Blockchain is more or less another word for Bitcoin or cryptocurrency in many peoples’ minds, but blockchain could be used in many other and different applications. Blockchain being an invention like the laser beam with new possible areas of application appearing almost by the hour and it will most likely affect an ever-widening group of users; from financial institutions and banks to consumers, merchants, governmental security and intelligence agencies, IT security firms, business developers, cyber criminals (unfortunately) and more.
Think of blockchain as an operating system for marketplaces, data-sharing networks, microcurrencies and decentralized digital communities.
Blockchain is a distributed ledger of transactions that is maintained by a network of computers on the internet rather than a centralized authority. The blockchain is formed of blocks, linked to each other in a chronological order, with each block containing data relating to the most recent transaction and a hashed reference to the previous block. The hashed reference is what creates the link between all the blocks in the chain, and because no one ‘owns’ the blockchain, no one single participant can corrupt it. Or at least, that is the idea.
The data is stored across the blockchain network, and it is this characteristic that gives it its inherent security. However, it is also this characteristic that makes blockchain something of an enigma to the man on the street. It is a new paradigm – technology that can rapidly, securely process transactions, but without being held or regulated centrally.
Blockchain projects have the potential to reduce, and possibly eliminate, settlement times due to their digital nature, ensuring the timely and secure processing of these operations. Other uses for bank-backed blockchain projects would include secured global currency exchange rate speeds and increased transaction security, among other benefits, eventually allowing for an overhaul of the banking industry, replacing traditional back-office clearinghouses and other outdated mediums that exist between asset sellers and buyers.
Users now and onwards - Possibilities and Risks
The decentralized nature of blockchain has meant that traditional financial services institutions have been slow to understand the impact of the technology. It has been going on peer-to-peer by the end users and they have not been fully involved. This is not the case with fintech’s, though, who have been actively evaluating and adopting the opportunities that blockchain presents – there is a huge amount of activity around blockchain technology, and payments is definitely one of the key areas to watch.
Blockchain could be particularly helpful for transacting across borders, with a significant positive impact on the speed, cost and security of international payments. A blockchainbased payment gateway would enable payments to be sent anywhere around the world in 15 to 20 seconds. This is significantly shorter than routing expenditures through traditional banking channels, which can take up to three days. And by using the blockchain ecosystem as a basis, payments are highly secured and therefore less disposed to attack than traditional online imbursement gateways. Using machine learning, transactions can be tracked across the blockchain network, to identify and flag fraudulent behavior, to the benefit of the merchant.
This element of security is one of the fundamentals that will help drive mainstream acceptance of blockchain as a transaction channel: merchants will likely come to appreciate the decentralized aspect of blockchain rather than necessarily view it as a barrier to adoption. This in turn will help drive consumer adoption: end-users of payment gateways will feel more comfortable and are more likely to use a payment platform when they know that their payments are safer from attacks. As consumer expectations change, the participants in the e-commerce ecosystem will need to adapt to them accordingly.
Currently, this ability to perform business expenditures, or offer blockchain payment solutions for companies, is an option for only a few technology firms – usually confined to the fintech space. The financial services sector is waking up to the potential of blockchain to radically change the way it operates, but the shift to widespread adoption will inevitably take time. Currently, banks transact with each other by creating agreements, as one would when purchasing an item from a store. A common example would be a bank agreeing to purchase a specific amount of stock for a specific cash price from another. This process, often awkward and slow, takes up to several days and suffers the risk that one party may default or go back on the agreement. This period, known as settlement, is such an issue that an Oliver Wyman report identified it as costing the financial industry anywhere from $65- $80 billion a year.
There is also an obvious Ponzi Scheme risk at present by the way the cryptocurrencies are used as a “lottery ticket” investment by many, a ticket with extreme volatility and without any real asset or institution to back it up. Soo far going more or less only up in value, but that could change from one day to the next. Nobody wants to be “the last owner” when the downturn comes.
