The blockchain could help advertisers lock up our attention

From The Conversation.

While technology has been making more devices “smart”, and we carry phones with all sorts of sensors, these haven’t yet been systematically applied to advertising’s central problem – engagement. The blockchain, however, will make advertising much smarter.

Traditional advertising – think of posters on bus stops and TV commercials – is easy to ignore and its effectiveness is hard to measure. Even online advertising has problems measuring engagement. But with the blockchain, advertisers will be able to tap into the data in our devices, automatically pull together multiple sources of information, and even offer rewards to consumers.

What is the blockchain again?

Think of the blockchain as a kind of a public spreadsheet. This spreadsheet is stored simultaneously on a bunch of different computers and is encrypted.

When someone transfers a Bitcoin (or anything else you’re trading on the blockchain) the transaction is verified by all of the computers, encrypted and added to the spreadsheet, where everyone can see. The encryption and transparency are what make the system secure.

Bitcoin and other cryptocurrencies, such as Ripple XRP and Ether, sit on top of the blockchain. They can be used as currencies, transferred between people just like normal money. Or they can be used as a kind of token, the transfer recorded to signify when something has been exchanged.

A computer program known as a smart contract has evolved out of this system. It can execute specific actions when predefined conditions within the blockchain are fulfilled – such as automatically paying a farmer when crops are delivered. But smart contracts could also have huge implications for advertising.

Advertising is going to be more complex

Advertising in the age of blockchains and smart contracts will be something more like an ecosystem. Information and value will flow and be captured in numerous directions. Using smart contracts, many different entities and data streams will be brought together.

Let’s imagine Jane sees an advertisement for a pair of shoes on her smartphone. The advertiser asks that, in exchange for Bitcoin, she reveal her identity by turning on her camera and taking a selfie. She must also allow the advertiser to access her SIM and verify with the phone company that it is indeed Jane who owns the phone. The advertiser would also like to know where Jane is located using the Google Maps application on her phone.

Individually, none of these actions are new. What will be new is having a smart contract to tie it all together.

At the initiation of this advertising effort, the parties involved in the smart contract are Jane, the advertiser, the phone company and Google. A predefined reward (in the form of Bitcoin) promised by the advertiser will be released to Jane only once all parties fulfil their part of the contract. Jane must take a selfie and send it to the advertiser, the phone company must confirm with the advertiser that Jane indeed owns the phone used to take the selfie and Google must release Jane’s location to the advertiser.

There are a few implications from this example.

Consumers like Jane will now be empowered to choose whether they want to give up their privacy in exchange for something. Jane could choose to block Google Maps from revealing her location, for example.

Advertisers will know exactly how consumers interact with their ads. By specifying actions for Jane to perform, like taking a selfie after watching an ad, advertisers will overcome the crucial problem of not being able to verify whether people are actually paying attention.

They will also know whether consumers have adhered to every part of the agreement. If Jane does not allow Google Maps to reveal her location, the advertiser will be aware of this and may release only some of her reward. This is an efficient and cost-effective method of piecing together the profiles of customers.

Finally, the blockchain will enable advertisers to capture value they could not previously, because they could not track or measure interaction with ads.

For example, let’s say the advertiser’s request is more ambitious, and Jane decides to reveal she is using a cab from company X and dropping by cafe Y to pick up a latte before going to the shoe store. The original advertisement has now generated value not only for the advertiser but also for those other entities.

Using the blockchain means all parties will have access to information about what happened. The advertiser could collaborate with other companies like cab company X and cafe Y to boost business. They could even demand those companies chip in to cover the costs.

A few years off

At this point we must go through a reality check.

While some parts of this picture are already being experimented with – Nasdaq has built a marketplace to buy and sell advertising on a blockchain, and others are building the tokens to sit on top – technologically and politically we are still sorely lacking.

There are also many digital blind spots that, like missing links among security cameras, allow some actions to go unobserved and unaccounted for during the advertising process.

But it is possible that in the future, once the infrastructure and our societies have caught up, every digital device will be connected to a blockchain-like system so that all digital actions are accounted for. When that happens, advertisers won’t know what hit them.

Author: Eric T.K. Lim, Senior Lecturer in Information Systems, UNSW; Chee-Wee Tan, Professor in IT Management, Copenhagen Business School

Standards Australia releases Roadmap for Blockchain Standards

Standards Australia has released its Roadmap for Blockchain Standards.

The Roadmap is designed to: identify the various technical issues associated with developing, governing and utilising blockchains and Distributed Ledger Technologies (DLT); identify blockchain and DLT use-cases relevant to Australia; and prioritise the order of standards development activities that could be undertaken in the development of blockchain standards by ISO/TC 307 Blockchain and electronic distributed ledger technologies.

Standards Australia facilitated the development of a Roadmap for Blockchain Standards between November 2016 and February 2017. The work represents a key component of Standards Australia’s role in supporting the development of a collective Australian position on blockchain standards priorities and contributing to the establishment of industry, consumer and market confidence in the use and application of blockchain technologies.

