As J. F. Kennedy put it: “Change is the law of life. And those who look only to the past or present are certain to miss the future”. The Fourth Industrial Revolution is the Digital Revolution. Its essential ingredients are 5G, quantum computers, the Internet of Things, artificial intelligence, cyber-security and, of course, blockchain technology.
Blockchain technology is one of its fundamental pillars. Everyone is talking about it. It is fashionable, but do we really know what its impact will be? Reviewing some of its applications will help us gauge its magnitude.
Blockchain technology consists of a series of transactions or services stored as records in containers (blocks), grouped together in a network and available to all participants. These blocks are validated using a “consensus” methodology. Each block can be traced (provenance) and its contents are highly protected against tampering and alteration (immutability).
So, what can it be used for? The first use that probably springs to mind is Bitcoin. Personally, it is the one I like least. True, it enjoys all the advantages inherent in blockchain technology. Yet it is a highly speculative instrument, an unregulated currency. The process by which it is created requires ever-increasing computing power, while the reward for creating it keeps shrinking. All of this raises serious doubts about the future cost of running it. Many already describe its soaring value as a bubble that could burst at any moment. Jamie Dimon himself (CEO of JP Morgan Chase) has warned that anyone using the bank, its resources or its advice for this kind of investment will be fired on the spot. The Chinese government does not seem keen either. That is not to say one cannot make money with this instrument, but be very careful: it is a high-risk investment.
Fortunately, the range of possible applications of blockchain technology is wide. I found the attached chart from www.aciworldwide.com illuminating; it groups them into four areas:
- Digital Currencies and Fraud Reduction
- Smart Contracts
- Securities
- Record Keeping
By combining two or more of the applications shown in this chart, additional services or businesses can be created. For example, if we combine “Proof of Identity” with “Ownership”, we could build a system allowing us to vote in any referendum without an electoral roll, ballot boxes or polling stations. We ourselves would be all of these. Perhaps it is just as well that this is not yet available, for the time being. If we add “Digital Rights” to the previous two, we could authenticate the authorship of intellectual works and make them enormously difficult to counterfeit.
We could go on, and I am sure the market will find countless combinations that, in the hands of investors and entrepreneurs, will bear fruit as sound businesses and services. Little wonder that banking is one of the sectors investing most enthusiastically in this field. Let us take a few examples. For months now Nasdaq has been using blockchain innovations to manage shares in companies that are not yet listed but which generate a great deal of “paperwork” whenever they are bought or sold. Blockchain allows it to eliminate much of the legal paperwork and significantly shorten the time it takes to transfer ownership.
The media recently announced an agreement between Citi and Nasdaq to use blockchain technology developed by the company Chain . The aim is to increase operational efficiency and simplify the reconciliation of payment activity generated by the American bank’s transactions, using the blockchain platform already installed at Nasdaq. To give an idea of the volumes involved: most transactions made with Visa cards are reconciled through Citi’s global infrastructure.
This is just one example. According to a study by Accenture, the savings for the banking system could exceed $8 billion on a cost base of around $30 billion. The greatest impact is expected in particular in the “Trading” and “Corporate Finance” businesses. “Cash Management” and payment processes will be the first to contribute to this development. It is the same concept that underpins crypto-currencies such as bitcoin or ethereum, but applied to conventional currencies. This will mean lower costs per transaction (transfers), faster execution (settlement) and a far more effective way of preventing fraud than traditional technology offers.
Weaknesses. It is not all good news. This is a technology still in its infancy. Let us look at some of its weaknesses:
- Interoperability between different systems. Let us compare a blockchain system to an accounts ledger to which all members of that system have access (a “distributed ledger”). Everyone who belongs to it has access, but those who belong to a different system do not. That is the lack of interoperability.
- Technical expertise. There are still not enough people trained in this field. They are in great demand and very well paid, but their scarcity acts as a brake on its development on an industrial scale.
- Standardised models. The blocks are standardised; the contents are not yet. Take so-called “Smart Contracts”. They are the digital equivalent of the contracts used in so many commercial activities: buying and selling homes, trade agreements, employment contracts and so on. If this is to be scalable and usable by large numbers of people, these Smart Contracts need to be common across each type of transaction. We are not there yet.
- Stress testing. We have not yet reached the volumes and situations in which a failure could bring down entire systems. Imagine the NYSE or Wall Street going down, with no transactions possible, or no access to liquidity because of a failure in the current system. Could the same thing happen with blockchain? In theory, no, but nobody has put it to the test yet.
- Regulation. For the most part, this technology is unregulated. That does not sit well with certain industries, such as banking, electricity, insurance or telecommunications, which are among the most heavily regulated in the world. Combining agility with appropriate regulation is a challenge for governments and regulators.
- Politicians. No party is complete without them, and they rarely lift the mood. They do not usually encourage progress, but they are highly skilled at putting obstacles in its way. We shall see.
- Blockchain systems. Their very evolution may give rise to different and even divergent technologies and standards. There are plenty of examples in other technologies (Beta vs VHS; Android vs iOS vs Windows; PAL vs SECAM, etc.). When this happens, which one will prevail? And what will become of the others?
We are in 2017. The market is still in its infancy, but let us not be misled by the difficulties, real as they are. This evolution is unstoppable. It is one of the fundamental pillars of the Fourth Industrial Revolution. According to the consultancy Gartner, the market for blockchain technology is expected to generate more than $3 trillion in revenue by 2030. That is a truly staggering amount of money, so we had better seize the great opportunities it is going to open up for us.
Francisco Canos
Article published on 9 October 2017 in:
