Author: Guo Kaiping, "Northeastern University College of Business Administration."
Article: Chinese Journal of Finance
Free capital flow is the due meaning of financial opening up and financial development. From the experience of various countries, not only to ensure the free flow of funds but also to prevent financial risks, not only institutional arrangements, but also the strong support of science and technology and finance. In the process of accelerating the construction of Hainan Free Trade Port, the blockchain-based digital currency can provide technical support for exploring a free and trace flow.
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Freedom in and out of trading ports faces regulatory challenges
From a realistic point of view, a major challenge for Hainan's freedom of capital entry and exit is that it is necessary to first explore for the internationalization of the renminbi and also to achieve substantial offshore supervision. To further open up finance and realize free convertibility and free access to capital under RMB capital, at the same time to prevent large inflows and outflows of funds, and prevent them from becoming tax evasion ports, the focus is on whether an effective financial regulatory system can be established. The challenge facing Hainan Free Trade Port is that although Hainan may implement a special financial system, it promotes financial opening up in a single currency financial environment. Existing accounts, whether online accounts in free trade accounts (FT) or Onshore accounts, it is difficult to achieve their goals. For example, an account with RMB 300 million yuan and two RMB 100 million yuan from overseas island funds (which may be overseas funds or domestic funds) entered Hainan, and after the free flow in Hainan, the account Transfer 250 million yuan out of the island. These three funds are difficult to achieve "backtracking."
From the actual situation, Hainan's FT account has been officially launched, and currently nearly 10,000 companies have opened FT accounts, which is a significant progress in the Hainan Free Trade Pilot Zone. However, from the trend of financial liberalization of free trade ports, once the free flow of funds is realized in Hainan, Hainan does not matter whether it is offshore or onshore. Hainan FT account will be a transitional measure. How to build an account system that is conducive to the free flow of funds and can achieve effective supervision has become a major issue for accelerating the construction of Hainan Free Trade Port.
In this regard, Dubai's experience is worth learning from. On the one hand, the financial system of "City in a City" guarantees the effective operation of funds. Dubai has a very unique financial system structure. There are three independent systems to support the organic operation of the financial center: Dubai Financial Services Authority is an independent regulatory agency. The center adopts a completely independent international regulatory system to achieve complete supervision. Independent and always maintain the international level; the Financial Center Court is an independent arbitration institution, mainly aimed at international financial centers, strictly abides by the British legal system, and helps companies in the region resolve disputes; the International Financial Center Authority is responsible for formulating the development plan of the entire center To enhance the soft environment construction within the financial center. The three institutions form an integrated system to ensure the efficient operation of the center and maintain a unique competitive advantage in the global financial market.
On the other hand, Dubai has strict financial regulations. Dubai's supervision of anti-money laundering is very strong, and it attaches great importance to the examination of account holders. It not only requires financial institutions to implement the real-name system of the account, understand the actual controller of the account and the actual beneficiary of the transaction, but also require the identity of the customer and the resident address. Or fully understand the business that the company is engaged in, and build a good financial supervision system foundation and financial ecology for anti-money laundering and corruption prevention.
Exploration of Blockchain Application in Financial Supervision
- Blockchain provides technical solutions to achieve financial openness and regulatory balance
The three core technologies of the cryptography principle, consensus mechanism, and distributed storage of the blockchain have four characteristics: decentralization, openness, non-forgery and tampering of information, and autonomy. These characteristics make blockchain technology an important technology choice to promote financial openness and financial supervision.
The first is to achieve an efficient and low-cost transaction model. Through the point-to-point information mode, the blockchain can greatly reduce the possibility of forgery and tampering of information transmission and improve the efficiency of financial transaction settlement. The second is to achieve information privacy protection. Blockchain technology can improve the user's personal information protection mechanism through the consensus mechanism based on nodes and the design of privacy permissions. The third is to reconstruct the credit trust mechanism. Blockchain technology is based on an asymmetric encryption algorithm to realize the reconstruction of the credit trust mechanism, and both parties to the transaction can directly exchange trusted value. The fourth is to reduce the cost of financial supervision. Blockchain technology, with its tamper-resistant and highly transparent features, guarantees the authenticity and accountability of data, reduces audit processes, and reduces the cost of financial supervision.
The first and second technical features can protect users' lower-cost transaction models and promote greater openness in finance. The third and fourth features make it possible to supervise after the fact. From this perspective, blockchain can play an important role in achieving financial openness and regulatory balance.
- The unique technical characteristics of the blockchain are suitable for wide application in the financial industry
After 10 years of development, the blockchain has entered the stage of scene application promotion. At present, domestic financial institutions have launched blockchain pilots. The application scenarios of blockchain in the financial field include digital currencies, payment clearing, digital bills, clearing management, equity certification, securities trading, and insurance management.
First, the blockchain system has high security and can be applied to the field of network security. The blockchain's own security system uses security technologies such as encryption, digital signatures, and timestamps to achieve data block confidentiality, node authentication, storage security, propagation verification, security fault tolerance, identity authentication, authorized access, security auditing, and privacy protection. And other functions. Second , it has broad application prospects in terms of cyberspace security. Blockchain has high security and time dimension, data has strong anti-tampering ability, and has broad application prospects in cyberspace security assurance, especially in identity authentication, access control, and data protection can play an important role. Third, it can be used as the underlying technology for future sovereign digital currencies, changing the nature of traditional financial operations. For example, using blockchain as the underlying technology of digital currency, the way to enter the trading market via blockchain currency is more direct, and the dependence on financial institutions is further reduced, thereby realizing the essential change to traditional financial operations and improving the efficiency of financial operations.
