Clifford Stoll, an astronomer, published in Newsweek in 1995 a now notorious article under the headline ‘The internet? Bah!’ Dismissing the WWW, he mocked Nicholas Negroponte, director of the MIT Media Lab, for predicting “we’ll soon buy books and newspapers straight over the internet. Uh, sure.”
No-one today is risking making the same boob when it comes to forecasting the future for Blockchain. That’s sensible: because Blockchain is potentially the most disruptive technology that has been seen since the creation of the internet itself.
The technology that underlies Blockchain demands sophisticated code-writing skills but, at the conceptual level, Blockchains are nothing more than decentralised ledgers, or lists, of transactions that happen in a peer-to-peer network.
Blockchain technology underlies Bitcoin and other cryptocurrencies. As yet, Bitcoin (and other cryptocurrencies vying with Bitcoin) have not really broken through the barriers of unfamiliarity and uncertainty; they have yet to become ubiquitous as payment options. Rather, price volatility and the chance of quick profits (and losses) means that Bitcoin has been more of a tradable asset than a way of actually paying for goods and services.
So Bitcoin, for all its publicity, is no more than the epiphenomenon of Blockchain; it’s the technology that is revolutionary, not the cryptocurrencies per se. Bitcoin is dependent on Blockchain; but Blockchain technology is independent of Bitcoin.
Blockchains fall into three broad categories – public, private, and a hybrid of the two. A public ‘permissionless’ Blockchain – for example Bitcoin – is a fully decentralised system open to everyone (no central ‘authority’ giving ‘permission’ to join) and where the ledger is updated by pseudonymous users. Private or ‘permissioned’ Blockchains involve a centralised organisation controlling the entire system, such as a company conducting (and controlling) internal auditing or database management.
A hybrid Blockchain is a system open to a controlled group of trusted and vetted users who update, preserve and maintain the network collectively.
"The key attraction is that there is no middle or back office, and no registry, so clearly a major impact on costs"
Virtually any type of information can be digitised, codified and placed onto a Blockchain, creating a database that is (theoretically) tamper-proof, permanent, and whose validity is confirmed by the consensus of a community of computer users, rather than by a central authority. The ‘central authority’ is this community of computer users.
The financial services industry is perhaps the most fascinated by the possibilities opened up by Blockchains. It sees the possibility of cutting costs from many time-consuming and therefore expensive routine activities. Alex Batlin, chief technology officer for innovation at UBS, says: “Blockchain technologies can make banks more efficient – for example through instantaneous settlement rather than the days it takes at present, lower costs and lower operational risk. The key attraction is that there is no middle or back office, and no registry, so clearly a major impact on costs.” A 2015 report by Santander InnoVentures, Oliver Wyman, and Anthemis, forecast that Blockchain technology could reduce banks’ infrastructure expenses related to securities trading, regulatory compliance and international transfers by $15-$20 billion a year within seven years.
Wider adoption of Blockchain hinges on how regulators and policymakers manage this swiftly evolving technology. It’s unlikely that the financial world – or policymakers – will ever take ‘unpermissioned’ Blockchain networks (such as Bitcoin) seriously, primarily because of anti-money laundering and rules that impose ‘know your customer’ stipulations.
But beyond the world of finance Blockchain is rapidly gaining traction in many other areas – such as diamond trading.
The Global Blockchain Council (GBC) with its HQ in Dubai has been set up to explore the application of Blockchain technology to a variety of operations, including the international diamond trade. In 2000 the Kimberley Process (KP) was set up to combat the ‘blood diamond’ trade. Countries signing up to the KP must ensure that any diamond originating from the country does not finance a rebel group or other entity seeking to overthrow a UN-recognised government; that every diamond export be accompanied by a KP certificate; and that no diamond is traded with a non-member of the scheme. With this process all diamonds collected from a mine are sealed in containers, and given warrantees. As they move from location to location, they are given further identifications to verify their origin.
Today, 74 countries are members of the KP, ensuring that more than 99 per cent of diamonds are from conflict-free sources. Anyone who imports or exports rough diamonds between these countries without a KP certificate is breaking the law.
The GBC’s ‘Operation Kimberley’ is a pilot project to use a ‘permissioned’ Blockchain to digitise the issuance and transfer of Kimberley Process Certificates used in the shipment of rough diamonds globally and the collection, transfer and storage of trade data and statistics provided by each member country.
James Bernard, Director of Business Development with the Dubai Multi Commodities Centre (DMCC), says that a ‘permissioned’ Blockchain can both revolutionise diamond trading and, critically, reduce costs across the trading spectrum: “Today, diamond production and trade data is collected by member countries who mainly use Excel and transfer that data to a centralised website. This could easily result in duplications and incorrect information through errors. Blockchain technology can be used to share a ledger across the member network. The network will be private to the parties concerned, permissioned so only authorised parties are allowed to join, and secured using cryptographic technology to ensure that participants only see what they are allowed to see. Diamond data can be collected and added by the authorised users and immediately viewed by everyone across the network. This establishes trust, accountability and transparency while streamlining the process. It has the potential to vastly reduce the cost and complexity of the processes involved.”
Ultimately, what Blockchain can deliver is confidence: it’s not the institution that you trust – but the transaction. If a ‘permissioned’ Blockchain had been in place for forex trading, the great Libor scam would have been impossible.
Blockchain is a decentralised list of transactions that happen in a peer-to-peer network. Those who join in the Blockchain can transfer value without the need for a central third party or ‘clearer’. It’s a distributed database which maintains a continuously growing list of encrypted data records, secure from tampering or revision. The buyer and seller in the archetypal Blockchain are pseudonymous. Without knowledge of the personal identity of their counterparty they interact directly, without the need for third party verification. The Blockchain automatically creates a transaction record, but no personal information is shared; any information about personal identities is encrypted. So imagine you are a ‘buyer’ via a Blockchain – you don’t know who you are buying from, but you do know that the seller has been trusted to enter the Blockchain; and vice versa.