Bitcoin’s dramatic rise may have put it in the cryptocurrency spotlight early on, but it’s the underlying blockchain technology that will continue to shape industries like financial services, regardless of what digital currency ultimately reigns supreme.
“Blockchain will be widely used regardless of what happens to Bitcoin,” said Duncan Stewart, Director of Technology, Media and Telecommunications Research for Deloitte Canada in Toronto.
“Many companies are already using blockchain, not just in trials but in actual internal processes, (and) more of that will occur. In many applications it will become the new normal.”
Blockchain is what’s called a “distributed ledger technology,” or a decentralized ledger managed by users rather than any central institution. It records information on every transaction in a “block.” That block is attached to the existing line of a chain that goes back to the very first transaction executed. It’s meant to be impossible to corrupt, so those who use the ledger trust the technology behind it.
“Blockchain, at the end of the day, is a technology,” said Iliana Oris Valiente, head of Accenture’s blockchain division.
“It’s very back-end, it’s difficult to demo or touch or feel, which makes it more challenging for people to wrap their heads around. It’s kind of like a database in some of its functions … but it essentially enables multiple stakeholders to transfer value or information amongst themselves in a way that is secure (and) transparent.”
It’s related to but separate from digital currencies like Bitcoin, the early crypto darling created as users solve cryptographic problems on a public, decentralized ledger.
Ethereum is another digital currency based on blockchain, although Ethereum also allows users to develop and run entire computer programs and validate their results on their own.
Public blockchain networks like those used for Bitcoin and Ethereum are the ones most people tend to think of when they picture a blockchain, added Oris Valiente, but there’s also a large enterprise sector where the technology is being widely applied.
Such networks are closed because they deal with business-to-business (B2B) needs and applications, where a certain degree of privacy is required.
Financial services, identity management and resources, as well as health and public sector companies have all shown a lot of interest in blockchain and in the ways the technology can improve their operations.
“Within financial services, the interest started primarily in the payments space – cross border payments between banks,” said Oris Valiente, pointing to Ripple as one of the more active companies in that area.
The TSX has also looked to blockchain technology for e-proxy voting, insurers are test-driving distributed ledger technology to deal with claim processing and reinsurance, and the Bank of Canada itself has been working on a distributed ledger research initiative.
HSBC and UBS have both acknowledged blockchain’s potential to disrupt financial services, while asset manger Vanguard has said it would use blockchain to share data between index providers and market participants to better track the benchmarks its index funds are tracked against, joining others like Goldman Sachs and Barclays, who are looking at ways to use blockchain technology in the markets.
“Any instance where you have industry or business processes where you have multiple stakeholders that have to interact with each other, they’re transferring value or information across, there’s a certain element of mistrust between the parties – those are instances where blockchain technology would be helpful,” she said.
“Whether it’s the financial services industry or the supply chain industry or any of the other industries where applying distributed ledger as part of their business processes (makes sense), those initiatives are completely separate and distinct to what’s happening in the public currency market.”
In addition to cryptocurrency and B2B, a third area where blockchain is being used is as part of Initial Coin Offerings or token generation, where companies are exploring new ways of funding projects using the power of the crowd.
That’s an area that has generated some controversy, as fund managers taper investors’ interest by warning these “ICOs” amount to essentially funding a company without actually receiving its stock, as they would in a traditional public offering.
According to Oris Valiente, anyone looking to invest or participate in the cryptocurrency or blockchain space simply needs to do their homework, as they would with anything else.
“The usual guidance applies if you are an investor – applying common sense and doing research and due diligence,” she said.
“All of those other ideas, just because you add the word ‘blockchain,’ do not go out the window.”