China’s Blockchain-based Service Network, or BSN, embodies China’s vision to push blockchain as a national priority. And the network has already onboarded global blockchain projects to ease blockchain applications for local developers. And certainly, there’s a push for an international presence as well.
And oh, have they been busy. On a mission to catch them all and now adding R3’s Corda to their blockchain dex.
Yifan He, the CEO of Red Date Technology — the company behind the BSN project — says this addition will enable Corda adoption amongst all Chinese banks. So it sounds like it’s time for a deep dive. Joining me today is Yifan He, and from R3, co-founder and chief product officer Todd McDonald. Gentlemen — welcome to the show. It’s great to have you both on.
Todd McDonald: Great to be here.
Yifan He: Great to be here.
Lau: It’s great to have you both. I want to start with you, Yifan. What is the Blockchain Services Network? How did it start? What was the genesis moment?
He: It’s a long story. First, we believe the blockchain industry right now is like the 1993 internet. So everybody’s building their own chain — and it’s like the internet. Why did the internet become so powerful? Because we connected all of the internets. Then, you can use the data from different countries, different industries, different businesses, to build a new business model. That’s how you build e-commerce. You have data from banking, merchandise, logistics, payments, then it’s put together to become e-commerce. That’s why, eventually, we will link all the chains, no matter if it’s a private chain, a public chain. They should call each other as simple as calling an HTTP protocol between websites. That’s why we think there will definitely be something like that in the future. And the second one, because it’s burgeoning, the cost is very high.
Also, just like the Internet — when you built a website in the year 2000, it cost you half a million dollars. Nobody wanted to build a website. There was no innovation. By the way, the costs have dropped to almost zero. Any high school student can build a website. That’s where the innovation begins. Everybody tries and there’s Yahoo!, there’s Google, there’s a bunch of new business models, and big corporations. Those two factors will really drive blockchain technology forward.
That’s why actually there are two reasons we want to build BSN. The first one is interoperability. And the second one is actually the cost, because we’re integrating all of the cloud resources, integrating all of the protocols and frameworks, and also opening up APIs for any website can access BSN’s infrastructure. That drives the cost down. Right now in China, if you build a very small [Hyperledger] Fabric chain three-tiered, it costs you just 200 RMB per month. Basically, it’s like US$300 per year. Compared to some major cloud services, if you build a [similar] chain — three-tiered Fabric there — it costs you US$20,000 per year. It’s like one percent of that cost. That’s the summation of BSN — interoperability, and cost — driving costs down.
Lau: It really sounds like a wide initiative to create that layer that allows for interoperability, which actually is the greatest strength. China’s version of Web 3.0, almost.
And Todd, when BSN started emerging a little bit over a year ago and started onboarding a lot of different protocols, what were your thoughts then as you observed it? Why are you joining BSN?
McDonald: So Angie, if you think about the beginnings of R3 when we started the company, we in a lot of ways started the company backwards, thinking about the networks that were needed for this technology, this infrastructure, to be successful. That’s why we started the way we did, with a large group of global banks to help initially bring R3 to life, and then, also build an underlying technology Corda, that would help power enterprise blockchain and really net new financial markets for today into the future. If you look at what BSN’s trying to do, it’s really trying to instantiate and start a new network, but in a way that is specific for the Chinese market.
So it’s very exciting for us at R3 to, number one, be part of a very credible and growing network. Number two, that it is focused on the enterprise space to begin with. That’s incredibly important for us. And number three, we understand that in order to bring what we do into the Chinese market, we need the right partners. That’s working with Red Date, working with the other partners in BSN — China UnionPay, and others. That’s what’s really going to make it successful. It’s those partnerships and in making sure that the network itself is as widespread as possible, but also done in a way that is enterprise-ready, and enterprise-ready for the Chinese market specifically.
So that’s on the technology side, it’s on the cost effective side and getting that penetration so we can start laying this new, as Yifan said, this new infrastructure for commerce.