The report was produced as a result of a series of consultations held in 2016 and 2017 which enabled industry, consumer, academic and government stakeholders to identify and priorities the relevant international standards that may be required to support the broad use and application of blockchain and DLT.

The report explains the methodology and process used by Standards Australia to develop a Roadmap for Blockchain Standards. It highlights the critical role Australia will have in leading international efforts to develop blockchain standards under ISO/TC 307 Blockchain and electronic distributed ledger technologies.

Blockchain has the potential to support efficient and secure real time transactions across a large number of sectors. From enabling efficient and accurate financial services to providing visibility along the supply chain, and from streamlining government services to delivering confidence in identity accuracy to consumers,blockchain and DLTs have the capacity to revolutionise the way we do business.

For many Australians and global stakeholders the key to utilising blockchain technologies is contingent upon the performance of the systems. While economic efficiencies, improvements in standards of living and increased access are just some of the benefits of applying blockchain technologies, there is a broad community expectation that an appropriate legal and standards framework will be developed in order to establish market confidence.

The work included a survey of Australian government, industry, academic/research and consumer organisations. More than 100 responses to the survey were received. The finance sector was well represented.

Within the financial services sector, there is potential for use of blockchain technologies to support:
• Digital Currencies
• Trade Finance
• Remittances
• Commodity Exchange
• Other transactions
Use Cases need to be developed.

The survey also identified propriety government services which might leverage blockchain. Land Transfers and Property Titles rated the highest.

Blockchain and others will transform financial advice

From Australian Fintech.

The potential for distributed ledger and associated technologies has fundamental, long-term ramifications for financial planning businesses. Planners need to be across these innovations now so that when commercial solutions that use these technologies hit the market, their businesses are ready to embrace them.

Distributed ledger technology is a way of recording information that makes it easy to verify. Blockchain, which is the system that records how the virtual currency Bitcoin is stored, is one application of this technology.

Shortened Australian Securities Exchange (ASX) transaction settlement times will likely be the first real change to the market from Blockchain. Last year, the ASX invested $14.9 million to acquire 5 per cent of US-based distributed ledger technology business Digital Asset Holdings to start working on Blockchain solutions for its business. Subsequently, the ASX shortened settlement times for trades made through the exchange from three days to two.

This will improve market liquidity, reduce the cost of trading and minimise paperwork. An ASX spokesperson has confirmed an update on its Blockchain development will be included in its half-year results announcement in February.

“We’ll provide an update on our development then. In the meantime, we’re engaging extensively with stakeholders,” he said.

Tim Lea, chief executive of innovative technology company Veredictum.io says Blockchain will also streamline the conveyancing process.

“It can take up to 15 weeks to complete a property settlement now. There are use cases for Blockchain being developed that will enable automatic registration of a property’s title to an immutable ledger, which means a substantial reduction in legal work.

“There are use cases internationally being tested that put all property registrations on the Blockchain. The state of Georgia in the former Soviet Union is doing a pilot to put all property online in the form of an immutable database that cannot be altered.”

Lea says any information that needs to be formally confirmed and identified naturally fits into the Blockchain remit.

“Anything that requires provenance, a look at the history of the asset, can very clearly be defined within a Blockchain-based structure.”

Robo advice on steroids

Blockchain is far from the only emerging technology that will affect financial advice. Decentralised Autonomous Organisation (DAO) is another game-changer for the sector.

Lea calls it, “the world’s largest crowd-funding campaign that nobody’s every heard of. They raised US$168 million in 30 days on the basis of a 28-page white paper in June last year.”

The idea was to challenge the notion of a traditional company with a board and management structure and replace it with computer code.

Is Blockchain the Next Great Hope — or Hype?

From Knowledge@Wharton.

Cryptocurrencies such as bitcoin may have captured the public’s fancy – and also engendered a healthy dose of skepticism — but it is their underlying technology that is proving to be of practical benefit to organizations: the blockchain. Many industries are exploring its benefits and testing its limitations, with financial services leading the way as firms eye potential windfalls in the blockchain’s ability to improve efficiency in such things as the trading and settlement of securities. The real estate industry also sees potential in the blockchain to make homes — even portions of homes — and other illiquid assets trade and transfer more easily. The blockchain is seen as disrupting global supply chains as well, by boosting transaction speed across borders and improving transparency.

These uses are merely the tip of the proverbial iceberg for a nascent technology whose development stage has been compared to the early years of the internet. “We’re very early in the game,” said Brad Bailey, research director of capital markets at Celent, at a recent Blockchain Opportunity Summit in New York. He likened the blockchain’s current status to the web of the early 1990s, heralding a coming wave of new ideas and uses. “This will impact the world.”

The blockchain technology came about initially as a way to verify bitcoin transactions online and to enable two parties to transact business without having to know or trust each other. It was designed without a central authority in mind, such as a bank or government, to oversee transactions. Essentially, the blockchain is a shared virtual public ledger where encrypted transactions are confirmed by outside parties. In the bitcoin world, these outside parties are called “miners” — computers that solve complex mathematical problems to confirm transactions and earn fees. Confirmed transactions are placed in a “block” and added to the chain. Since the ledger is shared by everyone on the network, it is thought to be nearly impossible to remove or change the data – a premise that turned out to be false in some cases.

