NAB trialling IBM blockchain technology

From Investor Daily.

National Australia Bank is one of a number of global banks that are trialling a cross-border payments solution powered by IBM Blockchain.

IBM has rolled out a new blockchain banking solution designed to reduce settlement times for cross-border payments.

NAB is the only Australian bank involved in the trial so far, along with institutions from Argentina, Indonesia, Thailand and the Philippines, among others.

According to a statement by IBM, the solution uses a blockchain distributed ledger to allow all parties to have access and insight into clearing and settlement of payments.

“It is designed to augment financial flows worldwide, for all payment types and values, and allows financial institutions to choose the settlement network of their choice for the exchange of central bank-issued digital assets,” said the statement.

The IBM solution, which has been created in collaboration with open source blockchain network and KlickEx Group, is already processing live transactions in 12 currency “corridors” across the Pacific islands and Australia, said IBM.

“For example, in the future, the new IBM network could make it possible for a farmer in Samoa to enter into a trade contract with a buyer in Indonesia.

“The blockchain would be used to record the terms of the contract, manage trade documentation, allow the farmer to put up collateral, obtain letters of credit, and finalise transaction terms with immediate payment, conducting global trade with transparency and relative ease.”

The solutions is run from IBM’s open source Blockchain Platform on Hyperledger Fabric.

Mortgage fintech looks to blockchain for home loans

From The Adviser.

The CEO and founder of an online mortgage platform has revealed that the fintech is looking into how it can utilise blockchain to make the home loan contract process more efficient.

Speaking at the Informa Credit Law Conference, Mandeep Sodhi, the CEO of HashChing, revealed that the platform was looking into the distributed ledger technology for mortgages.

When asked by The Adviser what HashChing was using blockchain for, Mr Sodhi said: “We have been exploring blockchain in the home loan contract, smart contract space and securitisation as well.

“It’s more in the future road map but mostly around how quickly can we exchange a contract, through smart contracts. But also, if you decide to come on with a loan product at a later stage (of course, we’ll distribute it through brokers only), but then, how quickly can you settle that loan as well and securitisation? That’s where blockchain plays a really important role, if you need a securitised [loans] done quickly.”

He concluded: “Start-ups are tapping into AI technology, through Amazon Alexa, Google. It’s where banks are lagging, but start-ups are moving fast. That’s what banks need to think about.”

Bank couldn’t beat broker rate

Looking back at the journey of HashChing, Mr Sodhi stated that the idea first came about in 2014, after he found that a major bank, at which he worked, could not match or beat a broker-secured home loan rate.

Speaking at the Informa Credit Law Conference, Mr Sodhi said that he had gotten his mortgage through the bank at a discounted employee rate, but later found that one of his friends had gotten a lower rate for his mortgage at the same bank.

He said: “I was a loyal banker looking for my first home loan and I reached out and said: ‘Hey, can I get my staff discount?’ And my bank said that they could give me the special staff discount rate.

“I told my friend, Atul Narang (the co-founder of HashChing), about securing this great rate on my home loan and asked him: ‘Why don’t you become a banking man?’ And he said: ‘Well, actually, I’ve secured a better rate than you, also at your bank.’ And that left a bad taste in my mouth. So, I took his letter to the bank and asked how he got a better rate and asked them to match it, or at least beat it, because it’s really embarrassing. And they said: ‘We can’t do that.’ When I asked why, they said it was because he had used a mortgage broker.

“Now, I didn’t think that mattered… I worked for the bank. But they said: ‘We can’t match mortgage brokers’ rates.’”

It was after this “frustrating experience” that Mr Sodhi said he tried to find the same rate on comparison sites and then through a broker, but still couldn’t (he reportedly didn’t use Mr Atul’s broker due to geographical barriers).

Mr Sodhi continued: “There are thousands of people searching for good home loan rates every day on home loan comparison sites, who are clueless, just like I was. And that’s when we decided to start HashChing — where the journey starts with a negotiated rate that the broker secures from the lender.”

