Bridling the blockchain for financial services
Many technologies have their origins not in corporate R&D labs, but instead in the bright minds of individuals working in their parents’ garages and student flats. Alongside developing great new technologies there is often a more radical motivation – changing society, tackling corruption & poverty or even breaking our current systems of working.
Bitcoin and blockchain – the background
Bitcoin and its supporting technology, blockchain, were designed to operate very differently from other currency systems. There would be no ‘Central Bank’, no interference or control from governments or financial corporates, and the system would be controlled, processed and managed by pretty much anybody who wanted to be involved.
Six years on, Bitcoin has grown massively, spawned many imitators and led to a huge development of associated technology. But some of the ideas have failed. Bitcoin is now effectively controlled by a small group of powerful ‘Bitcoin mining’ consortiums based in China, and its rapid expansion has outgrown its original design. Consensus on the way forward has been marred by conflicting interests over influence, security, income generated and ideology.
Blockchain, the technology that underpins Bitcoin, has perhaps made it further that its symbiotic bedfellow. It too was conceived with high ideals – no centralisation, no individual control, and most importantly, a pure, immutable record of the historical truth, protected by algorithms, encryption and distribution of the records amongst the masses.
Here once again, though, in the wild world of innovation outside regulation and compliance, it too has come unstuck. Following on from a targeted theft of ‘Ether’ (another digital currency like Bitcoin), the founders of the currency decided to ‘hard-fork’ the underlying blockchain – effectively rolling back the transactions until before the theft. Essentially, they were re-writing history, and in doing so did just what the blockchain was designed to prevent.
This has caused a major split in the key stakeholders of Ether, with some arguing that the blockchain should have remained as it was, and the criminals dealt with in a more conventional way. This group has now formed their own ‘Ether Classic’ digital currency.
Bringing blockchain in from the wild
As blockchain has become more interesting to the corporate and institutional world, these problems have been put into sharp focus before any failures have happened. Compliance and controls concerning liquidity, anti-money-laundering, privacy, accountancy & reporting practices, data protection, risk, tax, export restrictions and operational integrity have all come into play.
Put simply, these regulatory requirements cannot be left to the masses to ensure compliance and, more importantly, somebody has to be responsible should problems occur.
The blockchain is now being domesticated – and is in the process perhaps losing some of its teeth.
As the commercial world begins to experiment with blockchain, consortium only private blockchains are now the expected norm, especially in financial services. This is for lots of reasons, including manageability, standards definition, regulation and compliance, and of course to prevent fraud.
These financial organisations already maintain a level of trust between themselves outside the blockchain, allowing them to develop working pilot systems. As consortiums increase in size and they trade between themselves, they typically need a central function supported by all the players. This central function is needed to be responsible and accountable, to manage the way forward and to provide some of the associated operations.
Ironically this is the way that both Mastercard and VocaLink started, so there will most probably be some centralised control of blockchain in financial services, perhaps with competing schemes owned by a group of different banks. Sound familiar?
To keep history – or to change history?
And what about the immutable record of the historical truth? Well, once again this is challenged in the world of the domesticated blockchain. Accenture has recently filed a patent for an ‘editable’ blockchain. That’s right – you can legitimately go back and change the recorded history, just in case you recorded it incorrectly.
Whilst fundamentally challenging one of the core values of the blockchain, I would argue that this adaption is needed for lots of reasons. Mistakes will be made, fraud will be committed, new information will come to light. What is most important is that adequate controls are put in place to prevent its misuse, and this will only come from central, compliant and secure management of the blockchain environment.
(Hint – you can’t do this without funding and this will most likely come from joining fees and / or transaction fees).
Personally, I am a fan of blockchain technology. At Fujitsu, we have worked with a major bank to significantly reduce cross-border settlement times from the current three days to the same day. The point that I am making is that as we bridle the blockchain for regulated financial services use, we will reduce some of its perceived original value, and it will be implemented in a more evolutionary rather than the expected revolutionary way.
It will still, however, reduce transaction times, costs, complexities and risks, and almost certainly enable new business models. If you aren’t already, you should be running your pilots.
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