also uses its own crypto currency: ether. Its price is lower (about $700 at the beginning of March 2018) than that of bitcoin, but its capitalization reached $66 billion in March 2018.
Unlike Bitcoin, which only allows simple transactions (mainly payments), Ethereum goes further. It enables the running of “smart contracts”, autonomous programs that automatically execute actions previously validated by the stakeholders. Ethereum and these smart contracts are of interest to the banking and insurance industry, but also to the legal profession. In the future, these actors will be able to certify transfers of ownership in a more secure way or to pay compensation automatically. Axa was the first insurance company to release an insurance based on the blockchain. In September 2017, it launched an automated insurance for aircraft flight delays. Based on the Ethereum blockchain, this insurance is in fact a “smart contract” that triggers an automatic reimbursement once the delay has been noted. This offer, called Fizzy, was developed with the start-up Utocat, which publishes a platform to accelerate the design of blockchain prototypes.
On the banking side, many projects are underway. For example, UBS and IBM have launched an initiative to design a trade finance platform based on the blockchain. Called Batavia, this technology would allow banks and their clients to automate this process, which is still very manual and done on paper. In concrete terms, Batavia will make it possible to track a transaction from the departure of the merchandise until its arrival at the port of destination. A pilot should be launched in the first quarter of 2018. Another example: Crédit Agricole is experimenting with the blockchain for money transfers from their cross-border customers, via the Ripple protocol. The customers concerned will be able to transfer their salary in Swiss francs to their French bank account in a few minutes instead of three days at present. This can be done via a mobile application. The blockchain will also enable real-time settlement of transactions, “greater transparency of the exchange rate applied to the transaction and the reduction of structural costs,” according to a statement from the bank. The test will last six months before being generalized throughout France.
Other industries are experimenting with the blockchain, such as Boeing. The American manufacturer has filed a patent application for a system based on the blockchain which would allow to reinforce the GPS systems of the planes. The application published last December 14 by the U.S. Patent Office mentions an “on-board backup and anti-spoofing GPS system (usurpation of GPS location)” that could be used in case of malfunction of the main system of an aircraft.
Private blockchain versus public blockchain
The difference between the private and public blockchain is the degree of openness. The public blockchain can be viewed and used by everyone. Anyone can send transactions to it and expect them to be recorded in the registry (if they comply with the rules of this blockchain). This is the case for the Bitcoin and Ethereum blockchains. In the private blockchain, an organization can modify the protocol whenever it wants. No one can participate without being authorized, but everyone can consult it. Private blockchains are used a lot by companies to experiment internally. They can also be used to connect different information systems that do not speak well to each other within the same organization. There is also the “permissionned” blockchain in which an entity has control authority over the network. This is the case of the Ripple blockchain because it is a start-up (of the same name) that determines who can validate transactions on the network.
The “consortium” blockchain brings together several actors who have rights and the decisions are taken by the majority of the actors. For example, a dozen financial institutions could agree and organize a blockchain in which a block would have to be approved by at least 8 of them to be valid. This is therefore very different from the private blockchain and the public blockchain. Not only are the participants in the approval process limited and selected, but it is no longer the majority rule that is required. This hybrid blockchain is a real advantage for financial sector actors because they operate in regulated environments and are obliged to know the identity of the participants (which is not the case in the public blockchain). The best known blockchain consortium is R3. It includes about 100 financial institutions, including BNP Paribas. In May 2017, it raised 107 million euros.