He went on to tell delegates that the majority of fintech start-ups come to market because of “frustrations with the banking system”.

“They’ve seen this opportunity, tried to change it in banking, but have been shut down — and that happened to me as well, so we decided to take it on ourselves.”

Mr Sodhi said that the HashChing platform, which launched in 2015, now has 679 brokers on the platform helping 23,959 borrowers apply for more than $12 billion of loans through more than 60 lenders.

Is a Central bank-issued digital currency a realistic prospect?

Interesting speech from Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbankentitled “From Bitcoin to digital central bank money – still a long way to go“.

He says the Bundesbank actively shapes the ongoing conversation about distributed ledger technology (DLT) by contributing insights of its own, not least because as a central bank, trust is its most precious asset. The stability and efficiency of systems alone is their primary concern.

They wish to neither hype up a “hot topic” nor hinder the development of highly promising innovations.  But, healthy scepticism, coupled with curiosity and critical analysis, is warranted when it comes to both DLT and central bank-issued digital currency. He concludes that a Central bank-issued digital currency, is currently an unrealistic prospect.

“The road to a digital central bank – assuming there would be any benefits in the first place – would be a very lengthy one. At present, there is not even a recognised basic blockchain. Major consortiums are developing different types of basic blockchains, each with their own particular features. Not all of them can be used in the financial sector”.

The original promise of Bitcoin was to forge a “trustless” payment system – that is, one that required no trust. I quote from Satoshi Nakamoto’s paper from 2008 (Bitcoin: A Peer-to-Peer Electronic Cash System): “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

I feel that too little attention is being paid to Nakamoto’s primary goal of constructing a groundbreaking, trustless electronic payment system which, like cash, would facilitate peer-to-peer (P2P) transactions. At the same time, Nakamoto was looking to create a currency which was not based on trust. This aspect – forging a new currency that does away with central banks – has become a major talking point in the current debate. I have come here today to explain why a trustless currency is not feasible, and I will also argue that the merits of blockchain can be harnessed more readily with trustworthy institutions than without.

To get a grasp of Bitcoin, we need to put our minds to the essence of money. There are two types of money. Money as a commodity, and money as a claim.

Money as a commodity, that could be a commonly used consumer good which is mostly non-perishable. Cigarettes, for instance, were used as a money substitute in Germany after the Second World War.

But equally, money could be a durable good – gold being the most prominent example of this. Gold is extraordinarily durable, and it has an intrinsic value as a sought after industrial metal, say, or as jewellery. Indeed, for centuries, delivering gold was regarded as the ultimate form of settling a claim.

Consumer and durable goods which can be used as money substitutes both have an intrinsic, consumption or utility value.

Virtual currencies, meanwhile, which are transferred much like goods, are a fabrication. That is not to consign them straight to the category of “fraud”. Yet they have no intrinsic value, just an exchange value. You can’t consume or use them, only exchange them.

On the other hand, there is money as a claim. The bulk of our money – central bank money and commercial bank money – is a claim on either the central bank or a commercial bank.

Every euro in cash and every euro in credit balances in TARGET2 represents a liability for the Eurosystem. And the euro is backed by the Eurosystem with its constituent central banks, one of which is the Bundesbank.

Unlike consumer or durable goods, central bank money does not have any consumption or utility value. And the issuing central bank’s credit quality and integrity is reflected in the value of its currency. The value of a currency, then, hinges on trust in the central bank.

Not just that: the issuer – so in the euro’s case, the Eurosystem – takes collateral from its monetary policy counterparties as a “deposit” for providing euro currency. That indirectly anchors the euro in the real economy.

Virtual currencies, by contrast, have no issuer, no footing in the real economy. No one has to redeem them. They are a fabrication and propagate according to a fictitious set-up in virtual systems which, in some cases, can be altered or newly created at the whim of a small group of participants. What is more, their governance regime is opaque, if not to say obscure – not to mention the fact that the identity of the participant or participants – no one knows for sure how many there are – behind the pseudonym Satoshi Nakamoto remains shrouded in mystery.

