By Estelle Roiena, Associate, Financial Services & Blockchain
If you’re asking yourself whether the hype around blockchain is worth looking into it, the answer is yes.
You should definitively look to understand what the is fuss all about because there is a high probability that the future of blockchain will impact your work, your business and potentially your day-to-day life much sooner that you realise!
Let me first demystify this concept – because blockchain technology has become a concept beyond the technology itself, and make one point very clear: blockchain is NOT Bitcoin. The blockchain technology (commonly just called blockchain), also known as Distributed Ledger Technology (DLT) has been invented to enable Bitcoin transactions, in a fully decentralised and transparent approach. Imagine a giant, decentralised, shared, replicated, synchronised and distributed database that records immutable electronic transactions in a secure way. You then have the global picture of a blockchain.
Transactions are chronologically entered, shared and replicated between the participants and secured by cryptographic sealing, making them very difficult to falsify. The ledger is synchronised periodically and blocks of transactions are verified and validated by peer monitoring. Every participant has a replica of the ledger and a private key that represents a legal identity. The blockchain therefore, allows traceability, authenticity, accountability, privacy, security and data handling.
The decentralised part illustrates the peer-to-peer transactions, and that, to me, is probably the most important idea to retain, because it gives you a glimpse of the potentiality of the blockchain as a transformative technology, beyond the Bitcoin application. Even though no consensus has been reached on whether and how it should be applied to other markets, the idea of a decentralised ecosystem endorsed by the blockchain technology has started to flourish. We are about to enter a new era, repeating the same patterns as e-commerce: internet has allowed to intermediate consumers and consumers have become producers.
Similarly, the blockchain has started to create a paradigm shift in many industries, especially within financial services. The loss of trust in financial markets since 2007, coupled with a fragmented, inefficient architecture are pushing the sector towards a decentralised system. So, how could the blockchain answer inefficiencies inherent to the system, whilst complying with new requirements (greater transparency, better management of risks and higher capital) demanded by the regulators? To start, you would have to define the technology you need – whereas the Bitcoin application works on a public blockchain, financial institutions are looking at private blockchains where only authorised parties could access particular records for confidentiality purposes.
Then, define the business use cases. The technology will be applied to many departments; the question is where to start? For instance, blockchain will be useful for the ‘Know Your Customer’ (KYC) process. We can imagine a secured, distributed ledger shared between a closed group of banks and a regulator; this could help reduce duplication of verifications at the client on-boarding stage.
Another use case of blockchain implementation, that may be obvious in terms of benefits, is the post-trade application: by removing the various intermediaries, blockchain technology will significantly reduce costs and time. A real-time clearing and settlement process would remove the counterparty risk, mitigate the settlement risk and decrease the scope for data errors.
Exciting, isn’t it? Of course those kinds of changes don’t come easy. And, with the technology being in its infancy, there is a lot of interrogation around both the technicalities and implications.
How does one ensure anonymity, confidentiality and privacy – essential for financial institutions – whilst enabling greater transparency? Should you start by implementing small blockchains for different activities and scale up, or participate in a larger consortium to avoid interoperability issues? If the blockchain removes the middlemen then what will the roles be for banks, custodians, clearing and settlement houses? What would be the impact on the whole architecture of the financial markets? Last but not least, to what extent would the regulations around blockchain impact its implementation?
Nevertheless, one fact has been indisputably acknowledged: The blockchain revolution is here disrupting many industries, but it will not happen overnight.
A “wait-and-see” strategy is no longer an appropriate response and every organisation must prepare for change.
This change will require a pragmatic, well-adjusted approach and an active early engagement of all the stakeholders.
Not sure where to start on your blockchain adoption journey? We do! Why not take a look at our Blockchain Training Sessions and Innovation Workshops.
Note: This article has been originally written and published for Albany Beck