A conference call interview of VeChain COO Kevin Feng by Song Jiaji (China’s award winning equity research analyst from the largest investment banking firm Guotai Junan Securities), dialing in are over 2000 institutional investors interested about blockchain technology.

This interview serves as an educational piece for these institutional investors

The interview took place on Jan 8th, in Chinese. Below is the translation of the Transcript of the call.

Summary of Blockchain Teleconference: The discussion about blockchain and IoT (Guotai Junan Securities Telecommunication Equity Research Analyst Song Jiaji’s Team)

Theme: The integration and project landing of IoT and blockchain + the evolution of community governance models

Host — Principal analyst of Guotai Junan Securities Telecommunication team Song Jiaji

Special guest — VeChain COO Kevin Feng, who has previously worked for PwC for 12 years in the Cybersecurity, Blockchain and Fintech Practises.

Opening remarks:

By the beginning of the new year, blockchain has once again become the hot topic of technology industry. The collaboration between CNET and Jingtum Tech has brought about a surge of 700% in their share price within one day. It is obvious that blockchain has already become the leading trend of the revolution of next generation’s Internet. 2018 is about to witness the reconstruction of business patterns and the maturity of sharding and cross-chain technologies.

Recently, traditional listed companies like Xunlei and Baofeng have all collaborated with blockchain enterprises and gained impressive performances in capital market. Blockchain technology itself is also in constant evolution and promotion, and the concept of blockchain is constantly shifting towards project orientation, business patterns and economic patterns.

What’s the main business of VeChain? What made you want to join VeChain?

Kevin: VeChain focuses on providing the blockchain solutions regarding the product management of collaborative products and information sharing for enterprise users. The distinctive feature of our project is that: as an underlying technology, blockchain itself doesn’t require users to know about its operational principles. Our blockchain platform develops and connects characterized application system for our customers from different industries and thus supports the landing of commercial applications. VeChain has been focusing on application development based on its application-oriented technologies. Initially, VeChain focused on the anti-counterfeiting, tracking and tracing functions of products. Currently, the application scenarios of VeChain have expanded into the data sharing of vehicles’ life cycles, cold chain logistics management and carbon emissions solutions etc. The blockchain platform that we established not only provides underlying technologies, but also provides an end-to-end technical solution of both underlying and upper application layers.

After leaving PwC, I chose to join VeChain at serendipity. By 2016, PwC has already expanded its business into blockchain-related projects. Due to my personal interest in the new technology, I undertook the duty of the business development in this new field. By the end of 2016, I became the person in charge of the relevant service development of blockchain projects and started the cooperation with the VeChain team. During the cooperation with VeChain, I gained an in-depth understanding regarding the blockchain industry and the VeChain team. Personally, I think blockchain will be the next leading industry trend since the breakthrough of Internet industry. The reason I decided to join VeChain team is because I’m optimistic about the prospect of the team.

Despite the initial cooperation with luxury brands, VeChain has recently collaborated with DNV GL (world leading service provider that provides various services regarding risk management and various assessment and authorizations for various customers). What’s the business model involved in your new collaboration? Does it generate profit for your company?

Kevin: Our collaboration pattern with DNV GL is totally different from our collaboration with luxury brands and automobile industry. During our collaboration with luxury brands, we have referred to traditional methods of system integration, in which we should understand the demands of our partners and help them to construct a realistic and feasible plan for the landing of their blockchain applications. DNV GL has gained high authority in the global certification industry. With the evolution of global technological development, DNV GL realized last year that its certification business needs to shift towards the global trend of digitization. After conducting market research and development worldwide, DNV GL has decided to establish a cooperation partnership with VeChain due to the fact that VeChain’s application scenarios of the landing of applications in real world business environments perfectly matched the demand of business transformation of DNV GL regarding its digitization process. A lot of DNV GL’s valued customers are famous enterprises among the Fortune Global 500 List. Currently, DNV GL provides brand new digital authentication service based on digitized model. During this process, DNV GL provides the complete blockchain business model plan for its customers, and as the technology provider, VeChain provides technical support for DNV GL and both parties mutually conduct the landing of the project. VeChain has also benefited a lot from the cooperation with DNV GL, as the cooperation ensures the tight connection between VeChain’s technology and the future business model of DNV GL’s major customers, which enables VeChain to share the abundant customer resource with DNV GL.