Virtual currencies are exchanged in the same way as goods, but they have no intrinsic value of their own. That is undoubtedly one reason why their value is highly volatile. Over the long term, that naturally also exposes Bitcoin holders to the risk of total loss. For us, Bitcoin is not money, it is a speculative plaything. The great number of sometimes dubious initial coin offerings is a clear indication that Bitcoin is more of a funding instrument.

To repeat: it is more of a speculative plaything than a form of payment. Hence my repeated warnings against investing in virtual currencies. We are witnessing a remarkable increase in the value of some virtual currencies. But that does not alter the risk of total loss.

2 Blockchain/DLT in the world of payments

For us, Bitcoin’s most important contribution is the underlying blockchain technology, or to put it more broadly, distributed ledger technology (DLT). This technology could help boost efficiency in payment and settlement processes.

That is why we have been looking at this technology from three different perspectives. First, the Bundesbank develops and runs major payment and settlement systems, often in conjunction with other central banks, and in this context we explore innovative technical capabilities which can contribute to their stability and efficiency.

Second, the Bundesbank acts as a catalyst to forge improvements in payment operations and settlement structures. The better the Bundesbank grasps the practical implications of technologies or processes, the more forcefully it will be able to present its arguments, which always aim to preserve the stability and enhance the efficiency of payment and settlement systems.

Third, the Bundesbank monitors the stability of systems and tools used in the field of payments and settlement. Being able to gauge the relative merits of state-of-the-art technology is a key skill in this regard. That is why the Bundesbank – much like other central banks worldwide – has been putting a great deal of thought into DLT, even though this technology is still very much in its infancy.

Potentially, distributed data storage means that DLT can simplify reconciliation processes associated with complex work-sharing value added chains. DLT is seen as having disruptive potential since it generally allows transactions to be carried out directly – that is, without intermediaries.

Developed originally for the virtual currency Bitcoin, DLT will nonetheless require extensive modifications if it is to be adapted to the needs of the financial sector. For one thing, the legal framework as it stands requires participants to be identifiable, transactions to be kept secret from third parties, and transactions to be settled with finality.

For another, transaction throughput needs to be high. That said, some of the consensus mechanisms, as they are known, absorb so much time and energy that efficient settlement seems barely possible. Furthermore, they require substantial additional data transfers, which adds to the costs.

For comparison purposes, the Bitcoin network, at its peak, settles roughly 350,000 transactions worldwide every day, and given its current configuration, appears to be running at almost full capacity. The German payment system alone, meanwhile, processes more than 75 million transactions on average every business day, according to the data for 2016.

The traditional answer to the problem of mounting complexity in the interactions of a multitude of independent participants has been to use a central bank – an institution which centralises the settlement of payment transactions. Hence the name: Central. Bank. This arrangement channels the many different bilateral payment flows and order books into larger flows which are then routed via or by the central bank and posted in a central bank account. That was a huge step towards greater stability and efficiency in the world of payments.

As a matter of fact, that is why we are seeing a trend towards centralisation and hierarchical structures in the development of basic blockchains as well. There are multiple reasons why a pure P2P settlement arrangement does not appear viable.

A pure P2P world appears unfeasible without trusted institutions. I call this factor the lack of a real reference framework. Bitcoins, you see, are merely virtual, and they change hands between virtual participants. They never leave the Bitcoin blockchain, and they will never have a real point of reference until they are exchanged for real currency, which takes place outside the blockchain.

Once real transactions come into play, a real point of reference is needed. You can trade a house on the blockchain in the form of a virtual token. But on the blockchain, that tells you nothing about whether the house even exists, whether it has the features it is said to possess, and whether it belongs to the seller in the first place. To verify all those things, there needs to be a trustworthy outside third party.