Today, the concept of the blockchain has expanded beyond its use by cryptocurrencies. Instead, the benefits of the shared ledger and its seemingly immutable record of transactions accessible to multiple parties are being explored by a variety of industries. Experts said there won’t be a “mother blockchain,” but multiple ledgers with different purposes. Varying versions of blockchains have popped up, too: While the original bitcoin blockchain was open to anyone, some companies’ blockchains are private and “permissioned” — they restrict access to approved parties. The latter approach is preferred by companies fearful of being hit with government fines and lawsuits if they get hacked, said summit participant Sarab Sokhey, chief technology leader of new product innovations at Verizon Wireless. They’ll stay private until the technology matures and industry standards are set.

While the blockchain’s business applications are clear, it has social implications as well. For instance, it can create identities for individuals apart from those sanctioned by governments and not limited by geographic boundaries. The blockchain also allows less-technologically advanced nations to participate in global transactions more easily. “Blockchains are exciting, undoubtedly,” said Saikat Chaudhuri, executive director of the Mack Institute for Innovation Management, which was an official partner for the summit. “It’s much more than about transaction efficiency or flexibility. It’s really beyond that. It could provide an identity to those who don’t have it, or promote financial inclusion. Therein lies the power of this whole thing.”

‘Nervous’ Financial Institutions

According to a survey by the IBM Institute for Business Value and the Economist Intelligence Unit, one in seven companies it calls “trailblazers” expect to have blockchains in production and at commercial scale in 2017. Respondents were interested in taking advantage of the blockchain’s multiple benefits, which include cost reduction, immutability of records, transparency of transactions and the potential to create new business models. For example, the blockchain would eliminate the need for keeping multiple records at banks and other parties doing currency trades. The survey tracked responses of 200 global financial markets institutions.

The survey also said “trailblazers” were focusing their efforts on the following business areas: clearing and settlements, wholesale payments, equity and debt issuance and reference data. The report added that in recent years, financial institutions have “swarmed to blockchain pilots and proofs of concept” — opening innovation labs, holding hackathons, partnering with financial technology startups, joining consortia and collaborating with regulators.

To be sure, banks have a vested interest in participating. “Banks provide essentially escrow services for the transfer of value, and here comes a technology that threatens to eliminate that service,” said Chris Ballinger, global chief officer of strategic innovation at Toyota Financial Services. “So they are nervous about that, because it’s a huge revenue stream” that could be taken away. How? “With the blockchain, you can run a network that transfers value among untrusted nodes, and therefore you can eliminate the middle man and you can eliminate all the costs associated with the middle man,” he said. “You’re essentially turning assets into something like cash that you can hand to somebody and they will accept. That makes the transfer of assets extremely efficient.”

Another unique benefit of the blockchain is that it separates someone’s identity from the transaction they’re making. In general, a blockchain uses a digital signature – not real names and other personal information – that is activated by a private key or secret code held by the one doing the transaction. Compare that to current credit card or bank transactions, which tie one’s personal information such as a name and address to purchases and other financial activities. This separation improves the security of one’s data. “Today, the payments information and identity are [bound] together. The combined is a tempting honey pot for hackers,” Ballinger said. “By separating the financial information from the identity, there’s no honey pot, no central place to hack, no incentive to go after.”

In December 2015, Nasdaq executed its first trade on a blockchain, through its Linq ledger. The exchange said the blockchain promises to expedite trade clearing and settlement – all the steps needed to transfer the asset from seller to buyer including recording the transaction — from three days to as little as 10 minutes. That’s because the trades remove many manual processes and bypass third parties. As such, “settlement risk exposure can be reduced by over 99%, dramatically lowering capital costs and systemic risk,” according to Nasdaq. Other stock exchanges tinkering with the blockchain include ones in Australia, Myanmar, Germany, Japan, Korea, London and Toronto.

Overstock.com is on the cusp of issuing its first security using the blockchain. “We are in the process of proving out the first public trading of a blockchain security,” said Ralph Daiuto, Jr., general counsel of tØ, a subsidiary of the e-commerce retailer. While the company has kept its clearing firm, it is using digital wallets for the actual transfer of assets in settlement of the trade. “The goal is to shorten the settlement cycle and [avoid] all the ills that can go wrong with that cycle.” He added that the company can cut its equity trading costs by 70% using the blockchain.

Overstock got regulatory approval for its blockchain trade by taking “incremental steps in proving out the technology in use cases and demonstrating we have real-world application for this blockchain technology,” Daiuto said. “It literally has been a monthly, if not a weekly, education process with our core regulators.” It has taken nearly two years of laying the groundwork for Overstock to get to this point.