As a brand new technological concept, only very few companies have gained an insight of blockchain technology. As a technology start-up company, VeChain’s cooperation with world leading organizations such as PwC and DNV GL constructs a most appropriate business plan and mutually promotes the landing of the project, which greatly enhances the possibility of the successful implementation of the projects.

Regarding the profitability of VeChain, we charge our customers a service fee for every one-off solution we designed for them. Due to the characteristics of blockchain, apart from the service fee for every one-off solution we designed, the project landing fee, we also charge fees based on the amount of operations that each product generated on the blockchain system. Recently, our focus is on how to scale the ecosystem. Hence, profitability and a rise in service fees are not our major concerns at this stage. We can only manage to accumulate more advantages in future business negotiations and bring more profit for our company by expanding our ecosystem first.

How are the values of IoT + Blockchain reflected?

Kevin: IoT is our main focus. IoT and blockchain are indivisible. Currently, the security authentication of IoT equipment is still flawed and the application scenarios of IoT are still needing to be improved. The emergence of blockchain technology and IoT technology supplement each other. We can ensure the authenticity of data based on the fact that the data stored in blockchain system cannot be tampered. The first question is how do we acquire the data. If we chose to upload all data manually, errors may occur during the upload process. Once the faulty data is saved on blockchain system, the incorrect records are then saved on the blockchain system permanently as well. Our future development direction is to use IoT as the hands and feet of blockchain to capture the data of the real world and correctly save all data on blockchain platform. We have managed to develop all our microchips autonomously since the early stage of our development. Recently a team of a major China based multinational electronics R&D team joined VeChain as well. Our application scenarios, including the earlier scenarios in luxury industry and the later scenarios in cold-chain logistics and carbon emissions, are all deeply integrated with IoT. For example, regarding the cold chain logistics solutions, the cooperation partner of DNV GL has been specializing in providing certification services for the logistics industry ever since. One of the technical difficulties that DNV GL encountered is that they couldn’t find a technical method to certify that the temperature of any certain frozen product is controllable throughout its life cycle in every logistics chain from the production stage to supermarket retail stage. All DNV GL could do regarding this problem is to conduct certification through some traditional or internal control processes, which to a great extent involves artificial judgment. But once we have blockchain technology, we can conduct perfect technical certification in this area. During all stages of cold-chain logistics links, we can manage to collect precise real time data by scanning the on-board or micro temperature sensors installed on transportation vehicles or embedded in the products and upload this data onto the blockchain system. All data saved in the blockchain system cannot be tampered at all, which guarantees that every link of the complete cold-chain logistics is controllable. When we effectively integrate IoT and blockchain, we can potentially develop some new business models.

What kind of role does VeChain token (VEN) play in VeChain’s ecosystem?

Kevin: VEN’s role in our ecosystem is more inclined to a type of smart currency or programmable currency. If we want to establish a new business model, we would have to ensure the integration of logistics, information flow and value flow. Before the emergence of IoT industry, the research on logistics industry was mainly restricted to logistics technologies like how to move a certain object from point A to point B. The emergence of Internet solves the problem of information flow. Once the interconnection of logistics and information flow is formed, it creates a brand new business model. For example, for those leading enterprises like Didi and Taobao, they have already subverted traditional business models through the integration of logistics and information flow. Hence, we think that if we want to establish a brand new business model out of blockchain technology, we have to establish the new model on a higher dimension compared with current business models by the perfect integration of logistics, information flow and value flow. For example, in a logistics application scenario, once the product is delivered, a notice is sent to the receiver. The overall operation process of the capital flow involved in this transaction is conducted by smart contract automatically. In a business model like this, a programmable smart token is required. Hence, the VeChain token plays the role of smart currency on our platform and ensures the smooth running of the platform.

