Blockchain, Digital Currency and ICO
Abstract: Blockchain is a disruptive technology with the characteristics of decentralization, distribution and self-organization. The theoretical basis of its design is the mechanism design theory of neoclassical microeconomics. The development of blockchain can be divided into three stages. The first stage is distributed network. The second stage is to establish an accounting system on the distribution network. The third stage is called shared blockchain. The emergence of blockchain will reverse the trend of Internet centralization, and maintain the credit system of the whole society. Dr. Xiao Feng explained and compared digital currency, IPO and ICO, analyzing the development stage of digital currency and the current regulatory difficulty of digital assets. Finally, he expressed optimism for the development of digital assets.
On the evening of December 5th, 2017,at the invitation of professor Ba Shusong, Dr. Xiao Feng, the vice chairman and executive director of China Wanxiang Holding Co., LTD., attended the “ Lecture on Finance in Peking University HSBC Business School” and gave a wonderful lecture called “Blockchain, Digital Currency and ICO”. Professor Ren Ting, the assistant dean of Peking University HSBC Business School, teacher Li Zhiyi and more than 1,000 students and scholars, as well as the public, attended the lecture.
Mr. Ren Ting firstly gave a speech and introduced Dr. Xiao Feng who is our distinguished speaker. Dr. Xiao Feng is the Vice Chairman and Executive Director of Wanxiang Holding Co., Ltd., Vice Chairman of Minsheng Life Insurance Co., Ltd., Chairman of Wanxiang Trust Co., Ltd., Chairman of Minsheng Tonghui Asset Management Co., Ltd., Chairman of Tonglian Data Co., Chairman of Zhejiang Commercial Fund Management Co., Ltd., Chairman of Wanxiang Blockchain Co., Ltd. Dr. Xiao Feng has more than 20 years experience in securities industry and asset management. Boshi Fund Company established by him is one of the largest fund companies in asset management in China.
In the lecture, Dr. Xiao Feng introduced the background of the emergence of blockchain. He noted that blockchain could be called a disruptive technology. He believes that people are currently in the process of migrating from physical space to digital space, which requires a lot of new technology support, including the Internet, AI, blockchain and so on. In addition, blockchain embodies the evolution of information society based on biological logic described in a book called Out of Control. Dr. Xiao Feng summarized the content of the book into three words: decentralized, distributed and self-organized. First of all, people’s migration process is autonomous with no leader. The status between people is equal, which means no one can control another one. As for the business, today’s multiple platforms are the initial forms of self-organization, and the ultimate goal of blockchain is to achieve a self-organized ecology.
Economically, blockchain is based on the de-nationalization of money, while politically it is based on the re-emergence of anarchism in the digital world. When the Internet was first created, it was expected to achieve a decentralized state, but the final result is more monopolistic, so we cannot predict whether the blockchain can achieve it or not.
According to Dr Xiao Feng, the basic theory of blockchain design can be summarized as the mechanism design theory of neoclassical microeconomics, which just won the Nobel Prize in economics a few years ago. Since the launch of bitcoin in January 2009, countless people have been busy for this without payment. However, there has been no error in the process of payment or nformation transmission. The network has not been down for a second. Additionally, during the development of blockchain, game theory has been put into practice. Blockchain technology is mainly based on the maturity of distributed network, and at present, there is no authoritative definition and interpretation of distributed network. But it is recognized as a point-to-point network, in which people can get the same information from any node. In this case, game theory can be used to build a democratic system that helps all people achieve better outcomes. As a result, the bitcoin blockchain no longer requires a board of shareholders, board of directors or management. In the past, the most important principle of corporate governance was the maximization of shareholder value. However, the whole theory of corporate governance has been disintegrated in the field of blockchain. Furthermore, in the field of blockchain, the non-tampering of data is completed by cryptography.
