Subject: financial affairs, financial technologies, Fintech, distributed ledger, shared ledger

What is "blockchain"

  • Blockchain is generally referred to as a database or digital ledger on which transactions are recorded. The term blockchain is derived from the two words "block" and "chain". An individual "block" refers to all of the transactions which have taken place within a fixed period of time.4Legend symbol denoting The important parts of a block are: (a) its header, which includes information such as a unique block reference number, the time the block was created and a link to the previous block; and (b) its content, which is usually a validated list of digital assets and instruction statements, such as transactions made, their amounts and addresses of the parties to those transactions. See Deloitte (2016). Each block is "chained" to the next block mathematically and sequentially to form a blockchain. Given the latest block, it is possible to access previous blocks linked together in the chain. A blockchain database, thus, retains the complete history of all assets and instructions executed since the very first one - making its data verifiable and independently auditable. This in turn allows blockchain to be used as a ledger which can be shared and corroborated by anyone with the appropriate permissions.
  • As mentioned above, one of the key attributes of the blockchain technology is that it can eliminate the need for a central intermediary to verify and clear transactions. The difference between the conventional approach and blockchain-based approach to transaction clearance is illustrated in Figure 1 below. In a blockchain network, each computer maintains an identical copy of the blockchain, which is updated automatically every time a new transaction takes place. Computers verify each transaction with sophisticated algorithms to confirm the transfer of value and other information and create a historical ledger of all valid activities. The network computers that are processing the transactions are often spread across places and not owned or controlled by any single entity. Since a blockchain is distributed in the network instead of being stored on a central server, it is sometimes referred to as a distributed ledger.

    Figure 1 - Two different approaches to transaction clearance

    Figure 1 - Two different approaches to transaction clearance

    Sources: Oliver Wyman (2015) and IBM Corporation (2016).
  • In practice, a blockchain-based system can be in public or private setting. A public blockchain is open to everyone who can read or contribute data to the ledger, similar to that applied in virtual currency transactions. A private blockchain is a network where the participants are known a priori and have permission to update the ledger. Participants may come from the same organization or from different organizations within an industry sector where the relationships between them are governed by informal agreements, formal contracts or confidentiality arrangement.5Legend symbol denoting See Deloitte (2016).
  • To recapitulate the above, a blockchain-based system possesses the following key features:6Legend symbol denoting See, for example, Oliver Wyman (2015), Deloitte (2016), and DTCC (2016).

    (a)it is able to constantly validate the transactions based on the mathematical rules without requiring a third-party intermediary;

    (b)transactions are executed and settled in almost real-time;

    (c)it maintains a full history of transaction records which are traceable;

    (d)data contained in the blockchain can hardly be altered or removed once added; and

    (e)it can be embedded with instructions (such as "if…then…else") to allow transactions or other actions to be carried out only if certain conditions are met.

Applications of the blockchain technology

Challenges of adopting the blockchain technology

Concluding remarks

  • Blockchain has gained considerable attention and interest in recent years. It is seen as an innovative approach to the conventional way of record keeping and clearing financial transactions. In particular, it removes the need for reconciliations between participants through a third party, speeds up the settlement of transactions or completely revamps the existing processes. Many financial institutions and service providers around the world have already started to invest in the blockchain technology and explore its potential applications. That said, although the technology shows a lot of promise, challenges to adoption remain.
  • According to the Steering Group on Financial Technologies, Hong Kong has the potential to become a key blockchain hub through leveraging its high concentration of industry domain experts and institutions in finance, logistics and other professional services. Yet other Asian economies have also jumped on the blockchain bandwagon to explore the potential applications of the technology. In particular, the Singapore government's technology arm, Infocomm Development Authority of Singapore, in collaboration with two commercial banks, has recently completed an experimental demonstration delivering the first application of the blockchain technology to ensure the security of trade finance invoicing.21Legend symbol denoting See Infocomm Development Authority of Singapore (2015) and the website of Coindesk.

Prepared by Tiffany NG
Research Office
Information Services Division
Legislative Council Secretariat
20 April 2016


1.See PricewaterhouseCoopers (2016).

2.Bitcoin, being the first virtual currency, was launched in 2009. It is an internet-based currency and its payment system requires no intermediaries for reconciliation and clearance. Other virtual currencies in existence include Litecoin and Peercoin. They are commonly referred to as "cryptocurrencies". See Bank of England (2014).

3.The Government established the Steering Group on Financial Technologies in April 2015 to advise on how to develop Hong Kong into and promote Hong Kong as a Fintech hub. The Steering Group released its report in February 2016 setting out its analysis and recommendations.

4.The important parts of a block are: (a) its header, which includes information such as a unique block reference number, the time the block was created and a link to the previous block; and (b) its content, which is usually a validated list of digital assets and instruction statements, such as transactions made, their amounts and addresses of the parties to those transactions. See Deloitte (2016).

5.See Deloitte (2016).

6.See, for example, Oliver Wyman (2015), Deloitte (2016), and DTCC (2016).

7.See PricewaterhouseCoopers (2016).

8.Banks can use the blockchain technology to track the history of transactions with respect to the origin, ultimate destination and use of funds. This helps improve the ability of banks to identify suspicious customers. See White & Case (2016).

