“Blockchain began with crypto, as a grassroots, anti-establishment movement,” said Dato’ Fadzli Shah, a Malaysian venture capitalist and technologist. “But how do enterprises and governments use it?”
He says putting state-backed blockchains front and center is the fastest and most reliable path to mass adoption of the technology.
He is founder of MY E.G. Services (MYEG), a digital services company specializing in Malaysian government work. Among these is Zetrix, a layer-1 blockchain, focused on digital identity and cross-border trade.
Zetrix is now integrated with Xinghou Blockchain Infrastructure Facility, the Chinese state-driven blockchain for state-owned industries as well as large corporations, including multinationals such as SAP and Siemens operating in China.
China’s done it
Although Shah has also invested in local tech startups and run MX Exchange, a private crypto exchange, he has long operated in tandem with the Malaysian government, for example as former chief strategy officer for Malaysia Digital Economy Corporation.
The primary driver to his setting up Zetrix was watching how China’s government has created its own blockchain network to handle cross-border trade and other uses.
“Since 2020, China has been the only national-level government using blockchain,” Shah told DigFin. “They’ve proven the national use case for distributed-ledger technology. Our bet is that more countries will adopt sovereign blockchains.”
This reflects the increasing preference across countries to keep data onshore, with their own approaches to data handling, privacy, and sharing. As more national guardrails are installed, though, these sovereign blockchains need connecting tissue – in China’s case, to support its Belt-and-Road trade programs.
“Zetrix is a blockchain designed as a pass-through between two national blockchains,” Shah said. “We have become China’s international gateway, through which data passes in and out.”
Tricky comparisons
Getting a handle on the absolute size of these networks, and how relevant they are to trade (including trade finance), is difficult, as there isn’t a lot of published data, and networks are not apples-to-apples. Also, Xinghuo is still the only sovereign blockchain in operation, although MYEG is working with Kuala Lumpur to develop a similar chain for the Malaysian state.
The metric used for Xinghuo is that it says it is the world’s most active blockchain, with 100 million blockchain identifiers daily. This means every day the network processes or resolves up to 100 million unique codes or references on the blockchain: transactions, assets, participant identities, blocks, or smart-contract or wallet addresses.
By that metric it vastly outstrips private, permissionless chains: Solana processes 6-7 million blockchain identifiers a day; Ethereum, a little more than 1 million.
How relevant is this to digitizing trade finance? That’s hard to say. Zetrix last reported daily cross-border transaction volumes with Xinghuo of Rm25.6 million ($5.4 million), as of July 2022. It hasn’t published metrics since then, but that figure would suggest an annualized $2 billion of cross-border trade on the platform.
But it’s a negligible amount compared to the $6 billion a day that Solana can process.
Perhaps a better comparison is the fintechs that digitize trade finance with some element of DLT. The last big consortium, Contour, closed and its letter-of-credit business was acquired by Xalts, but there’s no public data on trade financing volumes.
Trade-finance digital marketplace Mitigram may be a closer comparison. The Stockholm-vased fintech claims to have processed $100 billion of trade finance across 185 markets since 2015, which annualized suggests volumes of up to $20 billion, or 10 times more than what Zetrix is processing for Xinghuo.
But even these figures are not reliable, as Xalts and Mitigram, although incorporating DLT, are more about API connectivity. They aren’t pure blockchain infrastructure like Xinghuo.
There are also private-sector blockchains in China. Tencent’s WeBank, for example, backs a consortium called FISCO-BCOS that launched in 2017. Its use cases are similar to Xinghuo’s: supply chain, finance, government services. It is open source, meaning any developers can contribute to its software.
One of FISCO-BCOS’s backers is the Blockchain Service Network, which relies on FISCO-BCOS’s infrastructure to develop decentralized apps on multiple blockchains. It also enjoys backing from major state-owned enterprises, including China Mobile and China UnionPay. And it has an international version of its network, partnering with Digital Asset to integrate with Ethereum and other public, permissionless chains.
DigFin couldn’t find public stats about activity on BSN or FISCO-BCOS. These are older, but onshore they can’t engage in the kind of speculative or coin-based activities that dominate DLT in the rest of the world.
Measuring success
Xinghuo is a government-controlled network, backed by the Ministry of Industry and Information Technology (MIIT) and led by China Academy of Information and Communications Technology (CAICT). It’s become the backbone of China’s blockchain world; apps developed by the likes of BSN will use Xinghuo rails.
