The first time the former CEO of software supplier SunGard heard about blockchain it reminded him of a major change in twentieth-century exchange trading.
[Blockchain] reminded me of when I heard about a company in New Jersey that was doing electronic trading in ways nobody had done before – the feeling that something was fundamentally changing.
Cristobel Conde told Institutional Investor last year.
Cristobal Conde told Institutional Investor last year.
It remains to be seen whether blockchain (a digital ledger that keeps a record of a transaction, encrypts and validates it and shares the information with multiple participants via a computer network) will be as transformative for financial services as the start of electronic trading was in the 1970s.
Most experts reckon that at the very least it could transform the way business is done in financial services, by removing many of the middle and back office functions currently needed to validate and service transactions.
‘We may be moving away from an internet of entertainment, shopping and advertising to a new era in which the technology is actually doing serious business,’ Dr Philip Godsiff, senior research fellow at the Surrey Centre for the Digital Economy at Surrey Business School, says in a new BearingPoint report on blockchain (‘Can the financial services master cryptofinance?’).
To achieve ubiquity, though, blockchain will have to overcome some technical constraints. Cryptographic distributed ledgers will have to talk to existing IT standards. Back-office systems that can be more than 30 years old will eventually have to be interfaced to the new technology or replaced with a single peer-to-peer platform.
Computing power can be another challenge. In the Bitcoin blockchain, the so-called “blocks”, individual books of transaction records in the digital currency, are currently restricted in size to one megabyte, equivalent to six seconds of CD audio.
Thus, the Bitcoin network is capable of processing just seven transactions per second. That’s far too sluggish for global financial markets and many blockchain vendors are striving to offer faster transaction validation times, although blockchain’s technology isn’t just for bankers.
Everledger is a blockchain technology used to keep track of diamonds and their ownership status. Diamonds certified and traded are given a ‘unique Identifier’ in a digital ledger, which is difficult to destroy or replicate. It’s used by owners, insurance companies, diamond certification bodies and law-enforcement agencies.
OpenBazaar lets people sell anything to anyone, anywhere using bitcoins. In contrast to online markets such as Amazon and eBay, users of OpenBazaar don't visit a website. They download a program that directly connects them with other potential buyers and sellers.
And as the UK government noted in a report earlier this year, (‘Distributed ledger technology: beyond block chain’), blockchain’s distributed ledger technology could be used to secure an enormous range of transactions including collecting taxes, delivering benefits, issuing passports, political elections and for controlling access to patients’ medical records in the health service.
When blockchain contracts are linked with the ‘Internet of Things’ – objects with sensors, including cars, fridges and clothes that are connected to the Internet – it will be possible to track all sorts of objects online.
Blockchain is still very new and won’t transform all industries immediately. Banks and financial institutions seem to be at the forefront at the moment, which is also due to the fact that the financial industry largely works without physical goods. Notwithstanding, blockchain technology, especially when linking it up with the Internet of Things, has the potential to transform the way business is done across all kinds of industries under consideration of their front-to-back supply chains. We will probably have to experiment for at least a couple more years before all technical and organisational tasks relating to blockchain are solved and the tipping point for a large-scale adoption of the technology is reached.
In five or 10 years blockchain may be used in ways few experts have predicted – just as few people predicted the huge growth in scale and scope of messaging services after the basic functionality was initially introduced as ‘Short Message Service’ aka SMS for mobile phones.