There is no longer any distinction made between an immutable ledger and a blockchain, and while the two are wildly different the terms have become synonyms. Nobody cares anymore but me and I’ll just need to get over it. This article argues that the public has become fed up with high-profile hacks and no longer trust banks and that the answer might be:“But perhaps instead of trusting banks, people might be willing to place their faith in code instead. Blockchain has been around for some time now but it’s only relatively recently that people have started to speak of it as a sort of truth serum for the way transactions are recorded. If things keep progressing as they are, it could seriously disrupt financial services companies – or perhaps even restore people’s confidence in them.”The article goes on to explain the technologies, further blurring any difference between a ledger and a blockchain and skipping over a lot of needed detail:“At the heart of the technology is a shared and decentralised ledger that allows people to stack entries on top of older ones and view others. But once data has been added, history can’t be rewritten and edits can only be made when the majority agrees to it. There’s no one controller who wields more editing power than others. This means that for any given exchange, you’re able to see exactly who’s had ownership and every stage is automatically logged – no middleman necessary.
And this is leading many in the industry to get very excited. “Blockchain-inspired distributed-ledger technology has the potential to transform the financial services industry,” says Charley Cooper, managing director of R3, the distributed-ledger technology firm. “It will allow financial agreements to be recorded and automatically managed without errors. Duplications, reconciliations, failed matches and breaks will be things of the past. Isolated islands of asset representations will be no more. This is a huge opportunity to improve the way the financial sector does business.”
It’s still early days for blockchain but we’re already starting to see some creative applications from startups. Maecenas is promising to transform the art-buying market and make it virtually impossible to falsify a painting while GovCoin is exploring how blockchain can be applied to the benefits payments process in partnership with the Department of Work and Pensions.”First, let’s be clear that a blockchain can’t prove a painting isn’t fraudulent, even the Maecenas website states that it uses reputable and trusted third-parties for that. It is however trying to change how the art market operates and utilizes technology from DXMarkets. Neither Maecenas or DXMarkets identifies exactly what technology is implemented but it is hard to imagine this solution needs to be very distributed. Immutable yes, distributed probably not.After providing more examples of how blockchain and ledger solutions will create entirely new solutions destroying existing markets, it provides banks one of two options, become excited for the technology or terrified of being made extinct (Really, these are the only options?): “For the banks and traditional financial service providers, it must be tough working out whether to be excited by the technology’s potential or terrified that it will make them extinct. Many are using outdated legacy systems that are inefficient and at the stage when they’re ready to be replaced. In fact, Santander has estimated that blockchain could save banks up to $20bn each year in administrative costs. However, it could also herald the start of a peer-to-peer lending regime that’s cheaper and more appealing to consumers. “Financial services companies are interested in blockchain because it has the power to do away with them entirely,” says Simon Carlino, founder of Regent Street Strategies, the consultancy specialising in blockchain. But necessity is often the mother of invention. “It’s no accident a multitude of blockchain startups can be found at the Level39 accelerator in the heart of the City: financial services companies are working with incubators, accelerators and startups in the hope that they’ll get some useful, value-added products out of it.” For instance, banks that develop a private blockchain could offer it to high-end customers. “It’s a fascinating balancing act for the banks,” Carlino adds.”
Articles like this tend to consider regulated markets as something to be eliminated or displaced, but that isn’t how life works. This article at least recognizes the regulatory hurdles that exist, albeit in passing:“But with things moving so fast, the regulators have taken a cautious, wait-and-see approach so far. In the UK, the Financial Conduct Authority (FCA) is considering blockchain-specific regulation because not all aspects of it fit into the current framework. More regulation is by no means a bad thing of course but for Marieke Flament, managing director at Circle, the payments company, it’s important that blockchain’s massive potential isn’t stifled so early on in its story. “The thing is to regulate the services, not the technology,” she advises. “Thankfully, the FCA has been forward-thinking and is looking at all the services around blockchain and engaging fintech startups in a dialogue.” Organisations like R3 also believe it’s crucial that the FCA continues to have these conversations to allow early-stage startups to innovate and come of age in the right regulatory environment. “The most effective regulations are born of real-world experimentation and consultation,” says Cooper. R3, for its part, invites regulators, trade associations and government to observe the ways in which its members are trialling the technology in a bid to boost mutual understanding.”What this article does bring up is the question of long term security given the technological leaps being made in quantum computing:“And as these conversations take place, cybersecurity continues to be one of the hottest topics: if blockchain proves to be not quite as tamper-proof as some are claiming, any trust it gains will vanish quickly. Theoretically, blockchain transactions are prohibitively difficult to hack because of the sheer amount of computing power needed to alter each and every block. But it’s certainly not an impossible task, as Ethereum, the blockchain application platform, discovered when it was compromised in 2016. “Blockchain is trustworthy to an extent but nothing is hack-proof,” warns Carlino. There’s also a nervousness surrounding quantum computing’s potential in the future to be able to tamper with ledgers on a massive scale. “Right now it would cost way more to hack a blockchain than you’d receive in return but with computers capable of carrying out billions of calculations per second, it could become a problem,” he adds.”The proper response to this threat is to make sure that any ledger that is maintained by existing crypto techniques can have that crypto technique retroactively replaced with new technology when it becomes available so that all transactions in the existing ledger remain protected. This is no small technological feat!
Overview by Tim Sloane
, VP, Payments Innovation Advisory Service at Mercator Advisory Group
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