By Anthony Voigt on Monday, 14 March 2016

The other night I  attended a presentation from Adam Ludwin, CEO of Chain.  Chain is a blockchain infrastructure company from San Francisco that completed a USD$30M fundraising from finance industry companies last September.

Adam spoke about how blockchain will transform not just finance but a range of industries where assets can be easily digitised.  Here’s my take on some of the key points in the presentation…

A blockchain supports digital assets

Just as the digital revolution allowed for the creation of digital assets such as music, news and movies, it also supports the creation of truly digital money.

Now with a digital asset like music (eg an MP# file), files can be relatively easily copied and given to another person.   Thus, a music file can be transferred to another person whilst still being kept by the original owner (which, of course, is contrary to the wishes of music industry barons, although my daughter hears rumors that this practice sometimes occurs between students at her school).

The key difference between this and digital money is that this behaviour (transferring copies of assets whilst still retaining ownership) s precisely what you don’t want to happen with money.  The last thing we need is the ability for money to be both paid to a counter-party and retained by the original holder (kind of defeats the purpose… never mind the inflationary consequences).

Which is where a blockchain comes in. To quote from the Chain blog:

"A blockchain is collection of mathematical, record keeping, and communication procedures that makes it possible to trade digital assets securely."

More specifically (to take from the same blog) a blockchain has four characteristics:

  • it is a ledger, in that it is an historical record of transactions
  • it is immutable so that once an entry is added to the ledger, it is permanent and unchangeable
  • it is distributed, which means that copies of the ledger are kept across the blockchain network (and these copies are all updated  with new entries in the ledger as they occur)
  • it is cryptographically secure, so that everyone can trust what’s in it

In theory many kinds of assets could be digitalised and traded/transferred via a blockchain.

A blockchain presents a new medium for money

The most well known attempt to digitalise and ‘blockchainise’ (can you say that?) money is, of course, Bitcoin.But Adam pointed out that Bitcoin is but one example of this.  Others include (to mention just two):

  • the possibility of a central bank issuing currency directly into a private blockchain under its control
  • Ripple, a global settlement network for delivering instant, low-cost international payments

These, and other examples, point to the opportunity to apply blockchain technology in financial services to:

  • reduce cost
  • improve speed and service
  • improve trust and transparency
  • reduce risk
  • simplify the ‘connectedness’ of financial system participants by using a standard platform or protocol (rather than the multi-party integration approach required by current API models)

Where does this take us?

Questions that arise for me include:

  • What common banking functions will be most impacted by this?  Market trading of shares, bonds, currencies, etc.  Remittances of every type.
  • Might this lead to the adoption of more commonly-accepted (across-border) currencies?
  • What is the future of Australia’s NPP?  Is it already a legacy system before it’s even built?
  • What about loan origination and settlement?
  • How should core banking systems avail of this capability?
  • And more