Real Estate and Smart Contracts

An area of particular promise for the blockchain is the real estate market. “The blockchain solves pretty much every problem in real estate that we have” in terms of fraud, middleman fees and friction, opaque due diligence, slow price discovery, complex transaction process and other ills, said Ragnar Lifthrasir, president of the International Blockchain Real Estate Association. “In many ways, our technology is still in the 17th century – notaries still use seals.” The blockchain promises to simplify and speed up the process while adding transparency to the records.

For example, in selling a house, people still sign paper deeds over to the new owner. It has to be entered into the public record, which means someone physically has to go to the local government office. “It’s a paper-based system that is ripe for fraud,” Lifthrasir said. The blockchain solution is fairly straightforward, using digital deeds. “When I want to transfer the property, I simply transfer it from my wallet to the buyer’s wallet.”

As for putting the property ownership on the public record, he said the list is already on the blockchain so recording it won’t be hard. Lifthrasir added that validation of ownership would be strengthened. “It’s very difficult to deny who owns the property when it’s on a public network.” His startup, Velox, is working with Cook County in Chicago to use the blockchain for transferring and recording property titles. It is also working on a way to show liens on titles on the blockchain.

Within a blockchain, so-called “smart” contracts could be revolutionary. “They programmatically represent a contract,” said Mark Smith, CEO of Symbiont and co-chair of the Smart Contract Council. For example, a smart contract on an auto loan could be linked in real time to payments made by the car buyer. If he misses payments, the contract gets wind of the violation and starts the repossession process. In Delaware, Smith’s company is working with the state to create “smart” records of its public archives to do such things as being able to sunset themselves.

EY’s Australian operations piloted a real estate blockchain ecosystem that is now being used in the market to trade full, and even fractional, ownership of properties. Real estate and financial institutions approved by EY all liked the idea of using a blockchain, but when it came to actual implementation, “fear and uncertainty crept in,” said James Roberts, partner and Australian blockchain leader. EY had to essentially guarantee verification of participants and transactions to build trust. “We decided we would solve the identity problem [of people and institutions]. We would build trust into the system and prove recordkeeping is true and accurate and can be used to transact financial instruments like property or debt.”

EY’s blockchain ecosystem goes through several stages. First, individuals using the blockchain have to be validated using identity checks and even biometrics. They create records on the blockchain using randomly generated unique keys that let EY do further checking against various databases from the government and elsewhere. Next, the transaction is traded on a blockchain exchange. The assets being traded are verified. The entire ecosystem is private and permissioned. Also, EY stores individuals’ unique keys offline for security. Moreover, EY built back-system administrative functions – despite the premise of the blockchain as not having a central authority – to make participants more comfortable in using the system. But to be a viable ecosystem, it needs to scale. “We need millions and millions of people in our system, and that’s going to take a lot of effort,” Roberts said.

Challenges and Risks

Security is still the biggest challenge confronting the blockchain. “The truth is, once you give someone access to a network, many times, more often than not, they can end up very easily getting blanket access to that network,” said Joe Ventura, CEO of AlphaPoint. “This is a huge security problem.” However, if one ends up building many protections to prevent hacks, then it bogs down the blockchain and defeats its purpose in the first place. “Basically, you have to jump through so many hoops simply to pass the message from some party to another party.”

And while blockchain records theoretically can’t be changed, there are ways around that. Smith cited a recent controversial decision by the Ethereum Foundation – the organization behind the open-source cryptocurrency Ethereum – after a hacker exploited a software flaw and took funds. The foundation decided to roll back the clock to give people their money back and created two versions of the ledger. “Imagine if you’re a business and they roll back a day,” Ventura said. “That’s completely unacceptable.” Moreover, by creating two versions, some people were able to exploit it. “People were able to double their money,” Smith said.

As for compliance, at least regulators could have a node on the blockchain itself in which companies define their access to data, said Sandeep Kumar, managing director of Synechron. As such, regulators wouldn’t have to wait days for a bank to hand over documents for compliance. “They can see it as it is happening.”

In the end, each company has to figure out whether a blockchain is suitable. “Is it a blockchain use case or is it a database use case?” said Tyler Mulvihill, director of Consensys. “If you are a company that has a lot of information internally and you don’t transact like a lot of vendors, and not a lot of people need to use your information or do business with you, a database can be fine for a lot of things. It’s when you have a lot of parties that need trust, need access to certain information and need to be audited – that’s where I see the biggest use cases.”

Centrelink data-matching problems show the need for a government blockchain

From The Conversation.

Governments across the globe are experimenting with the blockchain, the technology behind Bitcoin, as a way to reduce costs and provide more accountability to the public. In Europe alone, the United Kingdom, Ukraine and Estonia are experimenting with blockchains to fight corruption and deliver public services.

Australia, too, is looking at what a blockchain might achieve. The recent problems with Centrelink’s automated data-matching system show precisely where a government blockchain would fit in.

Rather than siloing our data in government agencies, we could create a single source of information. This would speed up our interactions with government, while reducing errors and fraud.

What is a blockchain?

