According to the International Monetary Fund (IMF), the global economy moves, on average, $5.1 trillion every day. The gears of the financial system behind this jaw-dropping number are too often reliant upon aging infrastructure and third-party intermediaries that require manual reconciliation, add cost, and provide opportunities for fraud. Could blockchain technology be the answer to improving the efficiency of clearing and settlement? This is just one example of how blockchain could restructure the financial services industry. We'll dive more deeply into the possibilities of blockchain in a future blog post, for now, let's step back and look at exactly what blockchain is, and isn't.
Blockchain is a distributed ledger technology (DLT) that provides verifiable proof of a transaction. Blockchain records can only be updated by consensus of a majority of the participants in the replicated peer-to-peer network of databases. Information can never be deleted, providing a precise and immutable record of time-sequenced events that allow multiple non-trusting parties to transact without a trusted third-party intermediary.
Just as important as defining what blockchain is, it is equally important to note what it isn't. Blockchain is a lot more than bitcoin. Bitcoin's volatility and its reputation as a vehicle for unregulated transactions are precisely the reasons why it is so important to differentiate the technology on which bitcoin is built from the cryptocurrency. For the financial services industry to carefully consider investments in blockchain technology, it must be decoupled from the singular use of bitcoin, which has well-respected leaders in the industry such as Jamie Dimon, JPMorgan Chase CEO, saying "It's worse than tulip bulbs. It won't end well. Someone is going to get killed." and, this quote from Lloyd Blankfein, head of Goldman Sachs, "Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud."
The public blockchain is permissionless and open to everybody, to both participate and to read / write new transactions, although some can be publicly readable, but limit the trusted parties allowed to write data to the network. The public blockchain can help communities worldwide share data securely and openly. A public blockchain offers high availability, transparency, trust and decreased hardware costs. There are also certain disadvantages that are tied to the decentralized nature of the public network. Public blockchains set their rules at the very beginning and have few opportunities for later changes to be made. To adjust the rules even slightly, the community needs to convince the majority of participants to make an update or accept a bug fix. As a result, public blockchains can be very slow to adapt, inefficient, and expensive. Committing transactions on a public blockchain, adding large amounts of data, or adding a lot of transactions can quickly become expensive on the major networks, so cost savings realized on hardware can easily be exhausted when adding or modifying data for your application.
Private blockchains give full control to their owners, who are invited or granted permission to join. Private blockchains offer low to no cost to add transactions to the blockchain, but the owners have to run servers and maintain the network. They can be extremely flexible and can adjust the rules for added efficiency and security. Access control can be governed by existing participants, or by a regulatory body. Once an entity joins the network, it plays a role in maintaining the blockchain.
There is a special kind of private blockchain called a "Consortium". Consortia have become a popular means for enterprises to work together on blockchain technology. Blockchain consortia can be either business-focused or technology-focused. Business-focused consortia build and operate blockchain-based platforms to solve specific business problems.
One example of a business-focused consortia is Digital Trade Chain, comprised of seven European banks focusing on "building a blockchain-based platform design to facilitate cross-border trade for small and medium-sized businesses". All members agree to collaborate and fund the development of the platform.
Technology-focused consortia come together to create technical standards and reusable blockchain platforms. One example of this type of consortia is Hyperledger, led by the Linux foundation, it is an "open source collaborative effort created to advance cross-industry blockchain technologies". Members include leading companies in finance, banking, logistics, and manufacturing who are from and operate in multiple countries.
Blockchain has the potential to transform money, business, government, and society. Tractica forecasts that annual revenue for enterprise applications of blockchain will increase from approximately $2.5 billion worldwide in 2016 to $19.9 billion by 2025, representing a compound annual growth rate (CAGR) of 26.2%. Watch this space for future blog posts on some of the practical applications for blockchain in financial services, and be sure to register for our upcoming webinar with MWD Advisors.
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