Blockchain, A Multi-Faceted Disruptor
The origin of the idea of blockchain is mysterious and largely attributed to Satoshi Nakamoto, likely a pseudonym for an individual or group who began using the technology to power Bitcoin, circa 2008. Today, blockchain technology allows for the disintermediation of transactions. Put simply, you may no longer need an intermediary or platform (such as a bank, a broker, or payment processor) to trade items of value in the future. The internet began as a collaboration between the federal government and academia. It started as a simple network of connectivity and communication for computers within the federal government and at university research centers. Today it powers the global economy. So the question remains, will blockchain have the same economic impact?
Everyone’s doing it (or trying to)
One of the main drawbacks and vulnerabilities of using blockchain is it allows for a level of open access, unprecedented in the financial sector. In an age of hacktivists, social media, and increasingly democratized information, many blockchain activists don’t see this as a drawback, but rather a positive evolution in financial services. Blockchain has the potential to be transformational in ways we can’t yet predict. We’re still in the very early stages of its development, exploration, and implementation.
More than three quarters of major financial institutions globally are looking into blockchain technology. Recently, there has a been a rush to understand how blockchain technology can be used internally at large enterprise companies. Enterprise brands have found many use cases to help them get ahead of the competition, as well as to avoid the possibility of major disruption, while accommodating customer needs. For example, the IRS now classifies bitcoin as property. Wealth management and investment professionals need to understand its implications for investments, tax, charitable giving, and estate planning purposes. Customers are also demanding more from large financial institutions with the advent of fintech applications like Venmo, that allow for easier money transfers.
Today it still takes several days to settle international foreign currency transactions through large financial intermediaries. With blockchain technology, you will be able to instantly send and receive funds across borders and currencies. Asset managers and banks are devoting immense resources to internal incubators and innovation teams as well as assigning outside talent resources to better understand and implement new payment technologies like blockchain. Many enterprises have partnered with blockchain startups and policy institutions and are participating in forums about the technology.
If you don’t use it, you lose it
In order for blockchain to work, there needs to be widespread adoption of the technology. Take Facebook for example: The social media giant has changed the way we interact with family and friends and the world around us. However, if you were the only person to have signed up for Facebook, the platform would be useless. For this reason, many financial institutions are collaborating on developing and researching blockchain technology in an attempt to expand its user base. One example of this is the former JP Morgan Managing Director, Blythe Masters, who has raised more than $60 million dollars from 15 of the largest financial institutions, including Goldman Sachs, JP Morgan, and Citibank for her blockchain startup, Digital Asset Holdings.
Blockchain is still very new and no government regulation yet exists on the proper use of the technology. The Federal Reserve System has committed a fairly robust effort to explore blockchain and measure its potential impact on our financial system. The Federal Reserve’s general ledger system processes the combined ledgers of all banking institutions that operate in the United States. As blockchain adoption grows, financial institutions need to work together with the Federal Reserve to ensure a safe transition from current database technology to the distributed ledger system that blockchain uses. The government needs to be a part of this effort to ensure the safety of our financial system from would-be cybercriminals or state actors.
The federal reserve and companies like Accenture, are exploring ways to create an edited, modified, or proprietary blockchain that wouldn’t be exposed to the potential threats of bad actors. There is a debate over whether or not this can be done effectively, and has blockchain purists arguing that modifying the blockchain defeats its purpose.
The U.S. likely won’t be the first country to officially adopt the technology as a new standard due to our pre-existing financial system being too large and complex to replace overnight. The first national adopters will probably be countries in the developing world. These countries would have “pure adoption,” where they would completely skip a generation of financial technology and database systems. Instead of replacing an old system, they would create a new one from scratch.
Its applications are endless and cut across industries
Aside from money markets, currency transfers, and general ledger database systems, blockchain will have applications across industries. In addition to the Federal Reserve System, other branches of government are studying the blockchain as well.
- The intelligence community is trying to answer questions like: How can we hack the blockchain? How can we move money around for covert operations without detection?
- Others are exploring its application in voting, both in government elections as well as for shareholder voting in publicly traded companies.
- The music industry has begun to explore blockchain’ s ability to end pirating and illegal downloading where songs can be protected by the blockchain and released and retracted in accordance with payment terms.
- The same is being explored in the healthcare industry, where one day patients may have the power to control who has direct access to their medical records, and for what amount of time.
- Who needs lawyers if we can make smart contracts for the transfer of title and deeds, and store assets in non-third party escrow over the blockchain?
- Companies like Amazon have started to explore blockchain for supply chain automation and logistical integration, potentially saving tens of billions of dollars in manual, time consuming, and expensive activities.
As large enterprises begin embracing “the future of work” while striving for leaner teams and efficiencies, blockchain represents a tremendous cost saving opportunity. It has the potential to completely eliminate middle and back office operations where no human involvement is necessary. This can offset losses in transaction fees and provide greater shareholder value.
The possible applications of this technology and its disruptive impacts across financial services, healthcare, logistics, entertainment, and in our personal lives can be enormous. The distributed ledger empowered by blockchain crypto-technology has the potential to change our world.