The blockchain is a kind of public database, one stored simultaneously on a bunch of different computers. When a new transaction occurs it is verified (otherwise known as “mining” or “consensus”), encrypted and added to the database.

The most famous example of the blockchain is Bitcoin, a crypto-currency built upon the blockchain. However, the blockchain is suitable for many other applications, not just financial transactions. For example, the blockchain could be used to authenticate that a diamond has not come from an illict source, or for buying and selling property.

A government blockchain

For the government’s purposes, the killer feature of the blockchain is that it is a way to record transactions so that they are transparent and cannot be altered or tampered with. When used to track fish through a supply chain, for instance, it allows customers and restaurants to follow where the fish has been and have confidence in the data.

When applied to a government context, these capabilities could be useful for collecting tax, delivering benefits, or regulating business. From the public’s point of view, this could enable us to track government spending, eliminate fraudulent transactions, reduce errors in data processing and speed up service delivery to almost real time. It could be useful almost anywhere records are kept.

All the while the public could be more confident about the accuracy and integrity of the data being held.

In practice

The Australian government makes benefit payments and provides support services through Medicare, Centrelink and Child Support services. It also collects information through numerous other agencies, such as the Australian Tax Office. A government blockchain could record the transactions about a citizen and link together information about health, welfare and child support.

The information would be entered only once into the blockchain by any one of these agencies. There would be no need for the data to be re-entered or matched again. Thus errors that occur in data processing as information is passed on down the line will be eliminated, avoiding some of the issues with the current Centrelink system.

Further, once data is entered it cannot be altered or changed in any way without proper authentication. Any authorised officer within the government could then access the information in the blockchain, avoiding a paper-pushing exercise between government departments. All of your data would be in one place.

We could go even further, as the blockchain would also allow other services to be processed through an app, as the UK is trialling with welfare payments.

The overall cost savings, reduction in bureaucracy and increased responsiveness to helping people in need could be immense. All we need is the government to invest in its own blockchain.

The challenge is making it legitimate

The essence of a blockchain is to reduce the reliance on centralised systems (such as the government), replacing it with a system with inherent accountability, transparency and trust. The original blockchain concept achieved this by being open, like the internet (also known as unpermissioned), relying on independent, anonymous “miners” to validate transactions. This guarantees the integrity of the data as no-one knows who the miners are to bribe or bully them into underhanded actions.

However, some might view a government-run, “permissioned” blockchain with suspicion. The trust of the public would need to be gained. A government blockchain would not be open, and we would have to rely on the government to approve all of the transactions. This negates some of the benefit offered by a blockchain. The legitimacy and trust would have to come from the government itself.

Thus a government-run blockchain would not be without its challenges. But if an Australian government blockchain is developed and allowed to succeed, then the potential benefits could be enormous. Society as we know it will be disrupted!

Author: Christine Helliar, Professor School of Commerce, University of South Australia

Deutsche Bundesbank and Deutsche Börse blockchain prototype

Deutsche Bundesbank and Deutsche Börse jointly presented a functional prototype for the blockchain technology-based settlement of securities.

Small-Chain-Picture

The innovative prototype is designed to provide the technical functionality for the settlement of securities in delivery-versus-payment mode for centrally-issued digital coins, as well as the pure transfer of either digital coins or digital securities alone. In addition, it is capable of settling basic corporate actions such as coupon payments on securities and the redemption of maturing securities.

The Deutsche Bundesbank and Deutsche Börse plan to develop the prototype further over the next few months, and this product will then be used to analyse the technical performance and the scalability of this kind of blockchain-based application.

With the blockchain prototype, the Deutsche Bundesbank and Deutsche Börse want to work together to find out whether this technology can be used for financial transactions, and if so, how this can be achieved. The Deutsche Bundesbank hopes that this prototype will contribute to a better practical understanding of blockchain technology in order to assess its potential,explained Carl-Ludwig Thiele, Member of the Deutsche Bundesbank’s Executive Board.

Along with the Deutsche Bundesbank we are innovatively and creatively addressing potentially radical technological opportunities for the financial sector. We will continue to do our utmost to leverage blockchain’s efficiency potential and to better understand and minimise the associated risks of this technology, added Carsten Kengeter, CEO of Deutsche Börse AG.

The blockchain-based prototype is the first result of a collaborative research project between Deutsche Börse and the Deutsche Bundesbank. The prototype is purely a conceptual study. It is far from being market-ready. The two institutions will continue to work on improving the prototype and drawing up a test concept.

The prototype has the following features:

  • Blockchain-based payments and securities transfers as well as the settlement of securities transactions against both instant and delayed payment
  • Maintenance of confidentiality/access rights in blockchain-based concepts on the basis of a flexible and adaptable rights framework
  • General observance of existing regulatory requirements
  • Identification of potential to simplify reconciliation processes and regulatory reporting, and
  • Implementation of a concept based on a blockchain from the Hyperledger project.

