Demystifying Blockchain: moving beyond cryptocurrencies

Blockchain in the finance industry has evolved considerably since its inception 10 years ago. Tweaks and modifications to the distributed ledger technology have seen it move beyond Bitcoin and become the underpinning technology for a host of new products and services that focus on sharing data and information more quickly, securely and cost-effectively.

More than just Bitcoin

The shift away from cryptocurrencies is in part due to the recent crypto-market crash — which has seen unregulated ICOs reaching some of their lowest levels ever — as well as technological advancements and a better understanding of Blockchain’s potential.

Now, arguably, the most sought-after application for Blockchain in the finance industry is as a decentralized database. Blockchain for storing and sharing information is proving easier, more secure and cheaper than traditional methods.

A distributed ledger database based on Blockchain works by each participant maintaining, calculating and updating new entries, with all nodes working together to reach the same conclusions, providing inherent inbuilt security for the network. Records are easily available to everyone in the platform but also immutable.

Unlike Bitcoin, Blockchain for this purpose uses a “proof of stake,” which is cheaper and requires less energy than the “proof of work” obligation used for bitcoin transactions. This makes it more scalable and cost-effective.

Increasing adoption

In this regard, several notable consortiums and collaborations have emerged that will likely see Blockchain in the finance sector grow exponentially.

Case-in-point: the growing use of Ripple, a U.S. fintech firm using what it calls “advanced Blockchain technology.” Japan’s SBI Holdings, a consortium of 61 banks, partnered with Ripple in 2016 to launch SBI Ripple Asia, which it says is “the next-generation payment platform powered by distributed ledger technology.” The platform allows financial institutions and remittance transfer providers in Asia to “seamlessly settle and make payments between banks nationally and across borders,” using Ripple’s Blockchain technology, according to Ripple. The platform reduces payments’ time frame from days to real time.

American Express is also using Ripple to process instant payments for U.S. corporate customers who want to send funds to U.K.-based businesses. Santander U.K. has been using it for international payments since 2015. It is reportedly ready to launch a Ripple-powered app.

In a similar vein, Enerchain, created by German IT firm Ponton for the energy sector, is set to use Blockchain technology to reduce the cost of wholesale energy trading for operators, matching producers with each other and other users. Backed by energy firms such as Italy’s Enel, Germany’s E.ON and Sweden’s Vattenfall, the platform is expected to go live sometime in 2018, according to Reuters, testing with an initial selection of contracts.

Semi and fully public blockchain

These new ventures show Blockchain in the finance industry is emerging fast. But perhaps the biggest indication of the validity and strength of the distributed ledger technology is the growing number of governments endorsing it for uses similar to that in the finance and energy sectors.

It is thought that, through Blockchain, governments can potentially access more data and more control to better assess the impact of public policy and provide more relevant services. If the technology is supported by the state and created with national legal compliance in mind, its credibility can only strengthen.

In Spain in 2017, semi-public Blockchain platform Alastria was established as a non-profit that became the “world’s first regulated national network based on Blockchain.” It is backed by the main Spanish banking, energy and telecommunications companies, among other sectors. It uses digital ID to allow citizens to have control over their personal information in a transparent way. As each member’s ID is certified and guaranteed, they can use “smart contracts” to offer services and exploit applications in a cross-sectional environment and with full legal guarantees in Spain.

CryptoSlate reported that the Spanish government, in July 2018, also made a proposal to introduce Blockchain into its public administration in a bid to increase cybersecurity, ease of use, efficiency and safety.

Dubai, China, Australia and the U.K., among others, are also looking into state-backed Blockchain. In 2016, the U.K. government trialed GovCoin for the welfare and benefits system, but is yet to release information on the success — or lack thereof — of the trial.

Watch this space

It is wise to beware of the hype. In 2017, Deloitte reported that of the 86,034 projects on GitHub, a software development platform commonly used for Blockchain, only 8 percent were active and the average life of a blockchain project is approximately 1.22 years. This could be considered normal for an emerging technology, or perhaps seen as indicative of its durability. Most likely, though, it will be the success or not of the government-backed Blockchains and those financed by multinationals that are most telling.

It is impossible to know how Blockchain will evolve, but its adoption is moving much faster than the digital banking revolution that came before it. The finance sector can likely expect more technological advancements, new applications and breakthrough projects to enter the pipeline swiftly.