Ten years of blockchain: it is flourishing everywhere, but how well has it been implemented?

Author: Zhou Ziqi (City University of Hong Kong)

In 2015, the launch of the Ethereum mainnet opened up a new era of smart contracts for blockchain technology and laid the foundation for its diversified application scenarios beyond Bitcoin. Since then, blockchain is no longer just the distributed ledger technology behind Bitcoin, but carries more expectations such as "decentralization" and "trusted collaboration".

Thanks to the natural fit between blockchain and capital circulation, the traditional financial sector has taken the lead in starting to pay attention to and try to use it to optimize processes such as capital settlement and clearing. A 2015 report by the World Economic Forum (WEF) pointed out that institutions including Goldman Sachs, JPMorgan Chase, London Stock Exchange Group, Wells Fargo and State Street Bank have shown great interest in blockchain technology and focused on exploring its application in the settlement process. At the end of 2017, IBM released blockchain cooperation projects covering cross-border payments, education, food safety, identity authentication, insurance, shipping and other fields, and pointed out that more and more industries will be directly affected by blockchain in the future.

As IBM said, from 2017 to 2021, a wave of "blockchain innovation boom" has been set off in all walks of life. In 2018, PricewaterhouseCoopers (PWC) conducted a questionnaire survey of 600 executives in 15 regions around the world. More than 84% of the respondents said that their companies have been involved in the blockchain field to some extent - "Everyone is talking about blockchain, and no one wants to be left behind." However, most of these explorations are focused on "permissioned ledgers", which essentially use blockchain to achieve data sharing and tracking within the company or between partners. However, due to the existing digital foundation of the company and the lack of blockchain governance, it is difficult to fully unleash the potential of the technology.

"Governance" was once one of the most offensive topics in the blockchain community, but over time, people have gradually realized that governance is not only the key to promoting the mature application of blockchain, but also a necessary condition (or people have given up fighting against regulation). The reports released by the World Economic Forum in 2020 and the Bank for International Settlements (BIS) in 2022 both pointed out that for blockchain to enter its maturity stage, in addition to technological breakthroughs, it is also necessary to continue to work on non-technical aspects such as standardization and regulatory frameworks.

When "governance" becomes the main theme, the application path of blockchain has gradually shifted from the ideal "revolution" and "subversion" to "evolutionary integration" with the existing system. The rebellious narrative has once again been incorporated by the mainstream. After 2021, people's focus on blockchain has returned to the financial field, specifically, "tokenization". The so-called tokenization is to transform traditional assets (such as currency, bonds, stocks, etc.) into digital forms that are recorded and circulated on programmable platforms such as blockchain. Different from the wild ICO boom in 2017, the tokenization practices in recent years - such as central bank digital currency, stablecoin legislation in Hong Kong and the United States, RWA (real world assets), etc. - emphasize the introduction of blockchain on the basis of the advantages of the existing financial system, while paying attention to compliance and risk control. This is exactly the "evolution" rather than "revolution" mentioned above.

Looking back over the past decade, although various industries have been keen to explore blockchain for business innovation, most applications still revolve around "transparency" and "public ledgers", lacking truly irreplaceable core functions. In many scenarios, blockchain is more of a supplement to existing database technology rather than a radical change. For example, supply chain traceability (such as Walmart's food traceability chain), public welfare donation records (such as the Ant Chain public welfare platform), and some government electronic ticket systems often only use blockchain to enhance trust endorsement rather than fundamentally reshape the process.

The development of blockchain often gives people a feeling of "scratching an itch through a shoe". No one denies its value as a technological innovation, but in many industries other than the gray industry, blockchain has not really met the core needs, and many seemingly cutting-edge attempts are inevitably "innovation for innovation's sake". To this day, although people's expectations for blockchain have spread from finance to all walks of life, they have finally returned to finance - in the final analysis, people have realized that finance may be the field with the most practical demand and landing space for blockchain.

In recent years, whether it is the upcoming stablecoin bill or the policy support for RWA tokenization, it shows that Hong Kong is trying to find a balance between compliance and innovation to attract high-quality digital asset projects to land and consolidate its position as an international financial hub in offshore RMB, cross-border payments and asset management. However, this direction is also full of challenges. Taking stablecoins as an example, the global market often presents a "winner takes all" pattern, and the US dollar stablecoin has long occupied a dominant position in transactions and value storage at the retail end (C end). If the Hong Kong dollar stablecoin wants to break through, it needs a clearer differentiated positioning and supporting ecological construction to give full play to Hong Kong's unique advantages as an offshore financial center. With the gradual improvement of supervision and the deepening of pilot projects, if the advantages of blockchain and traditional financial systems can be organically combined under the premise of controllable risks, Hong Kong is still expected to occupy an important position in the global digital financial landscape and truly become a "bridge" and "experimental field".

Whether blockchain can get out of the dilemma of "scratching the itch through the shoe" in Hong Kong remains to be verified by time, but at least the direction has become clearer.