The velocity of blockchain’s development is unprecedented and needs to be better understood by banks and society at large, writes John Kennedy.
As we mark Fintech 2017 here at Siliconrepublic.com, you can expect to be regaled with interviews, start-up profiles and expert points of view on all things fintech, regtech and everything else in between, all through the working week.
But if there is one common thread in all of this, it is the impact of blockchain technology.
Often confused with cryptocurrencies like bitcoin, blockchain technology is the enabler, not the currency. At its root, it could enable more than just financial transactions.
‘It is the underlying technology that fascinates us and it could one day be an efficient way of transacting value between people, and at the same time, leave a transparent trail of information’
– DAVID TIGHE
Blockchain technology, which currently underpins emerging digital, virtual, or cryptocurrencies, consists of blocks that hold timestamped batches of recent valid transactions, which form a chain, with each block reinforcing those preceding it.
The technology actually holds the key to new ways of managing identities, security, and entire networks – it could underpin the structure and future of technology as we know it.
And that is why it needs to be better understood.
The early days of a fintech revolution
As the dust settles on Brexit and most people in the UK realise that its biggest advocates lied to them and have no plan or clue what to do in the years ahead, rival countries in Europe are salivating at the chance of chipping away at London’s status as a global financial hub.
At stake are thousands of jobs and billions in investment.
London has hundreds of start-ups in districts like Shoreditch – or Silicon Roundabout, as it is known – who are cleverly creating start-ups centred on blockchain technology to develop future financial services.
Not only that, but established, eminent banks like Barclays have embraced the blockchain revolution and are providing the facilities that enable start-ups to actually create neo-banks, or alternative services banks.
Dublin and London-based Circle –which enables peer-to-peer payments for consumers via mobile devices using a platform built on blockchain, which is licensed through Barclays – is leading this charge.
Is this the golden future of banking or a threat?
It is still early days and, if anything, these new fintech players will either be acquired by banks, partner with banks or effectively replace services traditionally provided by banks. The silver lining, if there is any, is that banks can be freed up to focus on higher value activities, as even the notion of a physical branch becomes less necessary.
Where traditional banks do have a cause to be concerned about the advent of these challenger banks, is the failure to at least understand blockchain technology and how it could help their underlying businesses.
No slouch on the matter, Bank of Ireland is not only working with various fintech start-ups, but it is also engaged in various trials to figure out how blockchain can be embraced by the bank to make legacy systems more efficient.
For example, the use of blockchain technology as a way of tracing transactions in keeping with MiFID II regulations has been proven by Bank of Ireland and Deloitte.
“It is the underlying technology that fascinates us and it could one day be an efficient way of transacting value between people, and at the same time, leave a transparent trail of information,” Bank of Ireland’s head of technology, David Tighe, told Siliconrepublic.com earlier this year.
Blockchain could be the bedrock of future banking services
Last week a new report, overseen by the president of Dublin City University, Prof Brian MacCraith, called on the Department of Education and Skills to introduce computer science as a Leaving Certificate subject.
At the heart of this call is the realisation that coding will be a critical skill for jobs and entrepreneurship in the 21st century.
I would argue that judging by the speed of the evolution of blockchain technology, any course for Leaving Cert will also need to include a component on blockchain, because it could be the bedrock of a whole slew of services beyond finance. And this requires skills.
And yet, with just several months to go before this year’s crop of Leaving Cert students take their exams, it would be interesting to know how many classes in business studies have mentioned the rise of blockchain, or fintech or bitcoin for that matter. I would wager very few.
In recent weeks, I spoke with Seamus Cushley, who heads up PwC’s 25-strong blockchain research lab in Belfast.
Cushley said that blockchain-based investments are attracting a considerable chunk of investment by banks and venture capital companies in start-ups.
By PwC’s reckoning, some $1.4bn was invested in blockchain start-ups in the last nine months alone.
Cushley said that not only do banks see blockchain as the bedrock of future efficiency, it could well go beyond that.
“Right now, organisations are studying how blockchain ledgers can be used to securely manage exchanges in everything from medical records, land registry holdings, digital identity [and] government [to] even the sale of diamonds.
“But when it comes to actual production, nothing at scale has happened yet, as the banks are still investigating how they can best employ the technology.”
History in the making
Interestingly, as Dublin dithers and London lurches inexorably into a post-EU nightmare, it could be outlying tech outposts like Belfast that could have the most to gain from the blockchain revolution. As well as PwC having a fintech lab in Belfast, Japanese tech giant Rakuten has a base there too.
Rakuten acquired Belfast tech company and former Siliconrepublic.com Start-up of the Week, Bitnet, for an undisclosed sum and intends to make Belfast its major hub for the development of blockchain technology.
The lab’s function will be to explore applications for blockchain in e-commerce and fintech, pointing to a shift in how online sales will be orchestrated in future.
But the enablers are moving quickly and 2017 could be a blisteringly fast year for the technology.
Accenture, for example, has patented a new cryptography technique that would allow financial institutions to edit information stored using blockchain.
In September, Ornua – formerly known as the Irish Dairy Board – wrote its name in the history books by becoming the first organisation in the world to complete a trade transaction using blockchain.
Enabled through a partnership with Barclays, the credit transaction between Ornua and the Seychelles Trading Company was the first to have trade documentation handled on a platform developed by the fintech company Wave.
“Moving to paperless trade would be hugely beneficial in supporting the supply chain, through reduced costs, error-free documentation, and fast transfer of original documents to our customers worldwide,” said David O’Rourke, group trade finance manager at Ornua at the time.
Blockchain could also form the bedrock of future energy trading. Last week, we reported how Siemens is teaming up with solar energy start-up LO3 Energy to build blockchain protocols into the renewable energy management world.
“We’re convinced that our microgrid control and automation solutions, in combination with the blockchain technology of our partner LO3 Energy, will provide additional value for our customers,” said Ralf Christian, CEO of Siemens’s energy management division.
The velocity of blockchain’s development, from being associated with cryptocurrencies like bitcoin to be seen as an enabler for the future of banking, legal documentation and even energy trading, shows that it is no fad.
The alacrity banks are showing in experimenting with the technology shows that they see blockchain as a cost-effective way of ensuring the relevance of legacy systems, freeing them up to focus on more value-added work. Meanwhile, fintech start-ups may become the point of contact with the consumer.
A recent PwC survey found that 63pc of global bank leaders are concerned about keeping pace with technology innovators who are disrupting their industry sector, while at the same time, balancing the need to continue investing in legacy technology.
In essence, blockchain is part of the answer. And that’s why it needs to be better understood.