From our perspective, digital tokens play a very subtle role in blockchain systems. It is obvious that the digital currency market has been very prosperous these days. But from an industrial perspective, a digital token is a proof of VeChain blockchain infrastructure for users of both business and customer ends. The implied meaning of the word “token” is “proof”. If you hold the token, when you generate a smart contract on VeChain system, from an economical perspective, you use VeChain’s infrastructure. Hence, you are required to pay when you use VeChain’s infrastructure. This fees are not paid in traditional currency, but by the smart contract loaded with the tokens. Thus, digital tokens are not designed to be used for speculation purposes but for practical uses. The role of digital tokens in every ecosystem will be gradually clarified in the future.

There’s another concept called consortium chain. During the establishment of consortium chain, there’s no gap between all members, in another word, there is no token issues in the system. In a system like this, the cost can be even lower. So why do people choose VeChain and not establish their own consortium chains?

Kevin: This question is mainly about the discussion regarding whether we should choose to follow the path of public chain or consortium chain. From our team’s perspective, consortium chain does have its advantages, for example, the landing of consortium chains is easier. However, the participants of consortium chain are relatively limited to upper-stream or downstream participants or relevant participants from vertical industries. Also, the participants of consortium chain are all stakeholders, which make consortium chain much less decentralized than public chain. The greatest value of blockchain is that it reduces the cost of trust, and that’s why by using a blockchain platform, we can realize synergy based on zero trust between different enterprises. If we only promote business in a restricted ecology system of consortium chain, it would be very hard for us to guarantee the synergy or communication between different enterprises. People might ask that there are a lot of public chains around these days and why we haven’t seen much of the real landing of their business applications. As a matter of fact, we think that the absolute decentralization is set to cause problems as well. For example, absolute decentralization might lead to the lack of a clear management structure or huge fluctuations in token prices. Hence, when we design our public chain system, we hope to find the balance point between decentralization and centralization. Apart from VeChain team members, we also invited experts from PwC and economics professors to be part of our governance board and provide guidance for us based on their rich experience in traditional industries. We are aiming to design a public chain with very strong governance structure so that when any technical evolution occurs in this chain, all decisions will be made effectively through the governance structure like this. We want to avoid the situation of hard forking which have already occurred in some of the public chains nowadays, as these are the major barriers for users to use public chain. The fact that there is problems occurred in the public chain system today doesn’t mean that consortium chain has a greater comparative advantage than public chain.

That is to say, despite the fact that blockchain itself is decentralized, it doesn’t mean that anyone can act indulgently in a community like this. In a world of pure public chain like Bitcoin, all users can reach consensus in some extent. When disagreements occur among users, the problem can be resolved by a voting mechanism, which could possibly lead to forking. There are over ten forks like this within the last year which are caused by disagreements among users. Another type of fork is generated by certain commercial purposes. However, any fork under commercial purposes doesn’t have a unified governance structure. Hence, most commercial users dare not to adopt this solution. For example, if I ask Ethereum to conduct an application project, and by generating the smart contract, it consumes ETH. The price of ETH might be only 70–80 RMB one year ago, but now the price of ETH has soared to more than 7,000 RMB. Hence, the cost that consumed by an activity on blockchain system now is 100 times greater than it was 1 year ago. Under situation like this, the operation cost of certain commercial applications would be totally beyond control. Thus, we would have to reach certain level of balance between centralization and decentralization. The meaning of this balance is that, on one hand, it forms the autonomy of a community; on the other hand, it can also repair some of the disagreements occurred by itself.

We heard that you once worked for PwC, can you introduce the revolution that blockchain brings to audit industry?

Kevin: Personally, I think blockchain is set to bring huge impact to audit industry. If customers and auditors are both on the same blockchain platform, they can all benefit from the use of the feature of shared accounts. Through the function of shared accounts, auditors can independently obtain some reports and Excel files that are supposed to be provided by customers. Previously, after obtaining data from customers, auditors still have to verify the completeness and correctness of the data. After using blockchain technology, auditors can verify if the data provided literally existed by the time it was generated and if the data provided by customers are in correspondence with the original data easily by simply verify the hash value on blockchain system.

Another impact of blockchain on audit industry is that PwC is already conducting research on the possibility that any auditor or independent third party can join the blockchain platform as different blockchain nodes and conduct some real time third party data certification tasks by using the feature of shared accounts. Due to the real-time synchronization feature of shared accounts in blockchain system, the use of blockchain in audit industry enables auditors to conduct both annual and quarter audit in traditional methods and direct audit by directly connecting all data involved, which would eventually bring positive impact to audit industry, including the simplification of audit processes and the enhancement in audit efficiency.