- Significant results of the launch of the People's Bank of China's trade finance blockchain platform
On September 4, 2018, the People's Bank of China's trade finance blockchain platform project (hereinafter referred to as the "central bank's trade gold platform") was officially launched. For more than a year of operation, it has successfully implemented a number of business operations, including multi-level financing of supply chain accounts receivable, cross-border financing, supervision of international trade accounts, and external payment tax filing forms. As of the end of October 2019, there were 29 banks participating in the promotion and application in Shenzhen, 485 outlets, and 1,898 companies that had business operations, achieving more than 30,000 business on-chain transactions, more than 5,000 business transactions, and a business volume of approximately 75 billion yuan.
The central bank's trading platform is an important breakthrough in the independent innovation of core technology. It is a financial infrastructure that integrates open trade financial ecology, penetrable supervision, and credibility, and is built on the basis of co-construction, co-management, and co-governance. Focusing on the three goals of information penetrability, trust transferability, and credit sharing, the central bank's trading platform has realized the three major functions of inclusive docking, controllable sharing, and peer interconnection. It has cross-validation of trade data, data cannot be tampered with, Features of business life cycle management.
As a practical application of supervisory technology, supervisory departments can conduct penetrating supervision of the entire process and life cycle of trade finance through the central bank's trading platform. Because the underlying assets are highly transparent, the regulatory focus has gradually increased from the compliance level of financial institutions to the identification of systemic risks, thereby preventing the accumulation and outbreak of Internet-like financial risks, maintaining financial stability while promoting financial innovation, and regulating market health. development of.
Blockchain to achieve free and trace flow of funds in Hainan Free Trade Port
- The vision of Hainan's free flow of funds
On the one hand, with the assumption of good faith as the premise, and the goal of free flow under capital, the supervision of all funds is relaxed, and all funds are free from restrictions on currency, scale, and use. . On the other hand, the use of trace flow as a means to achieve effective real-time monitoring after the event. The free movement of funds does not mean that no traces are left, and the free movement of funds does not mean that there is no supervision. Through the use of high-tech means such as blockchain and big data, "free flow of compliance and trace" is achieved to ensure that supervision after the event is realized.
- Constructing Hainan Digital Currency Account with Blockchain Technology
First, it is clear that Hainan Digital Currency (HN) is a blockchain-stable digital currency that uses the RMB as the anchor currency. HN accounts are digital currency accounts.
Second, two circulation scenarios. The first is the entry of domestic funds. For example, if the company deposits 10 million yuan from the account of the Beijing Group to the designated gold deposit account of Hainan Free Trade Port, after confirming the 10 million yuan receipt, the fund deposit account will be verified and the fund will be added to the enterprise-linked HN account by 10 million yuan. HN, companies can use HN accounts in Hainan Free Trade Port to settle free transactions with other companies based on HN tokens. After completing transactions, companies can apply for a specified amount of HN in the HN wallet account for settlement. After review, the company Beijing The specified amount of RMB will be received in the account, and the equivalent amount of HN will be deducted accordingly in the HN account, and the withdrawal operation is completed. The second is the entry of foreign funds. For example, if an overseas company transfers USD 10 million from an overseas account to the designated gold deposit account (overseas currency account) of Hainan Free Trade Port, after confirming that the USD 10 million account has been received, the fund confirmation account will be officially entered into the exchange rate calculation process. The funds calculated after the exchange rate will be credited to the company's linked HN account. The company can use the HN account to settle free transactions with other companies based on HN tokens in the Hainan Free Trade Port. After completing the transaction, the company can apply for designation in the HN wallet account The amount of HN will be settled. After the review, the amount will enter the exchange rate calculation process. After the exchange rate calculation, the specified amount of foreign currency will be received in the overseas account of the enterprise, and the equivalent amount of HN will be deducted from the HN account, and the entire withdrawal operation is completed.
Third, funds in any currency through the HN account can be freely moved in and out of Hainan free trade port, and essentially free and traceable flows can be realized. Give the account greater supervision functions, realize all funds in and out of freedom, trace flow, identifiable, traceable, and supervisable, avoid tax evasion and avoid money laundering.
Financial supervision of free and trace flow of innovative funds
- Do the system's ultimate stress test
Taking into account the trend of the scale of capital in and out of the island, it is recommended to design this system with a trillion-dollar in and out scale and make hardware preparations that can support massive transactions. From the perspective of national financial security, it is recommended that domestic fintech companies conduct research and development and select some financial institutions for pilot and stress testing.
- Implement a special financial supervision system to ensure "openness and control"
Speed up the improvement of the macro-prudential regulatory framework for cross-border capital flows. Establish a trace management system for capital “two-line” flow based on the account system, and promote the formation of a cross-border capital flow monitoring system that meets international standards and meets the prudent supervision requirements of Hainan Free Trade Port. Based on the financial institution's capital, leverage, assets and liabilities, liquidity, cross-border financing risks, etc., a macro-prudential assessment of financial institutions in Hainan Free Trade Port was conducted, and hierarchical management was implemented according to different assessment results. In line with this, benchmarking international standards, we plan to establish a relatively independent regulatory mechanism in Hainan, supervise infrastructure construction, financial behavior supervision, etc., integrate the regulatory functions of the central bank and bank securities, and take the lead in implementing comprehensive supervision in Hainan.
- When the timing and conditions are mature, it will be gradually replicated and spread to the whole country.
With the increase of application scenarios, specific security issues related to blockchain technology will be exposed. In addition to technical means, supporting laws, regulations, standards, supervision, and management system construction should be strengthened to build a complete blockchain application in multiple ways Safe ecological environment. As the application of high-tech in the financial field, it is necessary to complete technical stress tests and system trial tests to provide exploration experience for China's financial opening and financial supervision, and to prepare the central bank to launch digital currencies.