Blockchain – A Touch Of Reaility

Separating the hype of Blockchain from reality is important. So, some interesting remarks from Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank on the subject. The debate has largely shifted from open blockchain applications, such as bitcoin, to closed networks with a limited circle of participants. But doubts will also increase as to whether this technology can meet the expectations being placed on it.

Small-Chain-Picture

Many enterprises and institutions currently working on blockchain-based solutions expect to reap great benefits from them. Blockchain technology holds out the promise of cost savings, de-risking potential and efficiency gains. This includes, among other things, the automation of work-sharing processes as well as faster processing and the fulfilment of contractual obligations via smart contract solutions.

One positive effect that can already be seen is industry-wide cooperation. Dialogue between various market participants on future market developments can foster mutual understanding and facilitate the harmonisation of processes. This makes it possible to adequately react to the challenges posed by new technologies. This is of importance in the financial industry, in particular, which is characterised by network effects.

That said, one should not simply gloss over the challenges and weaknesses posed by the technology.

The requirements imposed on regulated providers cannot currently be met by blockchain technology, or can only be met with difficulty. This concerns, for example, the question of how to engineer absolute finality. Furthermore, the know-your-customer requirements need to be observed and the confidentiality of transaction data must be ensured. This is also a reason why the regulatory status of blockchain technology in many countries is still unclear.

Furthermore, despite the supposedly greater resilience of its decentralised structure, blockchain still has high obstacles to surmount before it can be applied across the board, owing to its susceptibility to manipulation. Recent hacker attacks are a case in point.

This is another reason why the debate has largely shifted from open blockchain applications, such as bitcoin, to closed networks with a limited circle of participants.

Inefficiencies are often perpetuated not by a lack of technology, but by (historical) structures. Blockchain technology is therefore not a patent solution for change, but it does provide an opportunity to make change.

Disruptive technologies require time to develop, mature and unfurl their full potential. Not every innovation succeeds, though, and it remains to be seen how the application of blockchain technology will develop.

Following the revolutionary beginnings with bitcoin, the prevailing view now seems to be that blockchain applications will spread rather more gradually. One might therefore speak of evolution rather than revolution. Before we can even ask questions about the broader use of this technology, we must first be sure that using this new technology is at least as secure, efficient and cost-effective in financial transactions as conventional technology.

Blockchain technology could become a game changer, in the financial industry and, perhaps in particular, beyond. The potential of blockchain technology is often compared to that of the internet. It should be remembered that it took some time before the truly beneficial applications of the internet emerged. With blockchain, we are only at the very beginning of a potential development of this kind.

Innovations are the lifeblood of a continually developing economy. Moreover, evolution processes are never linear. The first great wave of euphoria, which was also seen in the media, is being followed by a phase of checking, weighing-up and consolidation, before new offers and technologies are rolled out on a broad scale.

Ladies and gentlemen, Goethe once said: “We know accurately only when we know little; with knowledge doubt increases.”

My impression is that with the increasing efforts being devoted to blockchain technology, doubts will also increase as to whether this technology can meet the expectations being placed on it, which in some cases are extremely high.

Blockchain: Implications for Payments, Clearing, and Settlement

A speech by Fed Governor Lael Brainard “Distributed Ledger Technology: Implications for Payments, Clearing, and Settlement” contains a number of interesting use cases, discussed in their blockchain working party.

Small-Chain-Picture

Let me briefly mention a few of the use cases that we have explored in our discussions with industry stakeholders in order to illustrate the potential of distributed ledger technologies to improve payments, clearing, and settlement, as well as the considerations that are important to us in our assessment of benefits and risks.

In cross-border payments and trade finance, significantly faster processing and reduced costs relative to the long and opaque intermediation chains associated with current methods of correspondent banking are promising potential benefits of the technology. Reducing intermediation steps in cross-border payments may help decrease time, costs, and counterparty risks and may materially diminish opacity, for instance by enabling small businesses or households remitting payments across borders to see the associated transfer costs and processing times up front.

In trade finance, where document-intensive processes are not fully automated, distributed ledger technology may be able to reduce significant costs and speed up processing associated with issuing and tracking letters of credit and associated documents. To see the full potential of this technology realized for cross-border payments, it will be important to identify and track identities associated with the transactions, which in itself may be facilitated by the use of distributed ledgers, depending on their design.

In securities markets, the industry is exploring activities ranging from the issuance of securities on a distributed ledger, to the clearing and settlement of trades, to tracking and administering corporate actions.

For securities clearing and settlement in particular, the potential shift to one master record shared “simultaneously” among users of a distributed ledger-based system could be compelling. Sharing one immutable record may have the potential to reduce or even eliminate the need for the reconciliation of multiple records linked to a single trade among and between dealers and other organizations.

In concept, such technology could lead to greater transparency, reduced costs, and faster settlement. Likewise, distributed ledgers may improve collateral management by improving the tracking of ownership and transactions. Nonetheless, as is frequently true in the complex arena of payments, clearing, and settlement, we can also expect that practical details covering a host of technical, business, and market issues will have an important role in determining how new technologies ultimately perform.