What are the investment opportunities for blockchain in the future? How do we analyze blockchain from the perspective of industry chain? From the perspective of business models, what are the areas of application in blockchain technology that can generate profits?

Kevin: The comparatively mature concept regarding the landing of application in blockchain technology these days is that, considering the fact that the use of blockchain technology reduces cost of trust and guarantees the authenticity of the data, blockchain technology can be used in logistics industry regarding the tracing, tracking and anti-counterfeiting of important or high value products. Also, blockchain technology can be used in supply chain industry. Due to the lack of information transparency, the cost of tier two and tier three suppliers is very high. By using blockchain technologies, the problem of supply chain can be easily solved. What’s more, blockchain technology can also be applied into food safety as many features of blockchain technology perfectly fit the problems that need to be solved in the food safety field.

Host:

As a matter of fact, many applications of blockchain technology are not to be used for profit gaining but rather for the reduction in management cost. In the broad sense, the management cost here refers to the direct friction cost generated by the enterprises. Also, take Xunlei for example, in the previous ecology system of P2P platforms, users are normally reluctant to keep logged in on the platform all the time. However, the more users choose to stay logged in on the platform, the more resource they would provide for other users to download. In previous business model, Xunlei offers those users who keep logged in all the time certain bonus points. The bonus points like this are actually marketing costs for enterprises. Now, this process can be achieved through the use of equipment like Onething Cloud. By purchasing equipment like Onething Cloud, users connect the equipment to the Internet at home and choose to share the bandwidth of their personal Internet connection when they’re not using it. The sharing of personal bandwidth is the same as logging in the platform all the time. In a system like this, the longer the users keep connected to the equipment, the easier it would be for users to obtain tokens. Tokens can be used for the exchange of other services on the platform. The cost generated by this marketing process and the marketing logic that the community established is thus totally different from the previous models. This typical example shows the reconstruction that blockchain brings to the industry. The value of the tokens is limited, and that the value of the tokens requires the platform’s support. This process totally changes previous marketing model. The new model indicates that users are working for themselves and not for others, and this is the typical application of decentralized autonomy.

Q&A

Question:

From the perspective of upper stream, mid-stream and downstream industry chain of blockchain industry, which part of blockchain industry chain benefits the most? Or is blockchain similar to Internet, which is just a type of technology that caters for different applications required by different people?

Kevin: Blockchain refers to the later definition. Blockchain is not purely something that helps people to make money. The revolution in blockchain business models is similar to the introduction of the Internet protocol. Blockchain itself is an underlying technology that doesn’t generate profit. Whether blockchain technology could generate benefit or not depends on the application of the technology by the enterprises. Recently, the application of blockchain by most listed companies is still far from enough. Blockchain is a revolution in business model.

Question:

Among various industries like logistics, finance and food safety, enterprises with which features are more likely to succeed in their business models?

Kevin: Luxury brands are more likely to do so. This is because luxury brands themselves don’t really have existing powerful solutions, which makes them easier to try out new technologies. This has something to do with the corporate culture. For those enterprises that are willing to adopt new technologies for a revolution in their business model or those enterprises with unique corporate cultures, like Internet companies, are more likely to accept blockchain technology. Overall, the acceptance of blockchain technology is based on corporate culture and the enterprises’ willing to change.

Question:

When will blockchain technology be promoted?

Kevin: It depends on which company first manages to perfect its new business model and establishes new ecology pattern. With the increase of use and users in blockchain technology, the value of the tokens of the platform will increase as well, which in turn leads to the rise of user number.

Question:

At this stage, are there any companies that can provide general blockchain technology in this field?

Kevin: I’m not quite sure about it. Most companies are still focusing on the concepts.

Question:

After the recognition of blockchain technology, do these companies still have any business opportunities?

Kevin: It still depends on the establishment of business models. At this stage, no enterprise has managed to expand its original business based on the sharing model of blockchain. Temporarily, blockchain hasn’t brought new profit growth for companies, but the use of blockchain technology can reduce management cost and friction cost. For example, during the project we implemented for luxury brands, blockchain technology guarantees that each product is assigned a unique QR code, which prevents buyers from returning fake products and ask for a refund out of the fake products they returned.

