Over the past couple of years, over US$900 million has been invested in the so-called crypto-technology industry and its promise to revolutionize not only the world of money, payments and finance, but also identity, accounting, the law and the Internet itself.
In the early days, it seemed as if this weird new form of digital money called bitcoin was going to eliminate the need for financial intermediaries enabling people and companies to make and receive payments. More recently, however, we have seen the most important financial institutions in the world become interested in exploring the potential benefits of blockchain technology.
Why? What is this all about? The promise of a revolution stems from the fundamental invention introduced by Bitcoin a little over six years ago: the possibility to register assets and transact with complete strangers across the globe without the need of a trusted intermediary. Bitcoin accomplished this feat by means of a cryptographically secure ledger shared across all network participants called the blockchain, and an ingenious system of incentives for all participants.
The advent of Bitcoin, the first successful cryptocurrency was indeed a revolution in its own merit. Yet money was just the first product or application of an underlying platform that offers considerable flexibility.
Bitcoin and its blockchain are, in effect, an open source technology platform that anyone can experiment and build products on.
The original blockchain has even stimulated the emergence of other types of blockchains, with alternative incentive and consensus mechanisms, but with the fundamental characteristic of being decentralized or distributed. What has captured the imagination of major financial players is the possibility to reduce costs and complexity in their middle and back offices.
To take the case of financial institutions and their regulators, an enormous amount of money, resources and time is spent second-guessing one another. Financial intermediaries operate their own platforms, databases and systems, every time there is an exchange of value among them, each must inevitably compare and reconcile its accounts and resolve any discrepancies. If a ledger system shared among counterparties, including regulators, were to guarantee a single and tamper-proof version of the truth, there would be massive aggregate efficiency gains.
Barclays-supported Wave is just one of the fintech start-ups leveraging blockchain technology for age-old financial transactions, in this case for bills of lading used in the transfer of goods and property rights.
But the blockchain revolution is not only about cost savings, it is also about reinventing and reengineering entire product classes and supply chains both within and outside of the financial services world.
The potential applications and opportunities for disruption include stocks and other real-world asset digitization, identity, crowdsourcing, property registration, smart property, financial derivatives, auditing, smart contracts, and governance.
Although there are real challenges, not the least of which is integration with legacy systems, the technology is today mature enough to be deployed at a minimum experimentally. This is suffient reason to explore how blockchain technologies and decentralized systems can help our companies and industries innovate and stay relevant (or just wait until the financial equivalent of Über comes to do it for us).
Co-written by Tanya Suarez & Juan Llanos
See this post also on LinkedIn