Opinion: Blockchain Should Stay Out of Currency and Finance
Blockchain was created years ago, but it wasn’t real-world applications that brought it to the market, but brainstorming — hundreds of international seminars over blockchain have been held.
However, no matter how much market participants or experts proselytize about the technology, it is not really suitable for the financial sector. People should keep an objective and sober mind toward so-called innovation in controlling financial risks.
I have three points to make about blockchain. First, blockchain cannot play a role in currency, because its biggest feature is decentralization. Policymaking over currencies is one of the major economic roles of governments, and they must monopolize the issuance of currencies. Such centralized power should not be undermine for the time being.
Second, blockchain technology isn’t a fit for the financial market. From what we can see in the current market situation, blockchain doesn’t seem to be all that useful for raising the efficiency of financial operations.
Third, blockchain may find applications in the real economy and real world. For example, its ability to prevent data from being altered retroactively may come into use in art or archeology.
Why it doesn’t fit the financial sector? All new tech meets doubt and cynicism at first. All apart from blockchain, which doesn’t seem to have experienced much scientific questioning. It has been mythologized and exaggerated. But years have passed, and we haven’t heard about companies or countries that have really used blockchain to solve problems or create new value.
If there are few examples of real-world application for a technology and people almost universally applaud it, there must be something wrong — it’s likely just hype.
Blockchain should stay away from finance. Although China has been stepping up its efforts to control financial risks, blockchain should not be considered a useful tool, neither in terms of enhancing financing efficiency or risk control.
Let’s look at the question of enhancing financial efficiency. The existing payment system is quite advanced, thanks to the assistance of internet networks that have sped up transactions. As each block within the chain has limited capacity, it may reduce efficiency if applied to finance.
Some suggest blockchain can guarantee better credit and prevent fraud. For example, if we use blockchain to record a bill, then any counterfeit bill will be rejected. However, such technology cannot identify scams such as the Ezubao case, in which the P2P lender Ezubao was found to have swindled 50 billion yuan from 900,000 investors using a Ponzi scheme between 2014 and 2015. China is facing financial problems such as illegal fundraising and excessive leverage. Blockchain technology can’t help with these problems.
Rather than using technology to prevent financial risks, I believe systemic measures are better tools.
The authorities in April 2018 released a sweeping set of rules regulating the asset management businesses. These included a new standard for qualified investors and a ban on the implicit guarantee on returns. These systemic changes paved the way for effective risk controls at the financial sector.
We must be clear that technology can only support risk control; it should not be considered a panacea that can deal with everything. If there is no clear proof of a technology’s abilities and some people keep hyping it up, we should be wary that someone is out to just make some quick cash by creating a bubble.
Sheng Songcheng, the former head of the Financial Survey and Statistics Department at the People’s Bank of China, is executive deputy director of the CEIBS Lujiazui Institute of International Finance. This piece has been translated from an interview published in May 2018 by Renmin Zhengxie Bao, the official publication of the Chinese People’s Political Consultative Conference.
Translated by Wu Gang (firstname.lastname@example.org)
Sheng Songcheng, the former head of the Financial Survey and Statistics Department at the People’s Bank of China, is executive deputy director of the CEIBS Lujiazui Institute of International Finance.
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