All new technologies go through some growing pains and the same can be said for blockchain. But while it’s still in the early stages of maturity, it has immense potential to improve many applications and systems across many industry sectors.
Blockchain is a public ledger that records all the transactions and movements of an item such as a cryptocurrency like Bitcoin. The technology can be applied to physical goods, for example tracking products through a supply chain, as well as electronic transactions and other services. Indeed, the UK Government’s Chief Scientific Adviser, Sir Mark Walport, said last year that distributed ledger technology has the potential to transform the delivery of public and private services. He also stated that any new technology creates challenges, but distributed ledgers (or blockchain) could yield significant benefits for the UK.
Blockchain is probably most advanced in the financial services sector, where it is moving beyond bitcoin into a phase of wider industry application. But while there’s a real appetite to explore the potential of blockchain in financial markets, some organisations still have concerns about its ability to ensure anonymity and transparency in such a highly regulated industry. Some also question the scalability of the technology and its performance under stress. It’s in these areas that major players, such as BT, Intel and IBM — as well as smaller start-ups — are driving innovation to find solutions.
So what are the applications we are likely to see emerging?
There are a number of hot spots for blockchain innovation in banking, and particularly in the capital markets. These include improving current inefficiencies in post-trade clearing, processing international payments, and SME lending. There are numerous currency services that could benefit from blockchain as well as other sometimes esoteric applications from oil trading to risk ledgers. The major promise of blockchain is its ability to process multiple transactions very quickly. For example when it comes to payment processing and corporate bonds, a distributed network of computers can potentially process transactions in less time, with more resilience, and more securely than conventional systems.
In the insurance industry, a distributed ledger such as blockchain can help to manage complex scenarios involving multiple parties; for example, a building owner managing a complicated matrix of insuring 50 office rental units rented via Airbnb for short-term lets of a week to a year. Blockchain can help by keeping record of all of these small transactions in a central place with full visibility to all involved.
There is a lot happening in the retail banking space as well. It is believed that at least two large European banks will introduce consumer blockchain products to the marketplace in the next year or so. They won’t be branded as blockchain products and will likely be presented as ‘new generation’ banking services that deliver greater efficiency.
The progress in the banking industry is helped by the R3 initiative – a body consisting of over 80 banks , financial institutions, regulators, trade associations, professional services firms and technology companies from across the world. This has been set up to get a collective agreement on how banking systems in the blockchain world should co- exist with legacy systems. A key function of R3 is to get endorsement from the various legal and regulatory bodies from around the world, which do seem open to blockchain and are actively encouraging development. Although the initiative has over 80 members, it should be noted that leading influences such as Goldman Sachs have left recently. The financial technology (fintech) sector is certainly buoyant about the possibilities in the long term.
The manufacturing supply chain is another space where blockchain can simplify complex and time critical functions. Tracking components used in the manufacture of an aeroplane is a complex task involving thousands of different parts coming in from multiple locations. Blockchain has both the capacity to store, and the ‘traceability’ to keep track of these assets as they move through the supply chain, giving the manufacturers a full view of their existing production as well as knowledge of which components are in each aeroplane for servicing and maintenance purposes.
Additionally blockchain has the capacity to provide immutable and multiparty authentication of provenance and ownership of high-value items, and has been used in diamond trading and art sales.
A really exciting example of where blockchain can transform a cumbersome process is in healthcare. Maintaining and storing paperwork is a huge challenge for most modern hospitals. Personal records need to be kept secure but made available quickly when needed. Blockchain has the power to revolutionise this process by securely keeping a central record and providing ID and permissions so only the relevant information is released to the right people.
Also, how about voting and proof of identity, particularly in remote or developing nations? The power of the distributed network combined with local processing can help to authenticate people securely.
However, the real life-changing potential of blockchain is in the area of benefit and aid distribution. How do you get aid delivered to the people or places that are in grave need of help and do it quickly? Some charities estimate that 30 per cent of intended aid is ‘lost’ as it is passes down the chain. But due to blockchain’s distributed nature and its availability to anyone with web connectivity, the technology could help aid distribution by enabling quick authentication of transactions and getting money to a known and approved list of people acting in the field, with greater transparency.
A key question is when all this is going to happen?
Well that’s quite complex. There are already some blockchain propositions in the marketplace — from digital currencies to provenance-based propositions for fine wine for instance. And we expect there to be the emergence of some functions, solutions and services based on blockchain in the banking and insurance markets in the next year or so.
However it is going to take a while for blockchain to become mainstream. But while it will take some time to get there, the blockchain-based future is coming.
Many of the building blocks are already in place; but some need strengthening for blockchain to become enterprise ready. Furthermore, blockchain requires secure global networks to function properly, with inbuilt resilience. For high value transactions, reliable and trusted networks will be the only suitable option. And those networks will need distributed nodes and storage capability potentially linking to cloud-based systems. Industry players will also need to take into consideration how these new blockchain-based systems will interact with legacy applications.
There is no denying that when it comes to blockchain, the art of the possible is vast. We are a way off this vision, but I for one am excited to watch this disruptive technology grow and mature, and to see where the technology takes off and flies.
Matthew Key, Head of Innovation, Global Banking & Financial Markets, BT
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