Dr. Xiao Feng said the development of blockchain can be divided into three stages. Dr. Xiao summarized the first stage as distributed network. With the development of the technology on Internet of things, the data of sendor will all be transmitted to the central server, and in the third generation of the Internet of things, any terminal and sensor itself have computing power, which Dr. Xiao feng summarized as distributed computing or edge computing. Today’s driverless cars are also based on distributed network technology. The second step in the development of blockchain system is to establish an accounting system on the distributed network, which forms a distributed ledger. This account system is a new accounting method completely different from the bank account system. At present, companies, institutions and banks keep their own books and people cannot trust the records of others. To build trust in other people’s accounts requires a lot of third-party supervisory organizations, which costs a lot. For example, Zhang San wants to send a sum of money to friends in the United States. In the past, it had to go through five financial institutions, each of which had to levelize their ledger, while on the blockchain, the five financial institutions jointly record on the same ledger, which can save a lot of time and manpower, and the process of sending money can be completed in an instant. In addition, blockchain is a system where the accounts of all affairs and all relevant parties can be recorded respectively. Everything can be recorded in the same ledger, which greatly saves labor, material and money.
As far as Dr. Xiao Feng’s concerned, the third stage that blockchain technology can achieve can be called shared blockchain. It is based on distributed ledger, plus the distribution mechanism of digital currency, such as bitcoin blockchain, ethereum blockchain. On the basis of the ledger, the system can automatically issue digital currency and manage it with the consensus algorithm of the whole network. People pay for bitcoin blockchain and they can get the incentive of bitcoin, which is a self-circulation incentive mechanism. Without the management deciding how much bonus people can get, everything is automatically distributed by the system, which is different from all other business models, subverting all the current governance structure and incentive mechanism.
Someone calls blockchain the second generation of the Internet. Dr. Xiao believes that there is an inherent reason. Firstly, blockchain moves the Internet of information to the Internet of value. When trading on the blockchain, people do not need the third-party credit guarantee. The credit guarantee system on the blockchain is actually a set of mathematical algorithms. Before the emergence of blockchain, people couldn’t transfer to each other on the Internet just like sending a email. Moreover, blockchain moves the consumer Internet to the industrial Internet and the public Internet to the encrypted Internet. Blockchain allows people to freely exchange information at different nodes while effectively protecting this information. Fourthly, blockchain enables the centralized Internet to become a distributed Internet. Now, the Internet is moving toward centralization, but blockchain is reversing that trend.
Blockchain is of great significance in society and life. Dr. Xiao Feng thinks it can maintain the trust system of the whole society as it functions as a bank, a judicial system, an accountant, a lawyer and other third-party authorities. If all the transaction systems are completely based on the blockchain, then the trust relationship of all exchanges will be reconstructed without cost. At the same time, a new business model will be created based on the blockchain, which is called “distributed business” by Dr.Xiao Feng . We don’t yet know whether bitcoin will succeed in the future, but the value of such an experiment for human society is incalculable.
In the lecture, Dr. Xiao Feng led us to analyze the concepts of various currencies. Many people have misconceptions about private money, but Dr. Xiao said there was no law around the world against the issue of private money and the key issue was whether users approved of it. Digital currency is also a private currency, but the difference is that private currency is issued by a centralized institution, while digital currency is a kind of ownless currency, issued by algorithms. And now a few organization advocate to issue legal digital currency whose issuance methods and nature still needs to deliberate. Tokens are derived from digital currencies and have use value, but are not currencies that can be circulated. Settlement currency is a kind of programmable currency. People can control its use and circulation and set its payment clauses by programming. Currently, there is much debate about the nature of bitcoin. Bitcoin is not legal tender. The issuance of legal tender is the exclusive right of the central bank, while the issuance of currency is not the exclusive right of the central bank. Currency can be issued by the central bank, currency board, local government authorized agencies, private institutions, or community consensus algorithm.
Next, Dr. Xiao Feng interpreted digital currency from the perspective of financial market and form of money. In essence, bitcoin is a coded digital currency with the nature of digital contract. He pointed out that if it cannot be coded and programmed, the digital currency is actually no essentially different from the traditional currency. Bitcoin and Ether currency are new financing tools. He called the ICO a “killer app” for digital currencies.
In the last part of the lecture, Dr. Xiao Feng discussed the current ICO phenomenon and problems. He pointed out that the concept of ICO comes from IPO, which refers to the initial coin offering of digital token financing. The primary difference between ICO and IPO lies in that ICO is a kind of venture investment, which is an absolutely high-risk angel round investment. IPO is the securitization of ownership and the core of the capital market system, while ICO is the monetization of the right of use and the core of the asset market system. In a word, it is the usage fee that people need to pay if they want to use the blockchain system in the future.
Dr. Xiao Feng pointed out that the emergence of ICO also provides new research directions for economics, such as cryptoeconomics. At present, all economic activities are based on the property right system. In the field of bitcoin blockchain, the original property right theory needs to be rethought. Many concepts such as transaction cost, business model, governance mechanism, role of producer and consumer and incentive model have changed greatly.
Subsequently, Dr. Xiao Feng introduced the classification of tokens. The first type of Token is security Token that satisfies the Howey test principle. The second type of Token is functional Token which is based on a common blockchain and is the “fuel” for system operation. It has inseparable use functions, suhc as open source sharing, no property rights and no revenue. The third type of Token is a unit trust Token which is investment-oriented.
Finally, Dr. Xiao Feng sorted out several stages of the development of digital currency investment. The first stage, from early 2009 to the end of 2016, was a chaotic period of speculation. Since the beginning of 2017, professional investors have entered the market and digital currencies have entered the asset management stage. First of all, some mainstream financial institutions workers foresaw that they would set up hedge funds after leaving. Such investors have been more than 200 in the United States. At the same time, some VC institutions in Silicon Valley accept the Token of ICO. The third stage has not yet come, but Dr. Xiao expects that by the end of next year, the market value of digital currencies will exceed one trillion USD. Mainstream financial institutions will certainly trade digital currencies for customers or for their own account, and financial markets will launch more related financial products. Several financial exchanges around the world are already planning to launch bitcoin futures.
Dr. Xiao Feng points out that when financial technology involves restructuring the financial infrastructure, different legal systems lead to different regulatory actions. At present, ICO market has a variety of problems on technology, business model, concept and security which need to be standardized and discussed. China’s ICO market is full of fraud and pyramid selling. Therefore, he believes that it makes sense for Chinese regulators to effectively prohibit and supervise them. At the same time, due to the characteristics of blockchain such as being point-to-point, borderless, no sovereignty and no property right, China will not lose the dominant power of blockchain technology because of the strict supervision.
After the lecture, professor Lu Jun of Peking University HSBC business school reviewed and summarized Dr. Xiao’s lecture. He believes that in this bitcoin craze, the practice has greatly promoted the academic thinking. Although bitcoin has been around for nearly 10 years, during which many people in the financial academic circle regard it as a “pyramid selling”, more and more scholars have studied and affirmed the value of bitcoin in recent years. Professor Lu believes that the core of money lies in its credit. The legal tender we use in our daily life is endorsed by the credit of governments, while the currency issued by many sovereign states does not necessarily have its credit. Conversely, credit of currency is not necessarily provided by sovereign states. Bitcoin has value in the initial issuance phase, with users being tech geeks who might spend a dozen bitcoins on a bottle of coke. However, in recent years, more and more people have entered the circulation circle of bitcoin, and its transaction value as an asset has greatly exceeded its use value, so it is mainly traded as an asset at present. However, professor Lu thinks that the supply and demand of bitcoin are necessarily out of balance in the future, so people will be less and less willing to give it away, so this problem may also need to be solved in the future. Furthermore, professor Lu also made further analysis and interpretation of ICO, pointing out that more formal private equity and angel foundations may join the bitcoin market in the future, so that the market can be better regulated.
In the Q&A session, Dr. Xiao Feng gave a patient answer to the encryption algorithm, intelligent contract and other relevant questions. Then, Mr. Ren Ting, the assistant dean, gave Dr. Xiao a souvenir to thank him for his excellent lecture.
This lecture is the 35th session of “ Lecture on Finance in Peking University HSBC Business School ”, which is hosted by Peking University HSBC business school and supported by Shenzhen Asset Management Institute. The lecture will continue to invite authorities to teach theoretical knowledge and practical experience in financial field, so as to create a high-quality platform focusing on the latest trends of the financial market for PKU students.
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