The basic matter of a participant’s personal identity needs to be verifiable outside the blockchain. Only then can we conduct real transactions with that participant.

That is why I feel that the purported goal of settling transactions without trustworthy third parties is a pie in the sky proposition.

All in all, we are highly sceptical about the extent to which DLT can be put to use in the financial sector. Given the current state of the art, it is somewhat unlikely that DLT will become a widely used application in individual and retail payments.

In the field of securities settlement, though, the shrinking processing times and reconciliation costs might prove to be a more important factor and suggest that DLT does have its uses.

The Deutsche Bundesbank is analysing the pros and cons of DLT in a project it is running with Deutsche Börse. While this project indicates that DLT does indeed have its functional merits, it is still unclear how far DLT also has the edge over today’s technology in terms of security, efficiency, costs and speed.

3 Central bank-issued digital currency

When using DLT, the question might arise in future as to whether central bank-issued digital currency could be provided for the safe settlement of larger transactions.

Central bank-issued digital currency would rank alongside cash and credit balances with the central bank as another form of central bank money, and it would also need to be posted as a liability on the central bank’s balance sheet.

There are several technical options in terms of the form this would take. Transfers could be value-based (like cash) or account-based (like deposits), anonymous or registered, its use could be restricted – in terms of amount or payment purpose, say – and it could be remunerated or, like cash, earn no interest.

The specific design dictates not just how far the supposed benefits of DLT-based central bank-issued digital currency will come into play, but also the macroeconomic repercussions, which also need to be factored into any overall verdict on its merits.

Arguably, the most important question here concerns who exactly should be allowed to use central bank-issued digital currency, or, to be more specific, whether central bank-issued digital currency should be issued to non-banks as well. Because if that were the case, we would probably see substitution effects between the different forms of money. Confining its use to the settlement of transactions among banks, on the other hand, would not involve any substantial changes over the status quo.

In particular, non-banks could convert their sight deposits at banks into central bank-issued digital currency if storage as an entry on the distributed ledger appears more secure and more convenient than hoarding it as cash.

Significant parts of non-banks’ sight deposits being shifted into a blockchain, however, and no longer being available­ to the credit institutions as virtually unremunerated funding ­might have considerable repercussions for the interest margin, the scale of lending ­as well as the business models in the banking system and the banking system’s structure.

Moreover, simply expanding the monetary base accompanied by sight deposits being shifted into central bank-issued digital currency would require a larger amount of collateral and would thus have a significant impact on the structure and risk profile of the central banks’ balance sheets.

There is a wide variety of potential monetary policy and stability policy implications. And these are currently being investigated by a number of central banks. As things stand, the likely consequences remain to be seen.

In a nutshell, the title of my speech today: “From Bitcoin to digital central bank money – still a long way to go” sums up the status quo of our considerations.

The road to a digital central bank – assuming there would be any benefits in the first place – would be a very lengthy one. At present, there is not even a recognised basic blockchain. Major consortiums are developing different types of basic blockchains, each with their own particular features. Not all of them can be used in the financial sector.

At the same time, applications for payment and settlement systems are being developed on these shifting sands. There is a lot going on in this field. Technology has been advancing at a pace unseen in the past decades.

Blockchain Prototype Is Credit Positive for P&C Insurers and Reinsurers

The Blockchain Insurance Industry Initiative (B3i) has unveiled a prototype application that streamlines contracts between insurers and reinsurers using blockchain technology according to Moody’s. Once the technology becomes mainstream, they expect that it will significantly reduce policy management expenses and speed up claims settlement for insurers and reinsurers, a credit positive.

B3i’s application gives insurers, reinsurers and brokers a shared view of policy data and documentation in real time.

Blockchain’s shared digital ledger has the potential to increase the speed and reduce the friction costs of reinsurance contract placements. Reinsurers would use the common platform to streamline claims analysis, potentially reducing significantly their administration and management costs.