9.Trade invoice financing allows a company to draw money against its sales invoices before the customer has actually paid, thereby improving its cash flow. Companies borrow from banks and financial institutions after furnishing unpaid customer invoices as collateral.

10.Banks can only detect if the same invoice has been financed by themselves within a prescribed period of time, but they are not able to do so if the same invoice is financed by another bank. By applying the blockchain technology, banks will have the ability to access a single source of information to detect if customers have obtained funding from multiple banks for the same invoices.

11.For example, the trading order of participant A and participant B is matched on a securities exchange platform. The blockchain-based system is able to verify that participant A owns the stock and participant B owns sufficient cash. The validated transaction is automatically recorded in the asset ledger and cash ledger respectively, eliminating the need for central clearing house. See Oliver Wyman (2016).

12.NASDAQ Private Market enables companies to identify a pool of potential buyers and set parameters on the percentage of holdings that shareholders can sell. Participating shareholders gain liquidity, and the company is able to facilitate the transition of ownership into the hands of long-term institutional holders in advance of a public offering.

13.See Australian Securities Exchange (2016), Japan Exchange Group (2016), and Korea Times (2016).

14.According to an industry report, the amount of investment in the blockchain technology in the capital markets amounted to US$75 million (HK$584 million) in 2015, and is expected to soar to US$400 million (HK$3.11 billion) in 2019. See Aite Group (2015).

15.See European Securities and Markets Authority (2016) and Morrison & Forerster (2016).

16.See Long Finance (2014).

17.See International Criminal Police Organization (2015).

18.Nevertheless, there are still regulations governing the use/trading of virtual currencies in a few places such as Brazil and the New York State of the United States. See BBVA (2016), CFA Institute (2016), and Commodity Futures Trading Commission (2016).

19.According to Financial Conduct Authority (2016), these issues include how individuals gain access to a distributed network, who have the right to control the process, and what data security exists for users.

20.See UK Government Office for Science (2016).

21.See Infocomm Development Authority of Singapore (2015) and the website of Coindesk.


1.Aite Group. (2015) Demystifying Blockchain in Capital Markets: Innovation or Disruption?

2.Australian Securities Exchange. (2016) Media Release: ASX Selects Digital Asset To Develop Distributed Ledger Technology For The Australian Equity Market.

3.Bank of England. (2014) Innovations in payment technologies and the emergence of digital currencies.

4.BBVA. (2016) Bitcoin and blockchain: threats and opportunities for the financial industry.

5.CFA Institute. (2016) Are Bitcoin and Blockchain Technology the Future?

6.CoinDesk. (2016) Official website.

7.Deloitte. (2016) Blockchain - Enigma. Paradox. Opportunity.

8.DTCC. (2016) Embracing Disruption - Tapping The Potential Of Distributed Ledgers To Improve The Post-Trade Landscape.

9.Evry. (2015) White Paper - Blockchain: Powering the Internet of Value.

10.European Securities and Markets Authority. (2016) Financial Innovation: towards a balanced regulatory response. Speech by Verena Ross, Executive Director. 7 March.

11.Financial Conduct Authority. (2016) UK FinTech: Regulating for innovation. Speech by Christopher Woolard, FCA Director of Strategy and Competition, delivered at the FCA's event on UK FinTech: Regulating for innovation. 22 February.

12.IBM. (2016) On the Blockchain nobody knows that you're a fridge?

13.Infocomm Development Authority of Singapore. (2015) Media Releases: Singapore demonstrates World's First Application of distributed ledger technology in Trade Finance.

14.International Criminal Police Organization. (2015) INTERPOL cyber research identifies malware threat to virtual currencies.

15.Japan Exchange Group. (2016) News Release: Commencement of Proof of Concept Testing for Blockchain Technology.

16.Long Finance. (2014) Chain Of A Lifetime: How Blockchain Technology Might Transform Personal Insurance.

17.Morrison & Foerster LLP. (2016) Demystifying Blockchain and Distributed Ledger Technology - Hype or Hero? 5 April.

18.NASDAQ. (2015) Press Releases: Nasdaq Linq Enables First-Ever Private Securities Issuance Documented With Blockchain Technology.

19.Oliver Wyman. (2015) The Fintech 2.0 Paper: Rebooting Financial Services.

20.Oliver Wyman. (2016) Blockchain in Capital Markets.

21.PricewaterhouseCoopers. (2016) Blurred lines: how FinTech is shaping Financial Services.

22.Sutardja Centre for Entrepreneurship & Technology of the University of California Berkeley. (2015) Blockchain technology beyond Bitcoin.

23.The Financial Times (2015) Technology: Banks seek the key to blockchain. 2 November.

24.The Korea Times. (2016) KRX seeks share trading through blockchain. 29 February.

25.UK Government Office for Science. (2016) Distributed Ledger Technology: beyond block chain.

26.U.S. Commodity Futures Trading Commission. (2016) First, Do No Harm. Special Address of CFTC Commissioner J. Christopher Giancarlo Before the Depository Trust & Clearing Corporation 2016 Blockchain Symposium: Regulators and the Blockchain. 29 March.

27.White & Case. (2016) Beyond Bitcoin: The blockchain revolution in financial services.