Blockchain technology – why all the hype?
As one of the most talked about emerging technologies, some say blockchain technology could revolutionize everything from stock exchange settlements and transport logistics to voting or welfare payments. So what is it and why is it relevant to financial advisers?
Internationally, the benefits and wide range of possible uses for blockchain technology have been touted for a couple of years now.
Within Australia, it’s gained some ground after a recent Australian Securities Exchange decision to examine its use for a new clearing and settlement system that’s faster and cheaper than the existing CHESS system. To enable this effort, the ASX bought a five per cent stake ($14.9 million) in Blythe Masters US-based fintech company Digital Asset Holdings.
Meanwhile, Australia’s major banks are also experimenting with global counterparts and blockchain providers to see if it delivers the transparency, cost and time efficiencies in banking and trading processes that its supporters have promised.
The Commonwealth Bank in particular has been investigating and experimenting widely with the technology in areas such as cross border payments, trade finance, privacy, post trade settlement for bonds and derivatives.
But, what exactly is it?
Blockchain is a distributed ledger technology that allows the transfer of almost anything of value among multiple parties in a transparent, immutable and highly secure way.
Let’s break that down further:
Transparent and immutable: Rather than having a ledger of transactions in one place, accessible by a few authorised users, the ledger is replicated across all users. Those users can be buyers and sellers exchanging currencies, commodities or land titles, or it could be a regulator watching and analysing transactions in real-time.
Highly secure: In the blockchain world, each transaction needs to be validated and authorised by a majority of users to avoid double-counting or inaccuracies. Blockchain’s transparency and wide distribution are why it is considered safer than a central system.
It’s also worth noting that, there are two types of blockchain. With a public or permission-less blockchain, such as Bitcoin, anyone can read or write data; and with a private or permissioned blockchain, only users who have been given access can use it.
Not so fast
So, with some saying it’s as revolutionary as the internet, is it all systems go?
“We haven’t seen any broader application of blockchain at scale in any industry yet. There’s still a lot of hype out there, that’s why we are experimenting extensively,” says Michael Eidel, Executive General Manager, Institutional Banking and Markets, Commonwealth Bank.
“While the base technology has been proven in payments, it’s still early days for other applications, but the technology is very promising. We will probably see some early adoption of blockchain in permissioned use cases where the participants in this network are well known and the usage would take place in the well regulated and known environment we are in today.”
What’s the takeout for advisers?
The benefits of blockchain: transparency, immutability and security, make it applicable to many industries, not just banking.
Blockchain based technologies can help enable a new world, where paper is eliminated due to digitisation and trading is more transparent and real-time due to blockchain replication. “Imagine the gain of efficiency along today’s complex processes and the better quality of business decisions based on real-time information,” says Eidel.
“Another example is using blockchain technology to make clients’ holdings available in a fully transparent way, with unit holders, fund managers and other market participants on the same network,” says Eidel. “This could enable trades to be done and settled in near real-time.”
But it doesn’t end there. If blockchain is the new database, then smart contracts are the business logic. Smart contracts are small computer programmes that facilitate, verify, execute and enforce commercial agreements between the participants on the blockchain and can be created by one party and replicated to all.
“The long processes of changing regulation or rules, due to adverse market conditions or fraud, can be done very quickly using smart contracts,” says Eidel. “The promised efficiency could not only reduce risks for your clients, but also for the whole financial system.”
However, as with any other new technology, people must use blockchain for the right purpose in the best way, starting with the industry pain point or customer need they would want to solve for. Only then, can they decide whether technology is the best way to do so.