Shah says transaction volumes are the wrong metric to appreciate Xinghuo’s importance. Zetrix’s participation is focused just on Certificates of Origin used to document cross-border trade. Impact is measured in making trade more efficient and in lowering costs.
It’s early days to measure this success because the only customs departments using blockchain are China’s. But Shah says for companies exporting goods to China, using Zetrix’s connectivity is cutting time in port in half, from four to two days, reducing warehousing costs and speeding up transfers to trucks or railways.
“We’re seeing savings of at-port costs of up to 40 percent,” he told DigFin.
Cost-cutting is the obvious benefit, but there is increasing value in accessing the data that is tracked by Xinghuo. For example, Xinghuo can measure things like how many kilograms of steel enter Shanghai port every day, he says.
MYEG is working with the Malaysian government to develop its own blockchain for customs, including trade finance and identity. Shah says he’s also in discussions with Manila and Jakarta. Once a second sovereign blockchain exists, then onchain provenance can become a two-way street – and this is what will effectively move Zetrix into full deployment. MYEG will then be able to provide additional services.
Data details
Shah says trade involves the exchange of three things: the goods, the data, and the money. Fintechs and banks focus on financing and payments. Zetrix is focused on the data, but he argues that once trade data is onchain, payments will follow – if banks and fintechs are able to move beyond their walled gardens, which is what bank blockchains are today. But Zetrix is not going to enter the business of tokenizing financial instruments; it’s not a financial institution. It’s just focused on the messaging side of trade services.
He believes more governments will want to manage trade data flows onchain. Tariffs and regulations are complex, even with Asian regional free-trade agreements. Tokenizing the messages brings benefits in time and surveilling what’s flowing in and out. Now that China has a proven model for tracking this onchain, he reckons other regional trade partners will follow.
Still, there are significant hurdles. Zetrix and Xinghuo centrally control their blockchains; they don’t allow open source. That will make integration into each sovereign blockchain – into customs – bespoke. Ditto for connecting with enterprises.
The company will have to develop and maintain an array of APIs. Also, Zetrix is cloud-based, with its data on servers in Singapore – which means either another country’s customs office must agree to storing data there, or Zetrix must work out a local cloud solution. This is technically feasible but would add to the costs Zetrix charges users.
Another question is around handling of sensitive, private data. Some aspects of data are by definition ‘national’, like certain aspects of identity: not a name, but perhaps a national ID number, like on a driver’s license. In China, the definition of public data is far broader than in most other countries. But data can be encrypted so that only authorized participants can view it, contingent on the user’s consent.
Indeed, Shah says while trade is the obvious commercial service, the real opportunity for Zetrix is putting business identities onchain as a means of facilitating regional movement and logistics.
For example, a Chinese national with her driver’s license information tokenized on Xinghuo could, via Zetrix, use that to rent a car in Malaysia by simply showing a QR code that Malaysia would recognize.
This would require a lot of legal updates, such as mutual recognition schemes, but Shah says there are precedents. “Malaysia and Singapore already have a soft-border approach,” he said. “An onchain ID would enable a regional version of that.”
Encryption or exposure?
How comfortable will governments be with putting so much data onchain? Or enterprises, or individuals? Xinghuo is a permissioned, public blockchain; although there are encryption tools, the Chinese government has ultimate control over user data, and over the infrastructure: as DLT goes, this isn’t very decentralized.
The flipside to Xinghuo’s 100 million daily data points is that using its network will help Beijing amass an unprecedented view. Should there be some sort of reciprocity in accessing this data if another government is going to hook up its trade information to Xinghuo?
Just as individuals using Facebook for “free” are giving away a trove of data, would Southeast Asian nations face a hidden cost, or be giving up something of great value, by connecting their trade information to Xinghuo?
China’s a superpower so governments and enterprises may be willing to open data to access the Chinese market. Would that go for dealing with other markets? Maybe not. On the other hand, that would create a hub-and-spoke of trade patterns centered on China, and preclude its trade partners from wanting to use onchain networks among each other. Is that a good outcome for the likes of Malaysia or Indonesia?
Today, global trade is a $30 trillion business. Less than 1 percent is digitized. Banks and fintechs operate in their walled gardens because they haven’t been able to get past their rivalries and long-tail investments. In most countries, this would be seen as a private-sector concern. But China is the biggest trading partner for most of the world. It has built a massive, government-directed blockchain infrastructure. Gradually, trading with China will mean accounting for Xinghuo BIF and its overseas partners.
