Abstract
Blockchain is one of the most important innovative technologies developed in recent years. It has great potential and capacity to help SMEs prosper due to its decentralized public ledger, which provides a secure infrastructure for transactions between unfamiliar parties without any major influence from a central authority. The use of a decentralized public ledger also makes it possible for SMEs to get credit more easily, thus assisting them in achieving sustainable development. This chapter gives an overview of the functions and applications of blockchain, the situation of SMEs in the Chinese market, and sheds some light on how the Chinese policies on blockchain may affect SMEs. The chapter uses the case of WeBank to show how blockchain technology can accelerate the development of SMEs.
TopIntroduction
The limited credit access by small and medium-sized enterprises (SMEs) continues to hamper their growth and development in almost every part of the world, and China is no exception. Several reasons have been cited as limiting factors to SMEs' quest to access credit. The most persistent challenge is the severe information disproportionateness between banks and firms. Adverse selection due to information asymmetry leads banks to allocate credit by means of rational choice (Guo et al., 2021). In addition, the lack of adequate collateral by most SMEs is a tenacious stumbling block that hinders deserving SMEs from demonstrating their creditworthiness effectively. This, consequently, sees many SMEs being constrained by the banks' credit rationing (Berger & Udell, 2006).
There has been some transition from traditional information towards a smarter information society due to the increased importance of Cloud Computing, Big Data, Mobile Internet amongst other forthcoming information technologies. One of the significantly growing and crucial technologies which is envisaged to show some great application potential is Blockchain (Peters & Panayi, 2016; Pilkington, 2016). Initially applied in time-stamping transactions (Haber and Stornetta, 1991), blockchain creates a decentralized public ledger that even without a central authority, results in safer transactions between unfamiliar parties (Dai & Vasarhelyi, 2017).
Blockchain has in recent times expanded its technological base to strengthen a number of businesses which include but are not limited to voting systems, banking, insurance, lease contracts, and government services (Reham et al., 2021). Since it arrived in China, blockchain technology has grown significantly in the unique Chinese social environment and is used in various industries.
Blockchain technology has enabled permissionless networks that can be used by independent operators with established incentives, operating without the aid of any individual financial institution or central authority. In particular, the financial services industry is experiencing rapid innovation and change due to blockchain, which has come to be called decentralized finance, or DeFi.
This chapter, that mainly focuses on the Chinese market, will consider the difficulties of SMEs in getting credit, before concentrating on how blockchain can assist them to achieve sustainable development goals.
Key Terms in this Chapter
Decentralized Public Ledger: A way for untrusted parties to reach a consensus on a common digital history.
Adverse Selection: In financial markets, adverse selection refers to a situation wherein one party in a potential transaction uses some extra information the other part does not have such that the transaction likely favors the former.
Hashing Algorithms: Hashing is a method of processing information in computer science. It is commonly used as a practical method of information security. Hashing algorithms are also used to encrypt password strings in databases, as the hash value calculated by the hashing algorithm cannot be reversed back to its original value, thus providing effective password protection.
Data Silos: A data silo is a group of raw data that is only accessible to one department, and not to the rest of the other divisions within that same organization. This results in a severe lack of transparency, efficiency, and trust within that organization.
Credit Rationing: At a micro level, there are two aspects to this: (1) some of the loan applicants are accepted, while others are denied a loan even if they are willing to pay a high interest rate, and (2) loan applications are only partially met (e.g., a $1 million loan application can only be granted up to $500,000).
ICO: Initial Coin Offering, derived from the stock market concept of Initial Public Offerings (IPO), are the first issuance of tokens by blockchain projects to raise general purpose digital currencies such as bitcoin and ethereum.
Idea of “Grasping the Big and Releasing the Small”: The emphasis is on the government supporting the development of large enterprises to make them more competitive in the international market. The idea sees the central government relinquishing control over SMEs.
Cryptocurrency: A medium of exchange that uses cryptographic principles to secure transactions and control the creation of units of exchange. A cryptocurrency is a type of digital currency (or virtual currency) such as Bitcoin.
Merkle Trees: Merkel tree is a binary tree that can be used to quickly check and summarise large amounts of data which can be used to verify the integrity of transaction records in a block.
Timestamps: A timestamp is data generated by digitally signing an object containing information such as the signature parameters of the original document, the time of signing and others using digital signature technology. Timestamps are used to prove that the original document existed before the time of signing.