The way forward, potential use and markets
We should also be watchful that, despite the promise, the reality of blockchain is not always as straightforward – and these contradictions also slow the pace of adoption. Processing time, transaction costs, examples of cryptocurrency fraud and the sheer energy requirements of blockchain currently limit its scalability, but the financial sector and others must get on the bandwagon not to risk losing the customers when blockchain technology is so user friendly that they are not needed for transaction handling. One conclusion is fairly obvious, the business model of today is going to be obsolete, nobody is going to be willing to pay for services that are as or more insecure, slower and most of the time much more expensive. Another problem is the lack of a single standard and unified developer stack to use when developing blockchain apps. It is not plug and play – thorough needs investigation for the services to be established and the need for a network of knowledgeable partners to make it happen. In these early days of Blockchain, neither the tools or the easy to get competence are in place. It is easy to create much too complicated and expensive Blockchain services, on the “wrong” platform and with over or “underkill” capacity. When developing a new Blockchain service it is probably more relevant than ever to include not only the ITdepartment, but marketing, strategy and operations since this in many cases may change the way the company or organization works more fundamentally.
Ultimately, though, businesses are looking for convenient, quick and secure payments systems to streamline processes, and blockchain technology has the potential to make it all a reality – and so we expect businesses to increasingly seek out payment service providers that will be able assist them with access to blockchain. This is likely to be particularly true in high impact areas such as multicurrency payments or multi-country settlements, which relatively few payment gateways comprehensively cover even in the non-blockchain world.
Some major parties behind developing blockchain technologies and driving standardization work
Hyperledger Fabric Project
To meet the demands of modern markets, companies are collaborating to develop an open source, industry focused implementation of blockchain technology for business use called Hyperledger Fabric, one of the Hyperledger projects hosted by The Linux Foundation. Hyperledger Fabric is intended as a foundation for developing applications or solutions with a modular architecture and allows components, such as consensus and membership services, to be plug-and-play. Hyperledger Fabric project
The Enterprise Ethereum Alliance
The Enterprise Ethereum Alliance connects Fortune 500 enterprises, startups, academics, and technology vendors with Ethereum subject matter experts. The ambition is to develop a de facto standard contract supporting blockchain based on open source with developers around the globe. Ethereum is the real challenger today to the Hyperledger Fabric Project, both community-driven open source initiatives. The alliance homepage
The Utility Settlement Coin (USC)
The Utility Settlement Coin is a Blockchain cooperation project between a number of large banks (including Barclay’s, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG, Deutche Bank, Banco Santander, UBS, BNY Mellon, NEX and State Street) in order to facilitate back office settlement systems, liberating capital in global transactions. To reduce risk and improving transaction efficiency.
R3 ’s blockchain consortium
R3 (R3CEV LLC) is a distributed database technology company. It leads a consortium of more than 70 of the world's biggest financial institutions in research and development of blockchain database usage in the financial system. The consortium's joint efforts have created an open-source distributed ledger platform called Corda. The aim of Corda is to provide a platform with common services to ensure that any services built on top are compatible between the network participants. Corda's code was open-sourced on November 30th, 2016 and may in the future be contributed to the Hyperledger project. Hyperledger is a cross-industry project led by the non-profit Linux Foundation to advance blockchain technology by coming up with common standards.
ISO/ANSI/other standardization organs
What about standards? Is there a need for interoperability or will de facto standards (like Bitcoin or Etherum) be transformed into “the standard”? The ambition from the standardization institutes (like the Standards Australian below) is to centralize the phenomena.
“[...] Blockchain is still an emerging technology and issues such as data sovereignty, privacy, and lack of consensus are causing headaches for policy makers, regulators and industry alike. Notwithstanding, Australian stakeholders and government want this technology to be sustainable in the long-term. ISO and its members have an important role to play in making 6Blockchain – much more than the Bitcoin hype | 2018-02-12 this a reality. ...The proposed international standards for blockchain will focus on technical solutions that promote interoperability, and compatibility between existing systems. This will allow the technology to be more widely used and deployed.”
Bitcoin and Etherum are for example not interoperable with each other, so there is a clear example on where adjustments must be made if to integrate or to live on with different platforms.
2018 will most likely be the year when blockchain technology and the potential it represents above and beyond cryptocurrency lottery that we have seen so far. We will follow it with keen interest and will be part of shaping the future of Blockchain together with our clients.