Blockchain technology is a chain of blocks of encrypted data that form an append-only database of transactions. Each block contains a record of transactions among multiple parties, each of which has real-time access to a shared database. As a block is encrypted with a link to the previous block, it cannot be altered, except by unencrypting and amending all subsequent blocks.

PricewaterhouseCoopers estimates that blockchain technology will reduce reinsurer non-commission expenses by 15%-25%, including data processing efficiencies and reduced chance of overpayment because of data errors. For illustrative purposes, the exhibit below shows the potential effect on annual pre-tax earnings for some of the world’s top reinsurance companies, all of which are included in the B3i consortium. We also expect the technology to decrease the time between primary insurance claim and reinsurance reimbursement, a credit positive for primary insurers.

B3i launched in October 2016 with five original members, including Aegon N.V., Allianz SE, Munich Reinsurance Company, Swiss Reinsurance Company Ltd. and Zurich Insurance Company Ltd. It now has 15 members. Beta testing for B3i’s program is scheduled for October and is open to any insurers, reinsurers or brokers that wish to pilot the technology, regardless of their membership status in the consortium. Although the initial pilot was for property-catastrophe excess-of-loss policies, B3i plans to broaden its application to other types of reinsurance, catastrophe bonds and other insurance- linked securities.

Bitcoin’s ‘hard fork’ becomes a reality

From Fintech Business.

Bitcoin cash has entered the scene as bitcoin finally split into two this week following years of community infighting about the future of the bitcoin blockchain.

However, Melbourne-based Blockchain Centre chief executive Martin Davidson said bitcoin cash was just one among many other ‘alt coins’, or bitcoin alternatives, available.

“Bitcoin cash can be thought of as another alt coin just like Litecoin and hundreds of other crypto currencies which have been created by a group of developers who want bitcoin to have a larger block size, rather than follow the road map set out by the Bitcoin Core development team,” Mr Davidson said.

The new bitcoin cash blockchain contains all the information from the previous blockchain but has eight times more transactional capacity (8 megabyte) than the original (1 megabyte), making transaction speeds on the new virtual currency much faster.

The fork was triggered due to a split in the bitcoin community over how to handle the increasing volume of traffic on the 1 megabyte blocks as bitcoin grew more popular.

Though bitcoin cash is only a few days old, it’s possible it will have its own community of users, much like ethereum classic and ethereum, according to Mr Davidson.

“It’s quite possible bitcoin cash will have its own network infrastructure, application layer services and new user base who like the value bitcoin cash brings over the existing, longest standing and most valuable crypto currency, the original bitcoin,” he said.

Blockchain Australia board member Lucas Cullen says most of the bitcoin community is resistant to change, and will likely gravitate towards the coin with the better software.

“There have been many attempts to convince the community that their version [of bitcoin] is better, but most of the time it’s about a majority — and I think most of the bitcoin community are pretty stubborn and pretty resistant to change,” Mr Cullen said.

“We’re pretty risk adverse.”

Announced in a tweet by CoinDesk, the first bitcoin cash block was mined at 2:14am on 2 August (EST). Since then, 24 more blocks have been mined (at the date of writing).

The value of bitcoin dropped from US$2,854 to $2,729 on the day of the fork, and bitcoin cash already has a market value of US$7 billion, according to Mr Davidson.

“And its great news from a financial perspective for all bitcoin holders as everyone who held their own bitcoins before the chain split or fork, now have an equal amount of bitcoin cash coins also,” he said.

Successful blockchain trial for bank guarantees

ANZ and Westpac have teamed with IBM and shopping centre operator Scentre Group and have now successfully digitised the bank guarantee process used for commercial property leasing.

The trial used Distributed Ledger Technology (DLT) to eliminate the need for current paper-based bank guarantee documents, resulting in a single source of information with reduced potential for fraud and increased efficiency.

