Is blockchain a short-lived illusion or a real game-changer?

I attended a breakfast seminar recently organised by a very well respected law firm and their tech partner – the subject matter was: ‘Blockchain – The concept and the law’.
It was explained at the event that blockchain has a myriad potential for applications, being deployable to transfer digital rights or digitasable assets, notably currency, shares and intellectual property. However, blockchain is particularly exciting for entrepreneurs as it enables them to dispense with lawyers of cost and inefficiency that are often required in order to police trust/authenticity in high value transactions.

With all this in mind surrounding the blockchain and its applications, I decided to do my own research to fully explain ‘exactly what is blockchain’.
The UK FCA (Financial Conduct Authority) has now opened its doors to blockchain technology and banks are rapidly advancing research in this area, which is a sign of its advancement for the future.
The financial crisis has driven the rapid development of alternative financial services models, the most revolutionary being the blockchain. This technology has the potential to fundamentally reshape the financial services industry and will have a much wider impact than bitcoins alone. For example, UK-based fintech start-up firms like Everledger and Coinsilium are already utilizing blockchain technology to create a transparent, immutable, secure global ledger for trade.

A lot of financial power and expertise is being invested in developing blockchain technology and harnessing uses for distributed ledgers for the payments and banking industry. The EPC (European Payments Counsel) gathered together six experts from different sectors (a central bank, a commercial/transaction bank, fintech companies, a consultancy and a payments processing company) to discuss whether and how blockchain could become a reality.

Here are some of the key points taken from the EPC’s write-up of the live debate between six leading payments industry experts.
Six reasons why blockchain is a game-changer:
1. The increased automation and reduction of manual processes enabled by blockchain reduces costs;
2. Blockchain has the potential to create new protocols and norms, in coordination with regulators;
3. Blockchain could bypass existing marketplaces while leveraging novel distribution channels;
4. The most promising use is contracts-recording;
5. Without cooperation among PSPs, there cannot be interoperable blockchains, and they cannot be used on a large scale. PSPs must therefore collaborate to progress on blockchain, in a manner that still needs to be defined;
6. Blockchain could offer central banks the possibility of monitoring money flows in real time, controlling the transactions more accurately, and acting in real time.

The below diagram from the EPC (European Payments Counsel) shows exactly how the blockchain works:
(click to enlarge – use your ‘back-button’ to return to this page)

EPCblockchaininfographic

A number of banks, including Citigroup, Barclays, and UBS Bank, are exploring blockchain technology for cross-border payments and plan to integrate it into their existing systems. Fintech start-ups such as Ripple and HyperLedger are also developing new ways to exchange data through blockchain technology.

Bankers are rushing to exploit a clearing platform whose imbalances are (for now at least) being absorbed by unsuspecting bitcoin investors, who perhaps don’t understand the extent to which they’re funding the costs of the system, which should hardly be a surprise.

What we should really be asking is whether an uncapitalised bitcoin-backed system is likely to square itself any more efficiently or cheaply in the long-run than the system it is replacing, and more pertinently, whether the systemic implications of a funding hole being discovered in such a network are likely to be any less destabilising than those experienced in 2008?

So do we have a conclusion, can we suggest that blockchain can and/or wil not be used heavily in the future for a wide range of commercial purposes?

The technology is compelling and has the ability to streamline and disrupt a wide range of industries. However, as with all new technologies, it does not solve all existing problems and crates many of its own.

Finally, Blockchain’s potential value is much greater than payments alone. And in order for the economy to benefit from the emerging capabilities of the technology, the ability to move from concept to trial in a safe and cost-effective manner is critical.

James Smith, CEO of Elliptic recently quoted by saying:

“In the future I see a public blockchain – whether that’s Bitcoin or some other open one, which is a way of registering ownership of all sorts of assets and it’s a way of transferring ownership of those assets in a single system that can be read by all of the right people and none of the wrong people. So it becomes very simple for me to swap my dollars for your IBM shares, or your pounds for my house. Any asset that we assign a value to and want to be sure about who owns it can be registered using this technology.”

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