This month, news outlets around the globe reported that nine major banks had entered a partnership with R3—a FinTech tech startup focused on harnessing blockchain technology to overhaul the future of financial services.
The BBC’s coverage of the development highlighted that “there are plenty of very rich individuals and corporations betting big that the next game-changing technology is called blockchain,” while Barclays’ Chief Design & Digital Officer, Derek White, weighed in to suggest entrepreneurs utilizing blockchain architecture were poised to “change the shape, and the face, of all industry.”
But what exactly is blockchain technology, and why does it have so many big players parting with their money and extoling its transformative potential?
The best known use of blockchain technology is in the governance of the Bitcoin peer-to-peer digital currency. To validate Bitcoin transactions, the blockchain acts as a public ledger that is overseen by hundreds of thousands of computers worldwide running Bitcoin’s software. Breaking the process down to its most basic form, CoinDesk offers a helpful beginner’s guide. Questioning how you or I could be sure we had received an “authentic” digital apple sent from another internet user, the guide highlights the power of the blockchain’s distributed ledger functionality; “What if we gave this ledger to everybody?” they ask. “All the transactions that have ever happened, from all time, in digital apples, will be recorded in it. You can’t cheat it. I can’t send you digital apples I don’t have, because then it wouldn’t sync up with everybody else in the system.” Elsewhere, a Canadian Senate report highlighted how transactions within the blockchain benefit from a strength in numbers approach, stating, “…if a tree falls in the forest, and millions of independent computers with cameras record its fall, we can trust that it fell.”
In practice, say blockchain proponents, the technology could be utilized to create an irrefutable, unalterable record of everything from the origin of diamonds to the identity of users on social networks. Ledra Capital lists 84 other possible uses! Moreover, by authenticating transactions in this de-centralized fashion, some analysts suggest “anything that plays a trusted intermediary role in today’s world could be replaced by blockchain technology.”
Which leads us to banking and financial services.
In the Payments Innovation Report 2015, a panel of FinTech insiders were quick to highlight the blockchain’s potential for causing industry disruption. Dismissing Bitcoin itself as being overhyped (a sentiment certainly not shared by everyone), one juror suggested, “…it is the underlying technology that is important,” while another predicted a future in which “…the blockchain will be the transfer mechanism of choice for business and consumer payments.”
Breaking down what it is about the blockchain that could be so revolutionary for financial services, commentators tend to focus on three main aspects; speed, savings, and security.
In terms of speed, one report asserts, “The several days it takes for a $40,000 payment to clear a bank, for example, could be cut to 10 minutes by relying on blockchain’s specialized, ostensibly highly secure computer networks.” Or as industry expert Chris Skinner puts it, “…if you can move $100 million on a Sunday morning instantaneously at zero cost, then the whole counterparty banking and settlements system is turned on its head.”
Skinner’s reference to “zero cost” touches on the savings aspect of blockchain protocols, which R3’s David Rutter reinforces by stating banks will save on “the cost of reporting transactions and working out who bought what and when.” With less need for costly, time-consuming manual processes, such savings should also theoretically be transferred to users.
In terms of security, blockchain technology is a step up from existing systems according to many commentators. Praising the “distributed consensus” approach to validating transactions, LinkedIn co-founder Reid Hoffman claims, “…a bank’s proprietary ledgers offer more centralised and private points of attack for hackers and criminals to target and potentially corrupt.” The blockchain is already inspiring innovation in myriad areas. And with banks and venture capitalists now going all-in on the technology, the expectation that it will transform the future of finance seems to be a safe bet.
In a follow-up blog, we’ll take a closer look at the volume investment banks are pouring into startups experimenting with blockchain architecture, and touch on the debate around whether the term “blockchain” can truly be applied in new incarnations of the technology.