Lau: Obviously, R3 permission blockchain here with a Corda-based open permission chain that you plan on launching in China — on BSN China domestically. How will you be working with banks and what other opportunities arise when you’re on the BSN China network as a permissioned chain if other permissionless chains are also operating? What is that interoperability opportunity there for you as well?
McDonald: It’s important. From the beginning, Corda has been open-source, so it has been an open protocol from day 1. And we’re very passionate about that. If you look across the other blockchain platforms, that really is a must-have for platforms to be even considered and potentially be successful. We’re very keen on how we’re rolling out Corda within the BSN as initially leveraging our open-source protocol. And I think that’s really, really important as a starting point.
But we also know that since this is targeted for business enterprise users, they’re going to need certain capabilities that we as R3 have specifically built for enterprises and very, very discerning, very, very demanding enterprise customers. That’s why we can go in a second phase and be able to roll out this enterprise-grade platform.
You think about managing the interoperability concepts. When we started the company in 2014-15, we were asked repeatedly about interoperability with other blockchain platforms. But quite frankly, nothing was live yet. There were no real use cases being done in anchor on any of these networks. So it was a bit early in the game for that. But if you think in 2021, we’re looking at what’s happening and we’re moving not only workloads but creating commerce and digital assets on these new networks.
We understand that you can’t be building these digital islands of commerce. They need to be integrated to existing systems and integrated to, potentially, other networks. Interoperability is a really critical component as we enter into this next phase of the enterprise space. It’s incredibly important — as Yifan said before — if we’re trying to build infrastructure, sort of a TCP/IP layer, we want to make the blockchain layer as invisible as possible to the Chinese corporate that’s interacting with it. That’s why the broader network is important. That’s why integration is important. And that’s why over time, interoperability of blockchain protocols is probably more important. Business networks are critically important.
Lau: I absolutely agree with that concept of interoperability and sharing. And quite often as we evolved in capital markets, competition is healthy. But in 2021, we’re seeing the rise of “coop-etition” — where corporates are also collaborators to reach greater goals. In this way, interoperability really reflects that sentiment. Yifan, with Blockchain Service Network and creating that universal layer, what are some of the dynamics beyond cost, beyond interoperability, that really are part of the foundation of BSN? And what are some of the opportunities — the apps that you hope will be built? Some of the things that we could see come out of BSN as a result of that universal layer.
He: Actually, before I dive into that, first, I want to just very quickly say how we really understand blockchain technology. We actually think it’s a new way to transmit it, it’s not really a new way to start it. Basically, we changed from a linear transaction on the internet to become a broadcasting wave. It’s much more efficient and it can involve very complicated business processes and business relationships. That’s actually the key. How you start it — you start in a traditional database or a ledger or a block — it doesn’t really matter. First, we don’t like the name “blockchain.” Personally, I don’t think it reflects true technology.
In China, you cannot use a public chain because it’s a little bit against the internet regulation. Because the data is not deleted, there is no KYC, so you cannot deploy your application on a public chain legally. So in China, everything is based on permissioned chains. And also, even with public chains outside China, you can see right now — I don’t want to say 99% — but most applications on public chains are built around cryptocurrencies. DeFi, everything’s built around cryptocurrency.
The problem is actually the economic model. Because you pay in cryptocurrency as a cost for gas. Which means, if we ran an application on public chain, the revenue must be in cryptocurrency. Then, the cost is in cryptocurrency, the revenue is in cryptocurrency — that makes no sense. So if you ask a bank to deploy a traditional application on a public chain, they serve the traditional payments model, which means the revenue is in fiat money and then you pay in cryptocurrency. It doesn’t make sense because you cannot control the cost. Next year, the cost could be more than your revenue. Which means, if you deploy a real-life application not related to cryptocurrency, you’ll need to make sure that cost stays in cryptocurrency, revenue is in cryptocurrency, or the cost is in fiat money and the revenue is in fiat money. So for a permissioned chain, what’s the cost? The cost is basically the licensing and the cloud services. That’s actually for a big corporation. Eventually when they really, really begin to adopt blockchain technology, personally, I believe that will be mostly the permissioned blockchain technology because they only pay for the licensing and the cloud resources. That’s what they do. That’s the cost because they don’t want to do speculation, investment, stuff like that.