The partners involved in the trial have today released a whitepaper detailing how the solution worked and how it could be used in other situations that rely on bank guarantees.

In addition to eliminating the need for physical document management, the trial also addressed other inefficiencies in the current bank guarantee process, including the challenges in tracking and reporting of a guarantee’s status through multiple changes.

This forms part of a broader plan to build a shared solution with the rest of the industry, and to invite other organisations to participate in a larger pilot.

Commenting on the successful trial, Mark Bloom, Chief Financial Officer at Scentre Group, said: “An update of the decades-old process for issuing, tracking and claiming on guarantees is long overdue.

“With approximately 11,500 retailers across Australia and New Zealand, who use guarantees to support rental obligations, manual tracking of guarantees has been an extremely cumbersome and labour intensive process.”

Nigel Dobson, General Manager Wholesale Digital, Digital Banking at ANZ, said: “We have been keen to avoid the hype surrounding blockchain and distributed ledger technologies, and instead focused on practical and deliverable use cases.

“This proof of concept demonstrates how we can collaborate with our partners to develop a digital solution for customers, which also has the potential for industry-wide adoption.”

Andrew McDonald, General Manager Corporate and Institutional Banking at Westpac, said: “This is about removing the cost of fraud, error and operational risk that will continue as long as bank guarantees remain paper-based and manually issued.

“Next steps involve encouraging all industry players to adopt this technology so we can better protect and save money for our customers. Beyond that there is no reason why this couldn’t be applied across other industries.”

Dr. Joanna Batstone, Vice President and Lab Director of IBM Research Australia, said: “Using an agile approach, IBM collaborated with ANZ to combine the bank’s deep knowledge of the industry and their partners, with IBM’s blockchain expertise.

“The business use case demonstrates the opportunity to lift efficiency and transparency for all parties involved. We believe blockchain can potentially drive productivity across all Australian industries.”

This blockchain trial used Distributed Ledger Technology (DLT) powered by Hyperledger Fabric V1.0 – a blockchain framework and one of the Hyperledger projects hosted by The Linux Foundation. You can view the whitepaper.

What’s holding up the blockchain?

From The Conversation.

It’s not technology or regulation holding back the blockchain – software that stores and transfers value or data across the internet – we just haven’t figured out the next big use-case. Two reports released this week by the CSIRO’s Data61 not only inject some well-researched gravitas into the conversation, they also provide insight into why some of the major blockchain projects have stalled.

Since 2015, banks, regulators, tech giants and startups all over the world have raised billions of dollars to explore the blockchain.

But the only really successful, scaleable use of the blockchain remains cryptocurrencies like Bitcoin. Bitcoins currently trade at almost AU$4,000, with a total market equivalent to thirty times the GDP of Australia.

Think of the blockchain as a type of transparent spreadsheet or “public ledger”. When someone transfers a Bitcoin, for example, the transaction is verified by “miners”, encrypted and a “block” is added to the spreadsheet. Mining takes a lot of computing power, and so miners are incentivised to participate in the system with a reward of bitcoin.

It’s finding a way to put all these pieces together for purposes other than cryptocurrencies that has yet to be figured out.

Because of all the computing power required to verify and encrypt new blocks, running a blockchain network is expensive and consumes a lot of electricity. For this reason, a blockchain should only be used if it solves particular problems. For example, a blockchain could allow users to see each other’s ledgers and transactions, negating the need for a trusted third party to manage risk. The blockchain itself, through sophisticated cryptography, would provide privacy and trust.

Conversely, if there is already a central third party managing trust between users and verifying transactions (something banks already do for consumers), then a blockchain is probably not needed at all. Failing that, a sophisticated database or expert system would be a cheaper and simpler alternative.

Opportunities and risks

The Data61 reports describe some of the possible opportunities for the blockchain in Australia, including monitoring the outbreak of pests or animal and plant diseases, border surveillance, tracking intellectual property, and identity systems that provide greater certainty over entitlements, benefits, and tax obligations. The reports also identify some of the risks.

