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28 January 2017


Tag(s): Technology
In this age of disruption there is one new process that has the potential to disrupt more than perhaps any other and that is blockchain. Best known for its application with bitcoin it has the power to reach many more industries than financial services. Whereas the internet has changed how we communicate, blockchain transforms the way we exchange assets and value between multiple untrusted parties. Nowadays, to exchange value digitally (such as currency, deeds or valuables) we rely on trusted intermediaries such as banks to establish trust between untrusted parties. Without blockchain, a trusted intermediary is necessary to prevent fraud, because when value is presented digitally, it can be altered or duplicated. Blockchain uses a decentralised mechanism to establish trust, thus eliminating the need for a trusted intermediary.

If you can remove intermediaries you can reduce cost, delay and risk. Blockchain has the potential to make many business processes more secure and resilient. They become more transparent and trusted.

 Like many so-called innovations Blockchain is not really a new technology but rather a new combination of existing technologies. It was released on Open Source eight weeks after the Lehman crash. It now threatens to disintermediate almost every process in financial services with huge consequences in reduced costs which also means lost jobs. It must be hoped that it will be like the Spinning Jenny which initially put people out of work as it did the work of sixteen weavers, but then led to more jobs as it could supply the demand that was there in the market.

Blockchain works by creating a single trusted version of the truth using a distributed ledger, consensus protocols and cryptography. A party in a network begins the process by requesting a transaction. The transaction is then broadcast to other nodes in the network. The network of nodes validates the transaction using agreed consensus protocols. If valid, the verified transaction is combined with other transactions to create a new block of data for the ledger. The new block is added to the chain in a way which is permanent and unalterable. The transaction is complete. If any outside party sought to alter the data in one of the nodes all the other nodes would see this and reject the alteration, preserving the integrity of the transaction. Every participant in the network can access a single shared view of the blocks.

Blockchain is industry agnostic and its potential applications very wide. It is instantaneous and carries no credit risk. Those organisations that depend for their business on creating trust as intermediaries are themselves at risk as blockchain removes the need for such intermediaries. It thus has potentially far-reaching impact for business and society more broadly.

The most obvious applications are in financial services. At present if I want to send money overseas I would do this through a bank or other exchange operator and their fees and commissions are extremely high. With blockchain this would be quicker, far cheaper and risk free. It is also difficult to see why conventional audits would be necessary as a single, accurate and transparent record of all an organisations transactions would be easily available. Thus if BT had had a blockchain system in place in Italy it would not be facing its current problems.

But such applications apply equally for several government transactions. The record of waste and corruption in overseas aid is legendary. Blockchain can track the distribution of such aid payments transparently and securely, helping to ensure that funds are directed to and spent by those genuinely in need.  At home the Department for Work and Pensions has developed a live proof of concept for the distribution of benefits. Its purpose is to eliminate the estimated £3.5 billion of benefits fraud. The Bank of England has its own laboratory researching blockchain applications. The maintenance of land registers is notoriously open to corruption, mismanagement and fraud. Blockchain can be used to build secure, reliable and distributed records of land titles that do not rely on central intermediaries. This removes the chance of single points of failure that are prone to error and fraud. There is just one trusted version of the truth. This does not just have implications for those in the management of the land registries but also for those whose living depends on litigating disputes. Honduras is transforming its land registry to blockchain.

Blockchain is already being used to track valuable items around the globe. The first application of this has been in the diamond industry, where it is helping fight insurance fraud. By tracking a diamond from the moment it is mined and through its supply chain, there is a permanent, trusted and transparent history for every diamond. This reduces the risk of investors purchasing counterfeit or blood diamonds, by allowing them to check the provenance of diamonds. It is not hard to see that such applications will extend to all types of traded valuable.

In the pharmaceutical industry it is expected that every packet of pills will have its bar code stored in a central repository enabling the tracking of every pill should fault be discovered.

In the travel industry IBM revolutionised the process of booking tickets for American Airlines in the 1960s with the development of the SABRE (Semi-Automatic Business Related Environment) reservation system. It was the first to work over phone lines in “real time”. Being able to have instant updates to its seat inventory and passenger information gave AA a big competitive advantage. The application of blockchain technology to such processes will give passengers a massive improvement in their online booking experience.

Both the Defense Advanced Research Projects Agency (DARPA) of the U.S. Department of Defense and NATO have put out requests for military related apps built on blockchain technology. DARPA wants to leverage blockchain technology to create a secure messaging service. The request for proposals targets a messaging platform able to transfer messages via a secure decentralised protocol that will be secured across multiple channels, including, but not limited to: transport protocol, encryption of messages via various application protocols and customised blockchain implementation of message deconstruction and reconstruction, and decentralised ledger implementation.[i]

Blockchain rests on provenance and legal identity. Any closed system requires identity to enter. Thus there is a global opportunity to deal with identity issues. An estimated 1.5 billion people have no legal identity. 53 million children are born every year with no birth identity. It is one of the UN Global Goals to address this. There are also opportunities to reduce the enormity of human trafficking. In the Isle of Man a UK blockchain infrastructure provider is testing applications around identity, ‘Know your Customer’ and Companies House information. [ii]

A House of Lords committee looked into block chain and expressed three concerns; monopoly, security and the risk of Big Brother. According to PwC who, faced with the risks that blockchain presents to some of their own business, are developing expertise in blockchain, this should not be an issue if blockchains can interact. Now multi chains are in development by companies like Sun and Oracle. As for security there has been no successful attack on Bitcoin after seven years of operation but in the cyber world there should be no complacency. Blockchain is policy agnostic so the risk of a Big Brother development is seen as small. However, one concern might be that once something is registered in blockchain it can never be changed. In blockchain speak it is immutable.

Blockchain is a global opportunity and the UK is one of the leading countries in developing it along with the USA, Canada, Australia and New Zealand. It requires a certain level of understanding of underlying mathematics/cryptography to understand how blockchain internals work (but it’s easy for anyone to use it). As a disruptive technology it’s not easy to predict how quickly these various applications will arrive and take a dominant position but everyone should consider how it might affect their own business or organisation.

Effectively there are now three different internets: www (Internet of Information), IoT (Internet of Things) and blockchain (Internet of Value). Today there are still few points of real connection between these three internets. But some experts believe that is going to change soon. We will progressively see the collision of these three internets until a point where we can’t determine a difference.

The Digital Catapult believes that blockchain will change everything. This does not just have implications for business but for society as a whole. In establishing personal relationships the most important thing between people is trust. With blockchain it becomes proof.

Sources: PwC, Digital Catapult

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