So that’s a true perspective of BSN. We really, really want to focus on the permissioned version to serve the real-life problem-solving, real-life business models. That’s a true belief from us. So people always, “What’s the future between permissioned or public chains?”. I think they will coexist but in different industries. Everything built around cryptocurrency — public chain. Everything built to solve real-life problems and working for real-life business models — go to permissioned chain. But of course, you’ll need the interoperability sometime for some certain business models and their scenarios. So that’s actually our belief. Personally, all my public chain friends hate me saying that. I still think public chain is a little limited. It’s like a big game. I don’t want to go there. I’ll receive calls after this.
This is a new way to transmit data. Which means our business process involves 15 different companies and I.T. systems. Then in the traditional way on the internet, the data pass from one, to the next one, to the next two and the next one. Anyone can change the data in the middle. Anybody can hold the data and not transfer it to the next one. But if you put those 15 I.T. systems on a permissioned chain, then everybody can receive data quickly. And also, with a framework like Corda that enables private transactions, you can cover transactions between just two-party out of these 15. It’s very, very flexible in controlling how the data moves. Just imagine how many powerful things you can do with this kind of technology. I always encourage people to think a little bit on the underlying [technology], not always on applications with cryptocurrency. Cryptocurrency — I consider that the most simple application build based on this technology. It’s like an email to the Internet.
When email came out [and if] people always said, “Okay, this is amazing. Let’s build everything around email.” Today we wouldn’t have the internet, we’d have “EmailNet”. That means you don’t just build an application. Go a little bit in the underlying [technology]. That’s when you invent HTTP protocol, HTML language — you begin to build the internet into its full strength. In all the opportunities, I encourage people: Go a little bit deeper, do not always focus on a simple application.
Lau: What you’ve addressed is actually one of the biggest criticisms that enterprise has about blockchain at the moment — at least public chains — is the massive volatility of cryptocurrency. When we take a look at the concept of fuel and the ultimate outcome of any stable business is determining fixed costs — its fixed operating costs — we have that volatility of the very thing that runs your business or runs a predominant part of your business that actually is quite restrictive. It bleeds a lot of energy from the company.
What you’re talking about is — there is value to permissioned chains, you pay a licensing fee, it’s a fixed cost, and because you see blockchain as that transportation layer of information rather than block by block and how others see it in a permission-less scene. That’s what I’m hearing. It sounds like BSN China is much more geared to the enterprise needs of Chinese corporates, but it also allows Chinese corporates to create an efficiency that potentially could be light years ahead of those companies that are not on blockchain, or not on that BSN layer that allows for the speed of transfer of data. Is that right?
He: Yeah.
McDonald: Yes.
Lau: That’s what I’m hearing.
McDonald: To bring it down to what businesses are trying to do on enterprise blockchain networks — and Angie, to use your example — large corporates are coming to these networks to help improve their working capital, to help finance their business day-to-day. The volatility of having to pay for transactions in a cryptocurrency is sort of the opposite of what they’re trying to achieve. But if you think around what BSN could be enabling is it’s starting to tie together networks where, if you think about a company like R3 with Corda, we’re really being pulled into the Chinese market where we have started to get really great traction within the trade finance space. These are the large companies and in a lot of cases, small or mid-sized companies that are looking to receive financing, do invoice financing, or finance cross-border trade with letters of credit. These networks we’re looking to interact with Chinese corporates, and Chinese corporates are looking to access these new pools of financing.