The risks include both business and technical risks. For example, public ledgers do not afford privacy and blockchains generally are not suitable for storing large volumes of high speed data. Bitcoin’s blockchain has been suffering from this very problem for more than a year. Finding a solution is a priority for any developers wanting to attract the number of users needed to make running a network profitable.

The use of blockchain in financial transactions also poses problems for compliance with anti-money laundering legislation, which requires that anyone providing financial services (for example) must satisfy themselves as to the identity of their client or customer.

These shortcomings may explain why a number of high-profile blockchain projects have recently stalled. For example, last week, the Bank of Canada announced that its blockchain project, Jasper, is not yet fit to handle settlements. Citing transparency and privacy issues, the bank found that the benefits of using blockchain did not outweigh the risks.

But risk is not the only reason that blockchain projects are stalling.

In February 2017, the R3CEV consortium of banks and technologists announced after more than 18 months of investment, innovation, and testing, that they would not be using blockchain for their project because they did not need it.

Meanwhile, in a speech delivered to the Africa Blockchain Conference in March 2017, Andreas Antonopoulos warned that many recent “blockchain” projects are fraudulent attempts to raise capital under the guise of innovation and disruptive technologies.

The blockchain’s holy grail

While bitcoin has proven what the blockchain can do, the technology still needs a killer app to justify the hype. The most likely contender is currently a “smart contract”. Smart contracts are programmable transactions with complex internal logic that can interact with internet-enabled devices and other smart contracts.

At this time, the problem with smart contracts is that they are susceptible to manipulation. What is needed to test the capacity of the blockchain is a small-scale low-stakes low-risk smart contract that (for example) regulates energy consumption, manages permissions, or ensures payment on supply.

Data61’s Smart Contracts Report lists some contenders, but first we need to manage the risk of fraud, breach of privacy, and blockchain bloat. Once these risks have been reduced to nil or negligible, the real work can resume.

Author: Philippa Ryan, Lecturer in Civil Practice and Commercial Equity, University of Technology Sydney

Thinking Small Can Help Blockchain Graduate From The Lab To The Real World

From S&P Global Market Intelligence.

Blockchain holds the promise to remove trusted third parties from transactions by creating a global network of peers that verify and record transactions on a shared ledger. While this represents a monumental shift in the way the financial system works, it will be a series of small changes and implementations that gets us there.

A partnership between Citigroup Inc. and Nasdaq Inc., which was announced at CoinDesk’s 2017 Consensus conference, gives insight into what it takes to bring a blockchain solution from the lab into the real world.

The partnership leverages Chain Core technology to connect Citi’s treasury and payments platform to Linq, Nasdaq’s private market blockchain platform. Citi created CitiConnect for Blockchain, which will allow Citi to seamlessly process payments for transactions in private company securities completed on the Nasdaq platform. Both products were built using Chain Core technology.

This partnership is not a research project or proof-of-concept. It is a real, live, platform operating at this very moment to settle cash securities transactions on the blockchain.

Instead of building an entire distributed network, like many blockchain evangelists want to see, Citi chose to use blockchain as a bridge. Connecting Citi’s current treasury infrastructure to Nasdaq’s Linq platform is an incremental step that allows Citi to see how a real blockchain network performs. This is step one in a potentially larger roll-out. While Nasdaq is the only current partner on the CitiConnect for Blockchain platform, the product is able to connect multiple blockchains to Citi’s treasury department.

Morgan McKenney, head of Asia-Pacific treasury cash management and trade solutions at Citi, outlined three key components in developing a blockchain solution. First, it must solve a real customer problem. Second, the solution must be extensible, meaning it should be applicable to more than just the initial use case. Finally, the product needs to be something that can be implemented within a year, according to McKenney.

How the blockchain will transform housing markets

From The Conversation.

