Whilst the internet has revolutionised much of the way in which we conduct business, the mechanics by which we manage asset ownership and transfer between businesses, governments and individuals have been largely unchanged for hundreds of years.
We still have business networks made of different participants, each trading tangible or intangible assets, and creating value through the flow of goods and services through the network; each participant managing and controlling their business through the use of ledgers and double-entry accounting.
This use of individual ledgers is not without its shortcomings. Firstly, it’s slow as there is time needed to reach a consensus between the parties: documents must be exchanged, checked for veracity, entered into ledgers, and, perhaps, in the case of some transactions, payments made to governments or third parties, before an asset can be released. Each party would then need to rely on auditors and banks to ensure the integrity of the network and its records.
All of this increases the cost associated with a transaction. Secondly, it’s exposed to the risk of fraud and error: a reliance on human agency to progress and verify paper-based transactions is naturally prone to fraud or human errors. Third, it doesn’t support a world where, increasingly, the agents and participants in economic transactions may not be humans but machines. Think, for example, of driver-less vehicles that will may need to pay for their own parking or settle insurance claims in the event of an accident between two self-driving vehicles.
The blockchain promises to change all this.
What is Blockchain?
Blockchain is a technology for a new generation of transactional applications that establishes trust, accountability and transparency while streamlining business processes. A blockchain has two main concepts. A business network, where members exchange items of value through a ledger, which each member possesses and whose content is always in sync with the others.
Think of it is a shared, replicated and permissioned ledger such that, for the first time, each participant in a defined business network can electronically access a single system of record. Rather than exchange paper or send messages between them, it becomes possible for each participant to securely and quickly read and write from the same ledger as transactions take place.
Blockchain ensures secure and efficient interactions.
The manufacturer of a vehicle, for example, writes a record of the vehicle to a ledger and then, once it passes to the dealer, a further entry is written to the same ledger describing this movement of an asset; this continues all the way through the lifecycle of a vehicle from purchase by a consumer through to ultimate disposal for scrap.
Although shared and distributed, the use of cryptographic technology, ensures participants can only see what they are allowed to see and transactions are immutable; meaning that once executed they cannot be changed or reversed. As a result, transactions can be executed much faster, with more confidence, and at lower transactional cost; as there is no longer a need for paper-based processes or delays associated with manually ensuring the veracity of a transaction.
The business rules governing these transactions – i.e. contracts – can be expressed as code with guaranteed execution once conditions are met: thus removing risk. Known as “smart contracts”, the possibilities that these self-executing instructions open up are enormous. For example, when buying goods online, a contract could be created on the blockchain that only released payment to the seller once the courier confirmed the goods had been delivered to the buyer.
Blockchain will transform businesses and societies.
Stock exchanges can also benefit from the efficiencies and speed that blockchain will deliver for clearing and settlement: mitigating risk of default through instantaneous transfer of shares and, by doing so, reducing the need for the mesh of brokers, custodians, clearing houses and central depositories that are currently needed. The end result would be lower transaction fees for investors but also more innovation. Several stock exchanges are already exploring, for example, how the blockchain can be used to enable the trading of shares in private companies cost-effectively and securely.
The immutability of the blockchain will also transform audit and compliance: allowing organisations to create internal blockchains against which all key transactions are written over a reporting period. Audits or compliance reporting would be simplified by providing permissioned “seek and find” permission to auditors and government regulators; removing the need for expensive and time-consuming audits. With the cost of compliance a significant burden on companies and governments alike, the ability to radically streamline this is a simple yet significant opportunity.
However, it isn’t just finance that will be transformed by the blockchain. Any domain where proving provenance is important will also benefit. Imagine, for example, the ability to record diamonds, medicine, luxury goods or artwork on a blockchain, such that, at each step of the product’s progress from manufacture to ultimate consumer, it can be tracked and its provenance assured. The buyer could take the item and, by looking it up on the blockchain, be assured that the luxury handbag is not counterfeit, the diamond is not a so-called “blood diamond”, or the medicine is not fake.
Governments are exploring the use of blockchain to simplify, automate and transform land titles, business registrations, and even disbursement of tax funds to government entities or collection of taxes themselves. It is estimated, for example, that five billion people live without adequate records: a fact that hinders their ability to acquire and trade property, to work, to travel, to procure banking services or to negotiate on an event footing with their documented compatriots. Economists are looking at blockchain as a fast approach to creating the necessary registries that will enable people to execute their property rights; and, by doing so, foster economic growth in under-developed societies.
The blockchain has the potential to transform every aspect of our lives. It could, as some academics have suggested, be as big a revolution – or even bigger – than that ushered in by the internet. We are just at the start of this journey but, already, it is clear that the transformational potential for private and public sector alike is significant and should not be ignored.