And number one, they want to be able to interact cross-border internationally. But number two, they want to be able to have it fit into their existing day-to-day business, something that integrates to their ERP [enterprise resource planning] system, something that slots into their treasury and cash management processes. They want to be able to – in some ways, we’re trying to make this as simple and boring as possible for these corporates to be able to plug in and get the cost savings. And get access to, hopefully, new ways to help finance and grow their businesses.
Lau: How much of an efficiency can be created here? I mean, a lot of enterprises, as you know, Todd, have been looking at blockchain to transform legacy systems, looking to migrate. Much of the industry has experienced some disappointment while developing potentially blockchain-based enterprise solutions. There hasn’t really been that transformative moment where people see the cost efficiencies. Are we there yet?
McDonald: What we have started to see over the last — I’d say, six to 12 months, as we entered and are coming out of the Covid pandemic, which has accelerated a lot of these transformations to some degree — we’re starting to see the beginnings of these networks take shape. But I think Angie, to your point, this is about the network effect. It’s about who is on the network, how many of counterparties are to be able to interact with. We’re starting to see these networks come online. And a lot of cases, you’re beginning to see the initial cost savings. A cost save play is interesting to a point, but it really doesn’t capture the imagination as much as net new products, or net new markets, or maybe net new revenue for these companies to be able to grab hold of. So I think part of what’s been holding back the industry has been getting these networks sort of started. You need to be able to bring the right key players into the network. And I think we have that in a lot of what we’re working on, but also others in the industry. And then importantly, if I’m in a financing network, I want to be able to integrate to the payment system and payment networks that I’m using today. I want to be able to potentially leverage things like digital value, digital currency, right next to the assets that I’m exchanging. And I think that’s where we are in this inflection point with the enterprise space. Where you think about not only what’s happening today, but potentially in the coming years with central bank digital currency (CBDC), bringing the transfer of value and the transfer of assets together on these net new networks. I think that’s where you’re going to start to see the scale up in adoption and in cost savings, but also in net new revenue for these participants.
Lau: Todd, I’m going to pick up on something that you said, that tweaked something for me. For China, it’s this expansive geographical footprint of 1.4 billion people and really transformed into modern history through trains. High-speed trains and that transport system that allowed people to traverse the country into cities and the rest. And that’s a critical part of any country’s development.
In this same way, it feels like — Yifan, correct me if I’m wrong — BSN is those railroads for the blockchain train of data that will traverse the country in a matter of seconds, linking Chinese enterprises and really transforming (at least) the data evolution in China. Where do you think this can go?
He: First, I still want to emphasize how powerful blockchain technology is. I believe in 10 years, 80% of all I.T. systems will need to adopt some kind of broadcasting transmission in some way. 80% of the I.T. systems. You don’t really see it today because we have very complicated business scenarios and anything we do, we evolved it with a partner. You don’t see a standalone system just by itself. As long as you have a business scenario involving more than two parties, I think you’ll need to adopt blockchain technology.
I just want to say in the future, probably 30 years from now, let’s say we build very complicated data transmitting technology for every car. So when you drive a car, basically, in a 100-meter range, you’re actually communicating with all the cars indirectly. But remember, you are broadcasting your data. And every car receives it and they react. This reaction will be received by all of the cars. So tell me how you can achieve that with just Internet transmissions — one car to another car, one car to all the cars. But that car reaction cannot be received by other cars. So eventually, you need this kind of broadcasting way to transmit data, to receive data, to process data, and to react to other systems. That’s why I really, really believe — not only in China but in the world — in 10 years, 80% of I.T. systems will somehow use some kind of broadcasting way to transmit data. You need blockchain technology. That’s why part of BSN mission is to help achieve a low-cost way to help our I.T. systems. In the meantime, we need all the developers and all the tech companies to understand this technology deeper and deeper because they are the people who will build the I.T. systems.
Lau: How will this transform, in your opinion, Yifan, the state of Chinese enterprises? How will this impact state-backed projects?
