Cai Weide: How does the blockchain shape the new financial system?

Editor’s note: On May 10, Cai Weide, a senior researcher at the Chongyang Institute for Financial Studies at Renmin University of China, a professor at Beihang University, a chair professor at Tsinghua University, and director of Beihang’s Digital Society and Blockchain Laboratory, hosted the “New Currency War” at Renmin University of China at Chongyang. In the fourth lecture of the "Technology, Market, Supervision" series of live broadcast events, he shared his latest thinking on "Blockchain Technology Reform". The content-zce of this issue is divided into two parts, the following is the live video and the second part of the record. Core points When we look at Bitcoin and PFMI, it is not difficult to find that its risk is very high. A key point between PFMI and digital currency is whether transactions and settlements are separated. Is this a regression or an improvement? Is it possible that the P2P network protocol will eliminate the financial market? This is possible, and now that a large amount of foreign exchange has passed through Bitcoin in many countries, it is known that this is possible. If it is not Bitcoin, there will be new digital tokens that will come out in the future, and their technology will be higher than the current Bitcoin technology. It is complicated to use the blockchain system now. It is not "decentralized", but there are many central units, regulatory units and financial institutions on it. This is a new type of financial blockchain system. Principles of Financial Market Infrastructure: A very important principle of the PFMI structure is the Principles of Financial Market Infrastructure (PFMI). You will find that during the 2008 international financial crisis, if the financial system of the whole world complied with PFMI, the financial crisis in one country would not spread to other countries. Therefore, when PFMI was proposed, more than 150 countries, including China, signed contracts to participate. In 2017, the Bank of Canada took the lead in using PFMI to evaluate blockchain systems. PFMI is an assessment of the financial system. In 2018, I proposed that blockchain basically cannot change PFMI, and blockchain will change because of PFMI. Because financial principles cannot be changed casually, PFMI is a conclusion drawn by thousands or tens of thousands of people, and there is a lot of experience in it. 1. List of PFMI principles Overall structure: 1) Legal basis, 2) Governance, 3) Integrated risk management framework. Credit risk and liquidity risk management: whether there are 4) credit risk, 5) collateral risk, 6) margin risk and 7) liquidity risk. Cai Weide: Regulatory blockchain is the direction of China's development, and blockchain needs to be regulated by law: Cai Weide, a nationally appointed professor and doctoral supervisor of Beihang University, said in an interview with "China Information Industry" that many blockchain systems are now designed to evade supervision. , These must be changed or replaced, and the blockchain that can be supervised is the direction that China should develop. While realizing real-time supervision, it is also protected by the government to avoid risks. Cai Weide suggested that blockchain and applications should be regulated by technology. In addition to regulation, China also needs to pass laws to regulate the blockchain. He suggested that legislative work should be started immediately on blockchain-related applications and industries. The point is that technology needs to be used to regulate technology, not just laws. [2020/3/24] Settlement: 8) Finality of settlement, 9) Currency settlement, 10) How to solve physical delivery. Central securities depository and exchange system (central securities depositories): Regarding why to do 11) Central Securities Depository System (CSD), the British and some units have had discussions, but no mature conclusions have been drawn. In 2019, the Bank of France adopted a blockchain-based CSD system, which is a very important system. 12) Value exchange settlement system. Default management: 13) Default system, rules and procedures for participant-default rules and procedures. 14) Isolation and portability. Business and operational risk: 15) general business risk, 16) custody and investment risk, 17) operational risk. Access management: 18) Access and participation requirements, etc. Efficiency: 21) efficiency and effectiveness, 22) communication procedures and standards. Transparency: 23) Disclosure of rules, key procedures and market data; 24) Disclosure of market data. It can be seen that PFMI is a very complete system. 2. PMFI application and interpretation Only one PFMI is not enough to design a blockchain system. PFMI is a general principle. If it is a traditional system, we use an interpretation based on the PFMI of the traditional system; if it is a new system, we need to explain it according to the PFMI of the new system. Since the Bank of Canada started doing it, many research institutions have been discussing the relationship between PFMI and blockchain. At first, the first-generation blockchain system was formed with Ethereum or some supply chain systems. According to the first-generation blockchain system PFMI, the interpretation of the first-generation PFMI system was generated, and the second-generation block was generated based on this explanation. Chain system design. Every time the explanation is different, the principle is the same, but there will be some gaps when it is used. When discussing the use of PFMI to guide blockchain design, it is necessary to carefully consider the design ideas, because although more than 90% of the problems have been concluded, 5% to 10% still have room for discussion. Voice | Cai Weide: If you try Bitcoin once, you don’t want to go to the bank to send money: The Science and Technology Expo "2019 China Financial Forum" will