Blockchain is all the rage, but what does it really mean?
The cryptocurrency Bitcoin was the first working example of a blockchain, or distributed ledger, but important as it has become, it barely begins to explain why banks, regulators (including central banks) and tech firms are all over this technology. Blockchain offers help with the central problem of 21st-century banking: trust.
“Blockchain enshrines truth; you don’t need a third party,” explains Søren Fog, founder of the Crypto Valley Forum, a networking association for companies involved in blockchain and cryptocurrencies, located in the canton of Zug in Switzerland. “It has the potential to cut out the middleman.” Fog says blockchain companies are not going after the banks: “They are just trying to make things smarter, cheaper and more transparent.” Blockchain can automate trust between disparate parties that may or may not know one another and ensure that information shared within the chain is not altered—thereby providing a single source of truth.
“There is almost no end to [blockchain’s] application,” says Fog. Distributed ledger technology could potentially bring greater transparency to the running of stock markets and provide central banks with an additional monetary policy instrument in the form of central-bank-issued digital currencies. “Blockchain could help create a more stable global financial system,” says Adriano Lucatelli, co-founder of Swiss robo-advisor Descartes Finance. “That’s why central banks are interested in it. It could also change the whole [financial netting] system.” CLS Bank is building a netting service using blockchain technology. Lucatelli says blockchain could run the FX market.
But if the future of financial services is a world of “private” or closed blockchains—as opposed to public ones like Bitcoin’s—then that will require some form of governance, business rules and cross-industry open standards, as well as identity management. That perhaps explains why most pundits believe the hype around blockchain is unlikely to deliver any immediate results.
“I have a measured view about blockchain,” says Warren Mead, global partner and co-leader fintech practice KPMG. “It will be about another five to 10 years before we see a major commercial application of the blockchain in banking. There are some interesting use cases, but it will take cross-industry participation and participants to agree and work out how they can get this through regulation and company boards, not to mention testing.”