He: Actually, it impacts all projects, not only state-backed projects. Right now in the world, the Chinese government really, really wants to push blockchain technology forward. They actually invested a lot of money last year and this year. So this money actually comes to the market to train a lot and to make a lot of small companies ready.
Of course, we never receive any money from the government. But it really helps the industry because there are many entrepreneurs in China that are beginning to build blockchain-related stuff because they can get some projects, they can raise money, they can hire people. I think the effort from the Chinese government has a huge impact on the world. In the blockchain industry and the world because, in the next three or five years, there will be more and more permissioned blockchain technology coming from China, Probably a new interoperability protocol, there’s a new framework. There’s a lot of things right now in China. Also that’s why we really want to bring in R3, the Corda framework into China. The reason is, personally, I really like Corda. It doesn’t really follow, the public chains, the blocks and everything.
Some people told me Corda is not blockchain because they use traditional databases. I think, if using traditional databases to store data is much more efficient, then why not? It’s a better framework. It’s a better framework than most of the other frameworks. So that’s why I really, really want developers in China to understand this technology. That’s why we actually are working with R3 to bring Corda into China. Also, the first step is, we build what we call an ‘open permissioned’ network based on Corda technology. Which means it’s a free version of Corda. And free to use for any developer, from high school students to small or medium companies. They can connect to BSN and to access this free-version Corda network and try this technology. I think it’s very important. Today’s like three months before launch, there are at least five banks that are talking with us who said as long as it’s launched, they want to try. They want to try it and their team will do some small development, build some Corda app. Right now, almost every single county in China — the technical teams, the research centers — they know Corda but they never tried it. So now, it is very easy to access our network based on Corda, for everybody. We really want the high school students, the colleges, to just have a class teaching how to program on Corda. That’s our goal.
Lau: Wow. Wow. High schoolers in Beijing are learning how to code in Corda. Todd, that must warm your heart, but you’ve got a few months to go. And it sounds like there’s a lot of excitement and anticipated pick-up from major Chinese banks. Are you ready? And what are you going to be offering those banks? What are the kind of things that we’ll be able to see applied once launched?
McDonald: Well, it is incredibly exciting. It’s one of the benefits of being in the space. Thinking a few years back when we started the company to think that, as you said, a group of high school students in Beijing could be building on a platform that we helped bring to market. It’s incredibly exciting. It is very important if you think of this as an infrastructure investment across the Chinese market for BSN, and it’s important to have this be open and have as many hands-on keywords as possible. But thinking about what we’re going to be rolling out, we want to be able to get developers comfortable and understanding what it means to be building applications on Corda or Cordapps. But it’s also incredibly important that we’re offering the enterprise-grade capabilities around the ability for these networks to be long-lasting and running and to have a consensus mechanism provided by China UnionPay, and also to be able to integrate to the payment systems on the backend. A big part of us being able to help get deployment within China is for some of these networks that have been started outside of China to be able to interact with these Chinese corporates, whether they’re insurance networks like our partners at B3i, which is a large reinsurance network in Europe, or Contour, which is a letter of credit network that is being backed by the likes of HSBC and Citibank.
This is the potential for these international networks to start to really establish a beachhead within the Chinese market in the right way and at the right time to have that connectivity to these international markets, into these funding pools. And importantly, as Yifan has mentioned before, this is about connecting businesses together, but it’s connecting them together with trust that they can rely on from the network itself — which if you think about international and global trade, we’ve had some challenges previously around that trust factor. And so, this doesn’t give you 100%, but it really brings more trusted commerce and more trusted participants together in a global network. But done in a way where there’s KYC and strong identity of the participants that you’re interacting and trading with.
Lau: We could see very, very clearly potentially blockchain triggering the next wave of multinational expansion in China. Currently, BSN has more than 100 city nodes in China. It’s targeting 150 by the end of the year. It’s 100 public city nodes that are spread over 80 major cities in mainland China. Todd, Yifan — what is next? What is the ultimate vision for BSN?