be held in Beijing on October 23-24, 2019. National Distinguished Professor, Director of Beihang Digital Society and Blockchain Laboratory, and Honorary Dean of CCID Blockchain Research Institute of the Ministry of Industry and Information Technology, Cai Weide attended and delivered a speech. He pointed out that digital fiat currency is fast and fast. He also mentioned that some people say that if you try Bitcoin once, you don't want to go to the bank to send money. Banks now use SWIFT to send money. Now customers choose, and customers will use stablecoins because of convenience, and then go to the bank to do slow remittances, which is impossible now. So the International Monetary Fund said the bank must be reformed. (Sina Finance) [2019/10/23] PFMI is a general principle that needs to be combined with the actual system to be used. 3. Whether transactions and settlements should be separated can be discussed. Some PFMI rules have nothing to do with blockchain systems or digital currency systems. , If the digital currency uses tokens, as long as you get the tokens, it means you have cash, and there is no credit risk. I once said that the Bank of England started because digital currency has no credit risk. With digital currency, the credit risk of currency disappears, but there are other risks, and the financial risk of institutions still exists. 4. PFMI still needs to re-interpret the next-generation financial blockchain system. The general secretary said that China will formulate an international standard, and one of the international standards can be discussed. Under the guidance of PFMI, how to propose the second-generation blockchain system The right to interpretation is a topic that can be studied. 5. Now the evaluation of digital tokens is based on PFMI to evaluate digital tokens. It can be seen quickly: from PFMI, it can be seen that digital tokens are full of risks. 6. Is transaction = settlement good or bad? When we look at Bitcoin and PFMI, it is not difficult to find that its risk is very high. A key point between PFMI and digital currency is whether transactions and settlements are separated. Is this a regression or progress? The U.S. private digital dollar project and the U.S. Department of the Treasury believe that "transaction = settlement" is good, but regulators such as the Bank for International Settlements think it is bad. It can be seen that compliance agencies are divided into two factions, one faction believes that transactions and settlements They should be separated, and the other faction says that they cannot be separated. The Bank of England proposed to build an RTGS real-time gross settlement system. Its "real-time" is 2-hour real-time settlement, and 2 hours is very long in digital currencies. The Bank of England proposes that 2 hours is enough for RTGS-based real-time settlement, but within 2 hours, the regulatory platform may have run risk analysis a thousand times in the background. Voice | Cai Weide: Digital legal currency may have to wait for the 10th generation blockchain technology to be realized: According to financial circles, Cai Weide, a distinguished professor of the "Thousand Talents Program" of the Organization Department of the Central Committee of the Communist Party of China and a professor at Beihang University, said that digital legal currency may have to wait for the 10th generation block chain Chain technology can be realized. It believes that general digital tokens cannot meet the requirements of digital legal currency at all. If the first-generation or second-generation digital token technology is used as digital legal currency, I am afraid that we will encounter "impossible tasks." In addition, it also stated that the blockchain is a sharp weapon for supervision, and the blockchain technology itself can reduce costs, and the saved costs can cover the costs incurred in the supervision process. If the company uses blockchain technology, there is no need for supervisors to manually check the accounts. Because on the blockchain, the company and the supervisory unit can share the ledger, so that the supervision saves the cost of manual audit. [2019/4/17] Block chain core design issues As mentioned earlier, the block chain is block chain + multi-node + Byzantine generals. The block chain basically supports non-tampering; multi-node supports data consistency and digital consistency in distributed systems; Byzantine generals discover liars. The definition of this blockchain supports non-tampering, data consistency, and detection of liars, but this also means that the blockchain has no transactional nature, and the blockchain does not have its own transactional completeness, nor does it discuss supervision. These all need to be added on the blockchain system. As a trust machine, the blockchain cannot be tampered with, data consistency and discovering that insiders are lying are the three basic trust mechanisms of the blockchain. However, the blockchain system does not have its own transaction and supervision. Transactionality means that the same input yields the same result, and consistency + transaction ordering is called transactionality. The ordering of transactions is to always get the same result no matter how the system is run. For example, any optimization (such as parallel processing, sharding, etc.) can be done on the execution, but the final result is consistent, and the final transaction order determines the final result of the financial transaction. For example, the financial system can buy (pay) or sell (income). If there is no income and payment, the system will go wrong. 1. The blockchain system is not transactional, so it cannot support digital currency. Some blockchains have a good consensus and Byzantine generals, but they are not transactional, so they cannot pass the important checkpoints of the Federal Reserve. This chain is basically useless in the financial market. . Transactionality can be done in different ways: a simple method is to find a central node and arrange all transactions, so that transaction integrity can be achieved, but the system becomes a centralized system and becomes a fake Chain instead of blockchain, which is why blockchain has always had a pseudo-chain. Voice | Cai Weide: The development of China's blockchain needs to establish a new regulatory sandbox: According to Nanhai.com, Cai Weide, a special expert of the national "Thousand Talents Program" and a doctoral supervisor of Beijing University of Aeronautics and Astronautics, was at the "Internet +" Innovation and Entrepreneurship Festival in Hainan yesterday. According to the Blockchain Innovation and Application Conference, the regulatory sandbox brings benefits to consumers through the company's financial service innovation, and at the same time enables the company to have funds and the ability to control risks. He proposed that the blockchain industry sandbox plan forms a practical industrial regulatory system through detailed rules, which can prevent, identify, early warning, alarm, and deal with the risks of blockchain industry applications. Cai Weide believes that the development of China's blockchain requires the establishment of a new regulatory sandbox. The promotion and use of the sandbox in China will accelerate the establishment of China's blockchain industry and become a leading country in Asia and even the world's blockchain. [2018/12/12] For example, Bitcoin and Ethereum have tokens, and rollback with a fork, it becomes a so-called probabilistic. The third is to do transactional processing together while doing consensus, which is more difficult. In fact, this is the research I did in 2015. I was doing transactional and distributed processing while doing consensus. The algorithms on both sides are running in with each other. I spent a lot of time making it in 2015 and 2016, but then a new idea emerged, transactions and consensus do not need to be tied together at all, transactions are transactions, consensus is consensus, and this has become the next generation blockchain Blockchain system. Why separate transactions and consensus? Because consensus is only consistency, transactions must have transaction ordering in addition to consistency, so consistency should be at the bottom, and transactionality should be at the top. After this, the entire blockchain core structure and system have changed, and some engineering problems that were previously difficult suddenly become very simple, so this is a major breakthrough for the next-generation blockchain system in 2020. An important concept of financial blockchain Any financial blockchain design must solve transactional and regulatory issues in a distributed environment before considering other system functions, otherwise the chain will have systemic risk or money laundering risk, and the faster the speed , the greater the risk. If these problems cannot be solved, this chain cannot be used in the financial system, because even if there are only one or two transactions that have problems, it will cause chaos in the financial system and the banking system. Robustness, scalability, and security cannot destroy transactional and regulatory capabilities. Every paragraph in the PFMI file that talks about scalability talks about reliability and can be expanded, but it must be very reliable, so if it is not reliable, do not expand. 2. In the past, the P2P protocol almost wiped out the music industry, so this technology is suitable for the financial industry? Voice | Cai Weide: There are five problems in the current blockchain technology that need to be solved urgently: According to Insight.com, Cai Weide, a distinguished professor of the "Thousand Talents Program" of the Organization Department of the Central Committee of the Communist Party of China and director of Beihang's Digital Society and Blockchain Laboratory, said recently that the current blockchain There are still five problems in the technology: weak chain (Liu Guanzhang agreement); false chain (central chain), original in the United States, Chinese cottage; reliability; if the fragmentation technology is not mature, it is compactness; PFMI. If these five problems are not resolved, there will be no way for the blockchain to enter the mainstream society. [2018/9/17] Including Bitcoin and Ethereum, there are many blockchains that have also joined the P2P network protocol after design. First of all, you must know that the P2P network protocol almost wiped out the world's music industry at that time. In the end, a number of music companies came together to sue the founders of the P2P network to restore the music industry, but it also made the entire music industry change its service mode and adopt a large number of online methods. P2P network protocols are very difficult to remove and adaptive. Is it now that the technology that was once almost the world's music industry is suitable for the financial system and currency industry? Until today, many people still put this P2P protocol into the definition of blockchain. Many blockchain books believe that without this protocol, it is not a blockchain system. 3. Using the P2P protocol is preparing the financial industry to be eliminated. Is it possible that the P2P network protocol will eliminate the financial market? This is possible, and now that a large amount of foreign exchange has passed through Bitcoin in many countries, it is known that this is possible. If it is not Bitcoin, there will be new digital tokens that will come out in the future, and their technology will be higher than the current Bitcoin technology. How does the system prevent the P2P network protocol from destroying the financial system? Because there will always be people using such technology, such technology may subvert the current financial system.

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