Blockchain and other distributed ledgers are bringing about a revolution in FinTech and beyond. In this article, we examine how blockchain and distributed ledger technologies work, and how they have solved a key issue at the heart of payment technologies, i.e. verifying that the person seeking to transfer money actually has the money in question.
In January, the UK Government’s Chief Scientific Adviser, Mark Walport, published a report called Distributed Ledger Technology: Beyond Blockchain. The Walport report sets out the benefits of distributed ledger technologies and Walport’s recommendations for its widespread application by government in other areas. In light of the Walport report and its findings, we explore what is likely to be 2016’s zeitgeist and most talked about tool in the technology and Fintech sectors – blockchain and other distributed ledger technologies.
Blockchain arose from Bitcoin. Peer-to-peer digital currencies, such as Bitcoin, allow someone to transfer virtual currency to another person without an intermediary like a bank having to process the transaction. The key technology at the heart of Bitcoin is its ability to verify that the person seeking to transfer a number of bitcoins actually owns the bitcoins in question. Historically, this verification of ownership by any payment system has been accomplished by keeping a ledger of buyers and sellers: who owns an asset, whether it is a financial, legal, electronic or physical asset. Bitcoin re-purposed the ledger concept for the digital era.
Bitcoin does this by maintaining a ledger – Blockchain – of every single Bitcoin transaction ever completed in history. The ledger is protected by a complex mathematical algorithm that verifies the ownership of the bitcoins in question. In a revolutionary turn, this public ledger is stored on every computer that downloaded the Bitcoin software. Every time that a bitcoin transaction is successfully verified and completed, every copy of the ledger is updated.
Advantages of blockchain
The two main advantages of blockchain technology are:
- accuracy - the Blockchain ledger offers traceable records on the history of the asset and proof of ownership;
- security – the ledger is extremely difficult to tamper with or make unauthorised changes to as multiple identical copies of the database are publically shared. This feature also makes it harder for cyber-criminals to hack as a successful attack would have to attack all distributed copies of the ledger at the same time.
In other words, the distributed ledger addresses many of the problems with paper ledgers by showing clear evidence of who owns the asset, where the asset is at every point of the transaction and stopping duplication and tampering.
While Blockchain and distributed ledger technologies can offer theoretically tamper-proof and transparent digital economy transactions, there is a current lack of consensus on the standards and versions of Blockchain to adopt. Organisations considering whether to test Blockchain and distributed ledger technologies or to invest in it will need to understand the legal and financial risks, such as privacy and security, that they may encounter when the technologies are in their infancy.