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China Merchants Bank readies its blockchain 2.0

The bank wants to add others to its cross-border payments blockchain – but will rival banks join?

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China Merchants Bank wants to get more banks to use a blockchain that it initially developed for use with its Hong Kong subsidiary, Wing Lung Bank.

Hou Tingwei, Shenzhen-based director of public team management design office, which is responsible for the bank’s blockchain development, says the bank is confident the platform is robust enough to extend to other Chinese banks.

CMB launched it for foreign currency-denominated cross-border clearing in February 2017, the first Chinese bank to do so. Yuan-denominated cross-border clearing was launched in December that year. The platform is meant to replace a centralized clearing system, which involves costly processing, such as accounts reconciliation and sending reports.

We were concerned with whether the platform would be stable enough

- Hou Tingwei, CMB

Given the need to share a lot of transaction information among many counterparties, the bank decided decentralized-ledger technology (DLT) made sense. It launched its platform after three months of testing. “We were concerned most with security and whether the platform would be stable enough,” Hou told DigFin.

Since it launched, CMB’s blockchain has processed more than 43,000 cross-border transactions with a total value of HK$7.7 billion (about $1 billion). This now represents about 70% of CMB’s mainland-Hong Kong cross-border payments business.

“We have done stress tests,” said Sun Jianping, a software engineer at the bank. “The maximum it can handle is around 60 transactions per second, while our current transaction volume is 500 per day.” The RMB/HKD volumes are not huge in the scheme of the $5 trillion daily volumes in global foreign exchange, so the platform is suitable to this particular niche, Sun says.

Will other banks join?
Hou says CMB now intends to add participants. “We are building a 2.0 version of this settlement platform,” he said. Describing the current version as a “public chatroom”, in which traders match bids and offers, the next iteration is meant to enable more collaboration among banks. The next version should launch this summer, at which point CMB wants to get other institutions involved.

Getting banks to work together on blockchains remains a big hurdle. Rivals are pushing their own platforms. Bank of China (Hong Kong) uses DLT to help Hong Kong customers pay with credit cards in Shenzhen. CITIC Bank and Minsheng Bank are deploying it for letters of credit. Agricultural Bank of China puts unsecured loans to farmers on its blockchain. And so on.

Banks need to trust each other more

- Carl Wegner, R3

So far they are largely chasing their own niche markets, but none have yet to combine in a meaningful way on a single platform. This shows the contradiction between scaling a blockchain as a common infrastructure, and banks’ instinctive needs to compete for new business.

Carl Wegner, managing director of DLT consortium R3, says that some of the Chinese banks are the most innovative in the world in blockchain technology. “But the best outcome is using blockchain between banks,” Wegner said. “They need to trust each other more.”

CMB is confident, however, that it can begin to attract second-tier banks to its platform. This is because it is the second-largest processor in China’s Cross-border Interbank Payment System (CIPC) out of 31 participants (ICBC is the biggest). Another 724 smaller institutions or foreign banks funnel trades through these primary members, so CMB has a built-in network.

Can DLT marry banking services?
But CMB doesn’t want its blockchain to stop with cross-border payments. “We hope to build a common, collaborative solution,” Hou said, to include trade finance, asset management and supply-chain services.

Some blockchain developers are skeptical decentralized ledgers will be suitable to all of these tasks. “Blockchain is serving as more of a marketing tool than as infrastructure,” said Lin Sen, director at CPCW, a Shanghai-based consultancy helping Chinese financial institutions launch DLT projects.

Blockchain is serving as more of a marketing tool than as infrastructure

- Lin Sen, CPCW

First, DLT doesn’t solve the problem of trust. It allows nodes to verify and time-stamp information. “But how do you know the information submitted is true?” he asked. Most customers trust their banks. “So why do we need blockchain?”

CMB’s Hou says banks enjoy a good reputation in China – but partly because the government supports them, particularly when they service big state-owned enterprises. “But when we add small enterprises and other private entities to the chain, we will need technology to protect everyone.”

The second challenge for DLT is privacy: banks don’t want their secrets spilled.

CMB has anonymized transaction entities. “We understand DLT itself goes against commercial privacy,” Hou said. “That is why we introduced encryption techniques.”

The third challenge is efficiency. Centralized systems for payments work by first netting all the trades down to a single day’s transaction that needs to be cleared. DLT requires every trade be transacted on the chain, tying up capital that could be used elsewhere and slowing the system with a lot of activity.

Hou says CMB is using its blockchain as a communication platform that provides users with a proof of settlement. CMB’s traditional, centralized I.T. still handles the actual funds transfers.

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China Merchants Bank readies its blockchain 2.0