Question:

Compared with traditional methods, does blockchain technology enjoy a significant advantage in the integration of logistics, information and value flow?

Kevin: The business logic, agreement logic and the payment are all realized by smart contract and program codes in blockchain system. In the current business environment, all transaction deliveries and payments are actually still relying on the mutual trust among all parties involved in the transaction. Also, cross-border settlement takes time and generates cost. In comparison, blockchain platform operates by token mechanism and smart contracts. Once a certain contract term is triggered, for example, the product is received, the following payment processes will be automatically conducted according to the preset program codes or agreements. The whole process only takes a couple of minutes for any cross-border transactions, and the cost involved in this process is negligible.

Question:

What kind of impact would blockchain bring to customer end business?

Kevin: The cross-border payment service provided by a lot of blockchain platforms today are actually based on the credibility of the platform. For example, Taobao releases the payment to sellers after confirming the customer has received the product through Alipay. However, in the blockchain system, the logic of the program codes is the only thing we believe. The logic of the program codes is totally transparent for all parties involved in the transaction and no agency is required during this process. The change in this process wouldn’t affect user experience, but the underlying nature of the process has changed profoundly.

Question:

Does the new generation of technology such as blockchain really bring that much change and revolution to the world? As otherwise it would be hard for the new generation of technologies to replace traditional technologies within a short period of time.

Kevin: As a new technology, blockchain enables individuals to conduct transactions with other individuals, which reduces the cost of trust by the agreements that are trusted by each other.

Question:

What’s the purpose for blockchain startups to issue tokens?

Kevin: Different blockchain projects would have different purposes regarding the issuance of tokens. Our purpose of token issuance is for the creation of a real cryptocurrency economy. Our token holders will actively help us to promote our projects. Our token holders focus on our project and provide suggestions and advices on our project, and this forms a closer tie between the project and the token holders compared with the relationship between listing companies and shareholders. Through the issuance of tokens, we hope to create a more active community compared with the communities of traditional projects. The tokens are the token holders’ proof of ownership of the platform. Token holders would hope to see the expansion of business activities and platform of the project, as the tokens will appreciate during this process for mutual benefit.

Question:

Are tokens of different projects exchangeable

Kevin: Token holders can exchange the tokens of certain projects into Bitcoin or Ethereum, then further exchanged into other currencies via cryptocurrency exchange platforms.

Question:

So now the world’s common cryptocurrency is just Bitcoin and Ethereum?

Kevin: If the liquidity of any project’s tokens is huge enough and the token has enough amount of holders, the token might become mainstream token in the future as well.

Question:

RFID verification generates a comparatively high cost. Due to the fact that VeChain’s previous cooperation partners are luxury brands, the comparatively high cost of RFID verification can still be considered as negligible. If VeChain cooperates with those supply chains with lower product values, is it possible for VeChain to consider the use of verification processes with lower cost like QR Code?

Kevin: Currently, we have multiple technical solutions like RFID, NFC and QR Code. During our cooperation with our customers, we won’t be restricted by our technology. Instead, we will design solutions based on our customers’ requirements. The advantage of RFID is that it is convenient to use in the warehouse and supports long distance scan. The disadvantage of RFID is that the use of the technology requires the use of a specialized scanner gun.

For high value products, we recommend the use of RFID and NFC dual frequency chip, which is both convenient for the brand to conduct warehouse management and for users to scan with mobile terminals. Regarding the use of this technology in mobile terminals, Android system has already supported this function, and IOS system has already allowed the programming and development of softwares in this area on its system. The cost of the solution of RFID and NFC dual frequency chip is comparatively high, but this cost can be negligible for high value products.

For those products with comparatively low values, we have our solutions for those products as well. For example, recently, we have provided product tracking and tracing solution for a red wine brand. The unit price of the red wine is 80 RMB per bottle. The brand’s major concern is on the convenience of product tracing and tracking, and anti-counterfeiting is not the major concern of the brand. Hence, the solution we provided for the brand is QR tracking and tracing. The tracing and tracking purpose can be successfully reached by scanning the unique QR code printed on the bottle.

