“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” This is the opening sentence of the abstract of Satoshi Nakamoto’s white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. With this, the first cryptocurrency, bitcoin, came into existence in 2008.
Since then, bitcoin has been under the microscope. However, it has survived despite being criticized, rebutted, banned, all the while developing a core following of supporters. The responses towards bitcoin have been mixed – sometimes more negative than positive – but amid the skepticism, its underlying technology started to gain attention. Thus, bitcoin not only paved the way for a cryptocurrency revolution, but it also brought with it an intriguing technology which runs it – the blockchain.
While blockchain has been introduced by bitcoin, the fact that it can be used independent of it has created enthusiasm to experiment and work on this great innovation. Blockchain works on ‘distributed ledger technology,’ which slices out the need of a neutral authority to check or certify ownership to clear transactions which reduces the transaction time, offers high speed and makes records meddle-proof. The figure seen further below shows how the working of a blockchain.
The year 2015 saw a substantial rise in blockchains’ fan-following from financial institutions, banks to technology firms. In fact, it has received an overwhelming response from a group, which doesn’t stand bitcoin one bit but is sure in love with blockchain. No points for guessing the group: big banks.
One of the most-talked-about projects involving banks has been the distributive ledger initiative by R3CEV, an innovation firm that has gathered the support of around 42 big banks. “R3 has long-believed that distributed ledger technology has the potential to impact the financial services sector the way the Internet changed media and entertainment,” said David Rutter. “Yes, that’s a big statement, but there is increasing evidence to support it.”
(Source: World Economic Forum, Financial Times)
Another recent development has been the formation the Open Ledger Project, which would work on customized distributed ledger systems among other things. It is a cohort, which includes names like International Business Machines Corporation (IBM), Wells Fargo Company (WFC), London Stock Exchange Group Plc., Accenture Plc. (ACN), Cisco Systems, Inc. (CSCO), Digital Asset, Intel Corporation (INTC), VMware, Inc. (VMW) and few more along with the not-for-profit Linux Foundation. The Digital Asset Holdings, which is a part of this project, had made headlines earlier during the year when former JP Morgan executive Blythe Masters got associated with the start-up, which aims at reducing settlement latency and counterparty risk.
The year also witnessed many individual ventures by financial institutions and banks. In July this year, International Business Times reported that, “Citibank have constructed three blockchains and a test currency to run across them.” It further quoted Ken Moore, head of Citi Innovation Labs, “We also have an equivalent to bitcoin up and running, again within the labs, so we can mine what we call a ‘CitiCoin’, for want of a better term. It’s in the labs, but it’s to make sure we are at the leading edge of this technology and that we can exploit the opportunities within it.”
Then there has been Goldman Sachs development of SETLcoin and Securities Settlement Patent. According to the application entitled “Cryptographic Currency for Securities Settlement,” Goldman Sachs is seeking patent protection for a settlement system for securities market based on cryptographic currency protocol, which introduces its own cryptographic currency – the SETLcoin.
Europe Visa’s Why 2015 was the year of payments highlights the importance of bitcoin and the blockchain technology. It read, “2015 has turned blockchain into something the industry has to live with. It is no longer a choice anymore. Recent news speculating about the identity of its creator and the formalisation of virtual money as a commodity, just makes it more real than ever before.”
In May this year, Nasdaq made a buzz as it announced its debut blockchain-enabled platform – Nasdaq Linq. The project ‘Nasdaq Linq’ was developed by the company’s in-house technologists in collaboration with blockchain technology provider Chain.com and human-centric, user experience contributions from award- winning global design and innovation firm IDEO according to the press release.
In October, Nasdaq made the first-ever demonstration of its blockchain technology at the Money 20/20 event, names like Chain.com, ChangeTip, PeerNova, Synack, Tango and Vera were on the initial roster of private company clients for Nasdaq Linq. According to Bob Greifeld, CEO, Nasdaq, “Blockchain applied to the private market is innovation built on top of innovation, and carries with it the opportunity to forever alter the future of financial services infrastructure.”
While Russia continues to be extremely wary of cryptocurrencies, there has been news about the country’s largest bank Sberbank keen joining the R3CEV initiative, which is a consortium of the biggest international banks working on the blockchain technology. In another development, President Putin even received a proposal to provide for a blockchain regulation from the Internet Development Institute of Russia.
Even India’s apex bank, the Reserve bank of India (RBI), which had issued a warning regarding cryptocurrencies two years ago, seems to be charmed by the blockchain technology. According to a report by the RBI, “With its potential to fight counterfeiting, the ‘blockchain’ is likely to bring about a major transformation in the functioning of financial markets, collateral identification (land records for instance) and payments’ system.” It further said, “Regulators and authorities need to keep pace with developments as many of the world’s largest banks are said to be supporting a joint effort for setting up of ‘private blockchain’ and building an industry-wide platform for standardising the use of the technology, which has the potential to transform the functioning of the back offices of banks, increase the speed and cost efficiency in payment systems and trade finance.”
While institutions and companies understand the technology well and have been working on projects openly (and secretly), it was The Economist cover story titled as “The promise of the blockchain: The trust machine” that introduced blockchain to an average audience it in a very positive manner.
Why It Matters to Investors, and What Lies Ahead?
Blockchain adoption can facilitate a high-speed, low-cost and efficient payment system, thereby resulting in huge savings for both banks and customers. The use of the blockchain technology could make the acceptance of ‘smart contracts’ possible, which can be used in areas that involve counter party risk, like trade finance, securities, swap, derivatives and more. Its use can reduce the trade settlement time to near spontaneous.
It can further provide a tamper-proof system, which eliminates the need of constant monitoring while increasing the accuracy in execution of transactions at the same time. Overall, investors can look to benefit from the technology in the form of reduced costs, faster speed, better accuracy and more transparency. All these combined together would increase the investor confidence in products and processes of the financial world.
The blockchain technology is at stage where it is widely believed that its true potential is only partially known. This is one reason why it is often compared to the era when internet was first invented. How many actually knew how internet would be shaping our lives many years later? Blockchain is just the start of another era, the benefits of which would be discovered in time.