For commodities and derivatives, there are projects to streamline some of the more antiquated corners of the markets. In markets that are heavily paper-based and lack any central means for coordination, distributed ledger technology could potentially be leveraged to provide coordination that facilitates exchange, clearing, and settlement of obligations.

A related development is the potential coupling of distributed ledger protocols with self-execution and possibly self-enforcement of contractual clauses, using so-called “smart contracts.” To take a familiar example, for a corporate bond with a specified par value, tenor, and coupon payment stream, a smart contract would automatically execute payments on the specified schedule to the assigned owner over the life of the bond. Although the idea of automating certain aspects of contracts is not new, and banks do some of this today, the potential introduction of smart contracts does raise several issues for consideration. For example, what is the legal status of a smart contract, which is written in code? Would consumers and businesses rely on smart contracts to perform certain services traditionally done by their banks or other intermediaries? Could the widespread automated interaction of multiple counterparties lead to any unwanted dynamics for financial markets? These and other considerations will be important factors in determining the extent of the application of smart contracts.

Regardless of the application, much of the industry is at a “proof of concept” stage of development. These proofs of concept are often simple, experimental uses of the technology on a small scale that help stakeholders understand the potential and limitations of the technology for a specific purpose, which in turn typically lead to refinements and more developed proofs of concept. As such, many potential applications are in their infancy, and the industry may still be several years away from an application that is ready to be fully implemented. Even so, the industry seems to be making announcements daily on new proofs of concept and progress that may lead to pilots, so that timeline could accelerate. In some cases, there have been announcements the technology will be used within the next year or two in actual production environments. The initial relatively simple proofs of concept must be followed by much more complex demonstrations in real-world situations before these technologies can be safely deployed in today’s highly interconnected, synchronized, and far-reaching financial markets.

Although many private and inward-facing projects are being explored, the industry has also recognized the need to collaborate at early stages of development. An important positive development is that industry participants are actively engaging with each other to look for common approaches. Some groups are creating standards that facilitate common platforms to enable greater interoperability of often proprietary applications that are built on them and interoperate through application program interfaces, or APIs.

In coming months and years, innovators, investors, and financial practitioners will no doubt make important strides in addressing key challenges such as adopting common standards, achieving interoperability between and among legacy systems and evolving distributed ledgers, improving scalability and computational throughput, and improving cryptographic security. These are positive developments that we will monitor closely.

ASX FY16 Result Strong, Blockchain Experiments Progress

The ASX released their results for FY16, with revenue of $746.3m, up 6.5%, and Net Profit of $426.2m, up 5.7%.

ASX-FY16Mr Rick Holliday-Smith, ASX Chairman, said: “ASX delivered strong financial results in FY16, with growth in all key business areas, supported by higher market activity. This was driven by a rise in secondary capital raisings within the financial sector and increased trading activity due to heightened volatility, particularly in the second half of the year, culminating in the surprise of Brexit. Revenue was up 6.5% to $746.3 million and profit after tax rose 5.7% to $426.2 million.

“ASX continued to invest in the infrastructure critical to Australia’s financial markets throughout the period. This included successfully introducing T+2 settlement, significant progress on the delivery of a new futures trading platform, and the assessment of distributed ledger technology or ‘blockchain’ as a potential post-trade solution for the equity market. These initiatives aim to improve market efficiency and reduce risk and complexity for investors, intermediaries and other market stakeholders. They help keep Australia at the forefront globally of innovative market developments”.

ComputerWorld reported on the Blockchain initiatives.

ASX has completed the first phase of work on a potential blockchain-based replacement for its CHESS system, which providers clearing and settlement services.

The operator of the Australian Securities Exchange announced earlier this year that taken a stake in US company Digital Asset Holdings with an eye to potentially developing technology inspired by the distributed ledger that underpins the Bitcoin cryptocurrency.

“We’ve completed our initial analysis of the technology and have begun work on the next stage of this journey,” ASX CEO Dominic Stevens said today during a full year results presentation.

“We’ve made good progress” in exploring the use of distributed ledger technology over the past year, said deputy CEO Peter Hiom.

“The initial phase of development has been completed,” Hiom said. “We’ve increased our investment in Digital Asset Holdings and we have commenced the next development phase. Over the next 18 months ASX and Digital Asset Holdings will build an industrial strength platform that could be used as the basis to replace CHESS over the longer term.

“ASX is now commencing engagement with customers and stakeholders on the requirements for that platform, with a final decision by ASX on whether to use the technology being made later in FY18.”

Hiom said that there were some key differences between the “permissioned disturbed ledger technology” ASX is experimenting with and the public blockchains employed by cryptocurrencies.

“The main difference I want to highlight is public blockchains are operated largely in unregulated marketplaces where anyone can join and access those markets anonymously via a public, or unpermissioned, network,” he said.

“Network security is public to scrutiny and if compromised it could allow someone to anonymously and unilaterally transfer cryptocurrency on the public network. This is clearly unacceptable in the types of highly regulated markets within which the ASX operates.”