He: That’s actually a very good question. First of all, blockchain technology is so important that eventually will rebuild the internet. From our point of view, right now, the internet is a really, really old system. For example, when I send an email, this email actually goes through a bunch of third-party servers. Why? When I visit a website, I need to go through a bunch of ISP servers. Why? Because on the internet it’s a linear transmission. I need to go from one point to one point and eventually reach my end. I think it costs a lot of resources, just processing that transmission. So eventually, the future internet in my mind, everybody will have their own data center. When we have our computer or we have our phone, it connects to our data center first.
Then when we perform any business like visiting your website, it actually goes from my data center to the website’s data center, probably downloading an application pack and running the application. You’ll still see the web pages. You’ll still see it like we see it today. But does that application run inside your data center and you’ll get the results pushed back. That backend system of that website receives it and processes it. We have our own data. We have our own privacy. And all the connections are based on point-to-point. Then, for example, when I involve you in a business transaction that involves like 10 parties, then basically I join a chain. So we process the data. The next one is when I join a business scenario that requires unlimited parties. It’s like a public chain scenario. Then I just download the software, join the network, and process my payments. Everything comes through my data center. Basically, they will change the way people visit websites, send messages, almost processing everything. I think that’s what the Internet should be 30 years, 20 years, 50 years.
Lau: 20, 30 years could be quicker than that. Certainly, the speed in which Blockchain Services Network is coming to market is really incredible. Todd, do you think there should be a Europe or U.S. version? What China is building internally for its own enterprise efficiencies domestically — could this also transform Europe and America, and should we see those versions there as well?
McDonald: Angie, this is an infrastructure investment. One potential future for BSN is that it almost becomes invisible to technology and infrastructure within China. It’s almost like the dial tone for business. Now, if you look at Europe or the U.S., as usually is the case, the investment in underlying infrastructure comes about a little bit more slowly than it would within the Chinese market. In Europe and the U.S., I think that they’re looking at this in a little bit of a different way. The focus within Europe is more on what is the potential for something like a digital Euro as more of a bigger project across the European Union. And I think that’s where a lot of the focus and attention from the public sector is being focused right now. We’re involved in projects with entities there. I think that’s where most of that energy is being spent at the moment.
I would love to say that in the U.S. there is an equal amount of common investment on the infrastructure side, but it’s really being led, obviously, by the private sector. Where here in the U.S., the investment is coming either from the large institutions that are either themselves trying to bring some of these things to market like a JPMorgan or others that are working with or through R3 or others, trying to build these new networks or existing market infrastructure like in the financial markets. If you look at the work that the DTTC (Depository Trust and Clearing Corporation) is doing with trying to modernize their equity settlement system, leveraging a blockchain platform like Corda. To be able to potentially reduce the challenges there might be within the settlement and solve some of the GameStop challenges that they had a few months back. I think that you’re seeing different pockets of investment, not to the scale or the ambition of what BSN is doing, but hopeful. What we have been seeing is that the investment from China and from the public sector — even into things like DCEP — it’s really pushing the agenda in the US and in Europe.
Lau: That’s certainly what we’re feeling here at Forkast.News. Being based in Asia, we know that the regulatory policy environment is so much more receptive to growing innovation. The liquidity is here, as we’ve often said. The projects are here. And those high school students in Beijing, well they’re learning it right now. They’re learning Corda, they’re learning blockchain. And we have learned so much from this conversation. Yifan He and Todd McDonald from R3. Yifan from Red Date Technology. I want to thank you both for joining us on Word on the Block.
McDonald: Thank you very much for having us.
He: Thank you. Thank you.
Lau: And thank you, everyone – our audience – for joining us on this latest episode. I’m Angie Lau, Editor-in-chief of Forkast.News. Until the next time.