Overall, we will design the most appropriate solution based on the nature of different industries and the concerns of different customers.

Question:

Are mostly solutions provided by VeChain currently operated on consortium chain?

Kevin: The solutions we currently provided for our customers are not operated on public blockchain. Our currently blockchain can be simply categorized as consortium chain. We plan to launch our project on public chain around quarter two in 2018 and seamlessly transfer all our customers from our current chain into the new chain.

Question:

Can you briefly introduce the team of VeChain?

Kevin: Project CEO: Lu Yang, formerly CIO of LV China, who gained rich experience in various industries such as luxury goods, logistics, retail sales and IT etc.

CFO: Zhang Jie, previously worked for PwC and Deloitte. Zhang Jie has been working in both China and UK and has gained rich experience in financial management and internal control. Lu Yang and Zhang Jie are the co-founders of VeChain.

CTO: To be announced soon.

Chief Scientist: Zhou Ziheng, Ph. D. Zhou Ziheng is responsible for the connection of blockchain research projects with multiple universities and institutions in Europe, Hong Kong and Mainland China and focus on the technical area of the project.

Other members of VeChain team include VeChain Europe Manager Jerome Grilleres etc, please refer to our official website. VeChain has already established offices in Paris and Singapore for our marketing promotion in Europe and Southeast Asia.

I’m Kevin Feng, the COO of VeChain. Before joining in VeChain, I worked for the financing protection service department of the Network Security Department of PwC for 12 years. Apart from that, my job responsibilities in PwC also include project management and financing consultancy service.

Question:

Currently, China’s supervision on digital currencies is quite strict. For example, a couple of days ago, the head of Renren.com has been warned by the government for the issuance of RR Coin. Will the policy regulations affect the development of the industry in the future?

Kevin: It’s very hard to predict the path of policy development. From the perspective of the development path of blockchain technology in countries like Singapore, USA and Japan, despite the fact that blockchain is a new technology, it is still required to meet the standards and policies of traditional supervision. For example, digital currencies have to obey policies and regulations regarding KYC, background investigation and anti money laundering etc.

Hence, during the design of VeChain public chain platform, we stress on governance structure, and KYC is also part of our requirements. Of course, customers can choose not to participate in KYC, but in that case, the customers will receive a comparatively lower benefit. We have very strict KYC requirements for our enterprise users regarding every transaction node. We have also invited our partner PwC to be a member of our strategic committee for compliance risk monitoring and control. PwC has acquired rich experience in this field and can help us to follow the supervision requirements that meet traditional industries during the landing of our application projects.

The above collaboration has already been reflected in the actual cases. Our customers from luxury goods industry in Europe will inquire that if the solutions we provide meet the Privacy Protection Act in Europe. Europe takes privacy protection very seriously, and we will improve on our solutions and make sure that our solutions meet the laws and regulations in Europe.

Question:

Where were VeChain tokens issued?

Kevin: VeChain’s Singapore Foundation issued VeChain tokens.

Question:

Now that VeChain tokens were issued by Singapore foundation, does it mean that the tokens are free from all policy supervisions in Mainland China?

Kevin: According to the supervision policy in Mainland China, all organizations in Mainland China are not allowed to promote ICO’s or conduct transactions with any cryptocurrency exchanges situated in Mainland China, and that all previous ICO projects need to conduct refund process. At this time, we fully complied with the regulation policies and conducted all relevant operations. Despite the fact that VeChain currently issues its tokens in Singapore, part of our team and business is still in Mainland China. Hence, we do respect the requirements of supervision policies in Mainland China. At this stage, our project meets all current supervision requirements in Mainland China.

Question:

Currently, it’s very hard for Chinese visitors to purchase your tokens. However, part of your business operation is still in Mainland China. How would you solve this contradiction?

Kevin: Our team is mainly situated in Mainland China, but our customers and business is not restricted to Mainland China. We have a lot of customers already in Europe and Singapore as well. Recently, our project is very internationalized and our overseas community is also well developed. We have more than 60,000 followers on our Twitter account. Of course, we also pay a lot of attention to the market in Mainland China. Despite the fact that the investment channels are limited currently, some investors have already held digital currencies such as Bitcoin and can exchange their tokens via exchange platforms.