“Not withstanding this, the underlying blockchain technology has inspired new applications that can be tailored for use in highly regulated markets such as those operated by ASX,” he added. “It is the database architecture, or distributed ledger technology, which interests us.”

He said that ASX didn’t seek to change the existing regulatory framework it operates in.

“What we do change is the way that data is authenticated, authorised, accessed and stored,” Hiom said. “It is this that creates the single source of truth that could remove complexity and deliver significant benefits to the industry.”

The deputy CEO said that there had so far been no “red flags” around scalability or performance.
Read more: Blockchain is useful for a lot more than just Bitcoin

ASX reported growth in its operating expenses for FY16 of 6.5 per cent to $170.6 million, which the company attributed in part to investment in its technology transformation program.

“We’re in the midst of a major transformation,” Stevens said. “Specifically we’re replacing or upgrading our trading, monitoring, risk and clearing systems, exploring post-trade innovation through the use of distributed ledger technology, [and] improving connectivity for our customers, here and abroad.”

Identifying Blockchain Opportunities

Juniper Research has released a brief report on where Blockchain might be leveraged.

The emergence of Bitcoin and an array of alternative cryptocurrencies (‘altcoins’) has been a true phenomenon of the past 7 years or so. In that time, billions of dollars’ worth of these currencies has been traded on the dedicated exchanges that have sprung up to support them, while a number of merchants now support Bitcoin as a payment option.

However, with only a small, dedicated base of users, attention is turning away from their usage as an alternative to fiat currencies and to the wider potential of the blockchain technology that underpins them.

Small-Chain-Picture

Numerous banks are now trialling the technology as a means of reducing settlement costs, while a host of other use cases, eg smart contracts and ID verification, are also seeing their first deployments.

Selected Blockchain Opportunities

  1. Settlement & Remittance
    It is increasingly envisaged that blockchain technology will have a significant role to play in the future evolution of transaction settlement solutions. Many clearing houses processes tens, or even hundreds, of millions of financial and commodities derivatives and securities transactions per annum. At present, the clearing firms involved in the transaction have independent processing systems; the introduction of a blockchain-based system would substantially reduce the risk of error and indeed the time taken for error checking.

Cross-border remittance in particular is viewed as an area where blockchain technology could have a profound impact. The total value of official cross-border remittance in 2015 (latest World Bank data) was $582 billion, of which $436 billion was sent to emerging or developing economies.

However, a substantial amount is additionally sent through unofficial channels, chiefly in the form of cash in envelopes. One reason for this is the high cost of remitting through the most popular official channels. The average cost of sending $200 via MTOs (Money Transfer Operators) was 6.6% in October 2015; via banks, this rose to 11%. Furthermore, several leading remittance corridors charge rates significantly higher than these average figures, in some cases up to 25%.

With blockchain technology able to significantly reduce the costs to the remitting organisations, the hope is that the savings enabled by this will be passed on to consumers and enable average prices at or below the 3% average price which the World Bank is targeting. The hope is that not only will it then result in more ‘grey’ remittance transferring to official channels, but also in a net increase in remittance flows, helping to boost economies which are in part dependent upon remittances from migrant workers.

  1. Smart Legal Contracts: Current & Future Use Cases

While there are a number of definitions for ‘smart contacts’ per se, smart legal contracts may be defined as:

Contracts in the form of computer protocols with the ability to verify their own conditions, emulating the logic of contractual clauses.

Smart contracts can self-execute by, for example, triggering the release of payment when certain conditions are fulfilled. These contracts run on networks beyond the control of the contract’s participants, thereby providing a record of the terms of the contract and ensuring its fulfillment. Furthermore, smart contracts can offer an array of additional benefits to participants, including:

  • Reduced cost – less human intervention in the procedure implies a lower resource cost;
  • Real-time updates – as the contract exists on the blockchain, tasks, including transaction fulfillment, are automated and can occur instantaneously.

Smart contracts could be particularly useful for governments in that they automate manual processes which are time-consuming and expensive.

i. Real Estate
In June 2016, Lantmäteriat (the Swedish National Land Survey) confirmed that it was working with the blockchain start-up ChromaWay, the consultancy firm Kairos Future and fixed/mobile network operator Telia to consider how blockchain technology ‘could reduce the risk of manual errors while creating more secure processes for transferring documents.

Several other agencies are understood to be working on PoCs (Proofs of Concept) in this field, including the Republic of Georgia’s National Agency of Public Registry (with BitFury as its blockchain partner).

ii. Internet of Things
The ‘Internet of Things’ represents the combination of devices and software systems, connected via the Internet, that produce, receive and analyse data with the aim of transcending traditional siloed ecosystems of electronic information to improve quality of life, efficiency, create value and reduce cost.

It may be possible to integrate blockchain technology in an M2M (Machine-To-Machine) environment, to provide real-time data and authorise access. Given that one of the blockchain’s capabilities is to allow Event Y to occur Given that Condition X is fulfilled, it could also lead to equipment which needs data to fulfil a task being able to locate and self-order that data.