Distributed ledger technology such as blockchain, the technology underlying the Bitcoin cryptocurrency, has become a buzzword almost synonymous with 'disruption' across a growing number of industries. We've been writing about the blockchain for some time ("Regulating the Blockchain" and "Smart Contracts - what are they are what differences could they make" and "Blockchain, what is it and why does it matter?"). More and more innovators are looking to devise new ways of exploiting blockchain to allow for the expedited transfer of value or data without the need for trusted central intermediaries. Some of the recent applications (and implications) of distributed ledger technology in the ever-changing blockchain space include:
- Securities post-trade processing: At the beginning of 2017, the Depository Trust and Clearing Corporation (DTCC) announced that it had selected IBM and two blockchain startups (Axoni and R3) to develop distributed ledger software for its post-trade processing in the credit derivatives market. This distributed ledger solution is projected to be the largest practical rollout of scale based on the technology to date and will build on the current "Trade Information Warehouse", which manages records and payments for trillions of dollars worth of credit derivatives. The distributed ledger, which operates as a single source of truth, will address a shortcoming of the current system, namely that the post-trade data is entered into multiple databases in different ways. However, the rollout, which is currently planned for 2018, does come with an important qualification - participation in the network will be voluntary for the more than 2,500 buy-side firms that use the current system, which means that the need to reconcile multiple ledgers will still exist, at least initially. DTCC chief executive Michael Bodson conceded that this situation "doesn't take advantage of the end-state, which is one version of the truth, but it’s a step in that direction" (Read the full article here)
- Digital fiat currency: In 2014, approximately a year after the Bitcoin values skyrocketed and the world began to take notice, China's central bank established a research team to look into the development of a government-controlled cryptocurrency. As of early 2017, the People's Bank of China (PBOC) had conducted trial runs of its prototype digital currency. For consumers transacting through smartphones and other devices, the change from physical currency to the central bank issued cryptocurrency probably would not seem much different, although it would reduce transaction costs for merchants by removing some of the banks and other payments provider intermediaries. However, the potential systemic advantages for the government are substantial, such as allowing the PBOC to monitor risks in the financial system and creating the potential for the collection of "real-time, complete and authentic" data to an extent scarcely before imagined. Other countries are also looking at launching digital versions of fiat currency, including Canada (with CAD-COIN) and the United Kingdom
- Privacy implications: The New Zealand Privacy Commissioner, John Edwards, recently shared some interesting thoughts on the implications that blockchain can have relating to privacy. Specifically, blockchain will allow individuals to control their own data in unprecedented ways, which could potentially nip the burgeoning trend of monetizing personal data in the bud. However, he raised some risks, such as whether the immutability of the blockchain would mean that it was impossible for individuals to get their personal information deleted or amended – given that the core concept of a blockchain is that it is a permanent and transparent ledger (Read the full article here)
- Supply chain optimisation: Some companies, including Foxconn (one of the world's largest tech employers) are now looking into using blockchain to minimise the frictions that arise in manufacturing supply chains due to funding delays. Foxconn's project, separately incorporated as Chained Finance, aims to onboard entire supply chains so that loans can be paid directly to the manufacturer in need, without having to pass these loans down the chain. This is particularly advantageous in industries where some supply chains can run 13 'links' deep, and such delays have the potential to stop work or even close factories. The blockchain platform would work by core suppliers handing over their supply chain data to Chained Finance, who would then onboard the other members of the chain, giving each credentialed access to the blockchain platform. Payments would then flow through the chain as and when necessary with minimal delays, with all the information being recorded on the private ledger.
There still exist many regulatory hurdles that blockchain developers and adopters will need to overcome as the rollout of new applications becomes more widespread and Governments are still considering how to approach this new technology and its implications on the existing regulations. In the UK, the Financial Conduct Authority is currently circulating a discussion paper seeking views on the potential future of distributed ledger technology in the markets that it regulates. In March 2017, the Arizona state legislature voted to pass a bill giving legal status to smart contracts and blockchain-based signatures, meaning that the current contract law applies to blockchain-based contracts. The law also states that blockchain based data amounts to ownership, which acts to clear up any residual ambiguity as to what may amount to theft in the blockchain space. This is the first legislation of its type globally. (Read related article here)