Thintech vs Fattech, diamonds and cyberthreats: looking beyond bitcoin
How will blockchain revolutionise the transfer of assets? We brought together five thought leaders to share their thoughts, and six key areas emerged.
“In cyber security terms, blockchain will be a major asset,” said Gavin Wood, (@gavofyork) founder of Ethcore, a distributed ledger development start-up. “Critically, because we are relying on hard maths and not relatively soft methods of protecting data, we are starting to use the right tools to fight against cyber threats. Having been tested in the ‘wild’ really supports this.”
The ‘wild’ origin of blockchain refers to its original intended use: as a method of transferring bitcoin. The cryptocurrency has no centralised authority to step in and prevent counterfeiting or fraud. Instead, a database of bitcoin transactions is set up with cryptography used to permanently fix records which are distributed and accessible to everyone on the network.
A transfer can only be made when that cryptographically stored information confirms ownership of the bitcoins needed. The system is unhackable, there can be no dispute of ownership and no counterfeit bitcoin can be introduced into the system. That makes the blockchain protocol of great interest to firms seeking to transfer value in other ways.
Philippe Denis, Head of CIB blockchain initiatives and Chief Digital Officer at BNP Paribas Securities Services, reflected on the first time he had heard about the innovative technology. “I was in charge of R&D and in 2011 a colleague said we should look at bitcoin. Not at the currency more at the protocol behind it. Our mantra became, ‘forget the currency, and think protocol’.”
Taking this concept and making it work in a practical sense requires several dynamics to come together. The first of these is consensus: if everyone develops their own blockchain, there is nothing to say they will work with each other. To tackle this, BNP Paribas has engaged with the R3 and Digital Asset Holdings consortiums, which are developing industry standards for finance.
The second is the ‘use cases’ being established. Where consensus and standards for replacing existing business-to-business (B2B) models are still forming, firms are developing these on a business-to-client basis to prove the technology.
In finance, the Securities Services division of BNP Paribas is working with the SmartAngels equity entity in order to issue securities for investors on the primary market via blockchain – and offering them the capacity to trade them via the distributed ledger as a secondary market function. However the technology can also create new models, where firms can operate B2B systems to take advantage of the immutability of the ledger.
"We started over a year ago by using blockchain technology to create a permanent ledger to protect the provenance of diamonds and luxury goods," said Calogero Scibetta, Head of Operations and Business Development at Everledger. "Our technology enables us to help insurance companies, banks and open marketplaces reduce the occurrence of theft, fraud and the selling of counterfeit goods by creating a digital footprint of these items on the blockchain."
Eveledger, which estimates some £100 million is paid out each year in relation to jewel theft and £200 million is paid out by insurers to tackle fraud, is using a digital ledger to identify real-world diamonds and track their transfer, ensuing their provenance is legitimate. As the firm digitises an ever greater proportion of the world’s diamonds those without the validation of such a system could be traded at a discount due to the risk merchants carry when failing to verify them.
Sean Murphy, partner and head of Norton Rose Fulbright’s global blockchain & distributed ledger practice said, “The potential use cases of distributed ledgers are enormous. We are seeing lots of interest from clients in the clearing and settlement space at the moment and also around provenance and identity (for example, for Know Your Customer purposes). From a legal standpoint identity is an interesting use case because it raises important questions around data privacy.”
From a practical perspective, there are many decisions to be made by the chief information, digital and technology officers as to the ledgers they use on the one hand and the underlying technologies that they use on the other.
“On one side we have thintech – for example those distributed ledger which are being tested by the R3 consortium – and on the other side we have fattech, for example IBM and Intel offering to share their technology to support the development of distributed ledgers,” said Denis.
Once the dust has settled around these decisions, the practicality of employing systems between businesses operating with their peers increases. The capacity to support issuance of an asset as a primary market function and also secondary market trading is not limited to simple instruments. Dividend payments can be set out, with complex clauses established to support structured products.
“The concept of smart contracts that trigger clauses automatically is big, but is [still] some way out,” said Murphy. “However, the use case I personally find most interesting is that of central banks issuing their own currency with a distributed ledger.”
He explained that once central bank money had been established on a distributed ledger, businesses would begin to have the capacity to make real money transactions in securities and cash using blockchain.
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