Across the last several years, distributed ledger technology (DLT, or as it is more commonly referred to, 'Blockchain') has gone from the good idea underpinning Bitcoin to the tangible foundation of a potential technological revolution. For those still unfamiliar with the concept, we have written about it in the past.
As Blockchain technology has matured, mainstream commercial interest has well and truly been piqued. In 2017, the global business community have progressed from experimentation and proof of concepts to actual working prototypes for DLT systems, and even commercial application. The central concept of DLT - the ability to remove the current heavy reliance on a trusted intermediary to exchanges between transacting parties - is broad enough that significant investments are being made across a multitude of tech-related industries. This article will focus on several of the biggest publicised developments in Blockchain across the past six months.
State of the nation: Cambridge's inaugural global benchmarking study
This year saw the release of the world's first global benchmarking study on DLT. Undertaken by Cambridge University, the study gathered data from more than 200 established banks, DLT start-ups, and government institutions around the globe, and provides an empirical analysis of the use of DLT of both enterprise and public sector use of the technology.
The key takeaways from the Cambridge report are:
- To date, most DLT applications have been experimental, small-scale operations and have mostly been built as 'permissioned layers' onto public blockchains
- The majority of use cases focus on financial services, but there is also a significant amount of attention to non-monetary applications, such as identity verification and supply chain solutions
- The core infrastructure is being slowly improved, but shared protocols are still fairly undeveloped, meaning that interoperability of the different applications is still very limited
- Public sectors worldwide are among the most involved in DLT development, with 63% of central banks and 69% of other public sector institutions involved in proofs of concept
- Of those public sector institutions that are experimenting with DLT, 15% were planning to deploy applications in 2017, while a further 23 per cent plan to do so within the next two years.
The rise of initial coin offerings
This year has seen a remarkable growth in an alternative method of capital raising through Initial Coin Offerings (ICOs). ICOs are similar to the more traditional IPO (Initial Public Offering), but instead of issuing equity in the company to investors, the company running the ICO will issue a promise to build a particular blockchain-based product or service, and will give the investor digital tokens for that product.
According to research firm Smith + Crown, over $260m was raised through ICOs last year, with a further $560m being raised in the first half of 2017 alone. As popularity surges, many have seen a pressing need for ICOs to be more strictly regulated. At present, most ICOs are unregulated, and so are regarded as attracting investors with a 'high risk, high reward' appetite. In the US, the SEC is continuing to 'examine' options for consumer protection, while China has taken a stronger stance, outlawing ICOs.
New Zealand's regulatory body, the Financial Markets Authority (FMA), recently published its own commentary on ICOs and cryptocurrencies. The FMA's approach is for ICOs to be regulated on a case by case basis, as the specific characteristics of each ICO will dictate the ICO's financial product classification. The FMA encourages businesses considering ICOs to work collaboratively with the regulator to align their approach with the FMA's guidance.
Financial sector applications
It is undoubtedly the banking and financial services sector that is most closely connected with investment in blockchain applications. An IBM study in 2016 found that 91% of banks worldwide were then investing in DLT for deposit-taking. Many of these bank blockchains have since been commercialised and rolled out to the market.
Perhaps one of the most exciting applications for financial services is in respect of cross-border payments. This is an area with a lot of room for improvement, as the incumbent foreign exchange systems are slow, bureaucratic, and expensive. Remittance payments often go through multiple intermediaries through the course of an end-to-end money transfer. DLT has the potential to fast-track the process by cutting out the middle man.
The solution, or at least one of many forthcoming solutions, is now in market. In November 2017, global tech giant IBM launched what it bills as the first blockchain network for cross-border currency payments. The network was built in collaboration with stellar.org, a non-profit that creates low-cost financial services in a bid to fight global poverty, and KlickEx, a New Zealand money remittance operator. The product allows customers to verify the exact time that payments are sent, when the foreign exchange transaction occurred, and when the money was received. There is no longer the need to trust multiple intermediaries at either end of the transfer.
The benefits of such technology becoming accessible and affordable are immense, especially for developing nations. The question now becomes whether the likes of Western Union and big banks will follow KlickEx in adopting IBM's blockchain payment network. Tribalism has often been identified as an inhibitor to any one network gaining market ubiquity, and with the likes of Amazon and other non-traditional financial services players looking to compete with networks of their own, it remains to be seen whether the IBM cross-border blockchain can be a market-wide solution for cross-border payments.
There are also several non-financial applications that are looking to exploit the opportunities presented by DLT. One such area is personal data protection and control - and it’s a timely development.
In addition to central government identity systems, there are many global firms that store huge quantities of our personal data and turn considerable profit from it, without any of the benefit necessarily coming to consumers. When those firms lose personal data (as Equifax did earlier this year, with data of more than 140 million people being compromised), there is often no recourse to the consumers who supplied the data.
DLT offers fresh opportunity for the control of this data to remain with individuals, by removing the need for a central third party to store and communicate the information between entities.
A development from the past couple of years that serves as a good example is the Estonian 'ID-Kaarts' system. The system uses shared databases to allow multiple parties to share authoritative information such as data-logging for clinical assessments or commercial deals. The result has been a secure, all-digital government experience, which has significantly reduced bureaucracy. Such systems can even allow individuals to easily access and create certified copies of any of their personal records, protected from anyone other than themselves by key-locked encryption. The ledgers themselves are also becoming more sophisticated, allowing for developments such as the ability to send documentation to others that need to see it, without compromising any of the control of access. This may also allow individuals to take back the value in their own data, and to choose whether they want to 'sell' their own personal information to businesses in the future.
While most of us have yet to directly benefit from the exciting possibilities that DLT holds, the past 12 months have seen DLT transform from potential disruptor to the foundation of truly marketable products. With more and more entities graduating their blockchain prototypes into actual service, the next 12 months promise to be a gruelling test of DLT, and whether it can silence its critics by making the difficult leap from 'good idea' to 'killer app'.