The debates over bitcoin and whether such cryptocurrencies can ever replace fiat money or gold as a reserve currency have only just begun. But there’s little doubt that blockchain, the underlying technology that powers cryptocurrencies, has enormous potential for many parts of the economy that is only now being realised.
Blockchains are the databases on which cryptocurrencies, or digital tokens, are created and stored electronically. It is essentially a “distributed ledger” that shows all the members of a particular network every transaction that was verified on the network, from its beginning to the current time. The transactions are collected in blocks, which are secured approximately every ten minutes in a mathematical process called “mining”, and must be verified by other members in the network before they are confirmed.
These digital tokens are currently being used to transfer money, but this technology has applications above and beyond that, because it offers a way for people who do not know or trust each other to transfer nearly any asset using the same process, creating a record of who owns what that compels the consent of everyone concerned. No central authority or potentially malicious third party can tamper with it, so everything from land registries to stock markets to financial services are interested in applying blockchain technology to limit fraud and corruption and improve efficiency.
Land registries, especially in emerging markets like those of the former Soviet Bloc, can be a source of conflict and fraud by powerful interests, who illegally distribute land that belongs to others while giving the victims little legal recourse to rectify such abuses. Some economists argue that bad property rights systems are one of the main underlying causes of developing world poverty and inequality.
In April, The BitFury Group, the world’s leading full service blockchain technology company, announced it was teaming up with Georgia’s National Agency of Public Registry and the renowned Peruvian economist Hernando de Soto to design and implement a blockchain-based land titling system for the former Soviet state.
“We are excited about the opportunity to harness the innovative power of blockchain and help the Republic of Georgia build a transparent, tamper-proof, modern property title registry,” says Valery Vavilov, CEO of The BitFury Group. “A secure property registry built on a blockchain can secure billions of dollars in assets and make a significant social and economic impact globally by addressing the need for transparency and accountability.”
Further, The Bitfury Group has launched a Blockchain Trust Accelerator with The America Foundation and the National Democratic Institute to create additional pilot projects focused on what they call “blockchain for good” efforts.
“The idea for this groundbreaking partnership and organization was solidified during The Bitfury Group’s 2016 Blockchain Summit on Sir Richard Branson’s Necker Island,” says Jamie Smith, global chief communications officer for The Bitfury Group and former deputy White House press secretary. “During our very unique summit, we determined that the ecosystem needs a thoughtful process specifically dedicated to launching, funding and supporting Blockchain pilot projects focused entirely on global change for good. The Bitfury Group is a company dedicated to positive global change and we look forward to working to enhance the impact of the groundbreaking Blockchain technology.”
Other developing nations like Ghana and Honduras are also looking at piloting such land title projects, while even some Western nations like Sweden are looking to blockchain to solve their own land registry problems.
The financial industry is looking to blockchain technology to solve the myriad regulatory and fraud issues that afflict it, as well as make operations more efficient.
The accountancy firm KPMG believes this technology could be the “perfect antidote” to the increased burdens that financial regulators have placed on its clients in the wake of the 2008 financial crisis. “From a perfect storm point of view, having suffered for years from regulation and overheads, this is potentially a light at the end of the tunnel that gives clients relief from costs,” Eamonn Maguire, managing director of financial management at KPMG, has said.
Banks and insurance companies are also swayed by the opportunity to cut the huge costs associated with running their back offices. On August 24, UBS said it is teaming up with Deutsche Bank, Santander and BNY Mellon as well as the broker ICAP to develop a new form of digital cash that they hope will become an industry standard to clear and settle financial trades over blockchain. In September 2015, nine of the world's biggest banks, including Barclays, Credit Suisse and JPMorgan, threw their weight behind blockchain by forming a partnership to draw up industry standards and protocols for using blockchain in banking.
“Our solution is designed to reduce the overall delays and frictions that exist in the back offices and reduce the costs and frictions in the regulatory sphere,” says Clement Francomme, founder of Utocat, an internet access blockchain provider for banking and insurance firms. His Blockchainiz platform enables public blockchain access through bitcoin and ethereum, another public blockchain-based distributed computing platform. “This is already used in prototype mode at BNP Paribas and Axa so they can understand deeper the ecosystem and the network,” says Francomme.
Blockchain technology will also help substantially reduce reduce fraud in banks’ back offices, where many of the largest frauds have occurred when rogue traders masked trades and hid open positions. Think of Nick Lesson, who caused the collapse Barings Bank in 1995, or Kweku Adoboli, whose $2bn fraud almost brought down UBS in 2011. “You cannot commit internal fraud with this technology, because if you modify anything, then every actor on the stem will be aware of that,” he says. “It doesn’t mean you eliminate mistakes, but the mistake will be there forever for everyone to see.”
In fact, back offices are widely regarded as the weakest link in all corporations, big and small. According to Javelin’s “2016 Small Business Fraud Report”, small businesses are increasingly targeted by cyberthieves looking for easy prey and lost an average of more than $12,000 in 2015 because of back-office fraud. Yet because anti-fraud measures are often cumbersome and expensive to introduce, many small and medium-sized enterprises don’t bother with them. Blockchain technology, on the other hand, is attractive because of its relative simplicity and cost effectiveness.
Looking at his firm’s prospects, Francomme says the anti-fraud aspect is proving very attractive for potential clients in the Middle East, while in Europe BNP Paribas and Axa have already understood the power of this technology and are pioneers in it. “They are going full steam in rolling out blockchain over the next few months or maybe a year, but other banks and insurers are still asking why they should change the way they do things – they don’t get it yet,” he says.
Francomme concedes that one reason for the resistance by larger organizations is that using the technology means giving up some power in the process. “Because you don’t operate your own system, rather your system is shared with other participants in the world, the mentality of giving up this part of your power is difficult to accept for many in the banking and insurance world, especially the banks I’d say,” he says.
However, change is definitely in the air, and will come through one of two ways: either through ‘proselytizing’ by companies like Utocat, or through one of the larger banks or insurance companies insisting on one kind of operation using blockchain, which would oblige all the other players to adopt it or risk losing a huge advantage in the market.
“If we need to convince companies it will take maybe three to five more years; if it’s BNP or Axa driving this, then just one more year will be enough,” he concludes.