An emerging technology, blockchain, could transform the way we buy and sell real estate by doing away with the hidden costs and inefficiencies of our housing markets.

Blockchain is an online ledger that records transactions. It’s capable of recording the movement of any kind of asset from one owner to the next.

It’s public and isn’t owned by any one corporation, there are no charges to record transactions. Its openness ensures the integrity of transactions and ownership, as everyone involved has a stake in keeping it honest.

This means there are fewer intermediaries; less middle-men who increase the costs and time to complete a transaction.

There are risks associated with the system as it’s only as strong as the code that supports it, which has come under attack in the past. Despite this, examples from overseas show it is possible to apply this technology successfully to our housing market.

Problems in how the property market is run

For buyers able to find the right property, secure a mortgage and save a deposit, they must also pay for a range of so-called “hidden costs”. These are additional payments associated with the transaction over the cost of the home itself. Many legal and title-related costs would become near-obsolete in a blockchain system.

The combined costs of title registration, title insurance, and legal fees associated with register the property transfer approach A$1,000 on the average Australian house. Costs continue to rise as the prudent buyer undertakes further due diligence, through building inspection documentation, previous sales records and so forth.

On top of the financial cost, it then typically takes over a month to settle a real estate transaction in Australia. The blockchain system can speed things up, as currently tedious checks undertaken by hand, move to an automated system overseen and approved by the relevant stakeholders.

There is also the risk that land titles offices with a single database simply get things wrong too. In 2016 it was reported that 300 incorrect certificates had been issued in NSW, with 140 of those being recent property buyers affected by government plans for major motorways in Sydney’s west.

There are now concerns that the system’s quality could be compromised in several states, including NSW and South Australia, as land titles offices become privatised.

A blockchain real estate market

If blockchain were applied to the property market in Australia, every property would be encoded with a unique identifier. Property IDs already exist in most land registry systems, so these would need to be migrated to a blockchain.

Next, the blockchain ecosystem then needs to have defined who the people behind the transaction are, those stakeholders that include the owner, lender, and government.

Transactions of property are conducted via “smart contracts” – digital rules in the blockchain that process the agreement and any specified conditions. Buying and selling could still take place via agents, or the smart contract can be advanced to incorporate the sale rules and make this decision automatically. The blockchain for each property grows as transactions are added to the ledger.

A housing market without agents, conveyancers and a land-titles office may seem decades away, but a handful of countries have already piloted blockchain land registration system.

In Australia, our current land titles system is among the world’s best, but it is not infallible. A range of hidden taxes and transaction costs increase market inefficiencies.

And while the electronic system Property Exchange Australia or PEXA, has brought us to the point of a near paperless property market, it’s still an intermediary between the parties and the record of the transfer in the Torrens system – our current land title system.

The added advantage of a blockchain system is in eliminating risks, in particular the risk of records being accessed fraudulently and altered or deleted because it is a permanent and immutable record. This means that a huge amount of computing power would be required, probably along with some collusion, and the alteration is easily detected across the ledger. That’s not to say the blockchain system is perfect.

Blockchain’s advantage in restricting any changes to historical records becomes a disadvantage when incorrect or fraudulent entries are added. Digital currency managers, Ether and Bitfinex, learned this the hard way through cyber attacks.

Last year these attacks siphoned off over US$50 million in ether tokens from The DAO, the largest crowdfunded venture capital fund. This breach led to a controversial split of Ether into two separate active digital currencies.

Only months later, Hong Kong-based crytocurrency trading firm, Bitfinex, had the equivalent of US$68 million stolen by hackers in a security breach reminiscent of the hack that bought down Mt Gox in 2014. It is little comfort to cautious market regulators that the thieves behind these attacks can not spend it without revealing their identity on the blockchain.

These hacks demonstrate that blockchain systems are only as secure as the code which supports them. As a nascent technology, its cracks are detected only when they are exposed.

Where blockchain has worked before

Sweden became the first western country to explore the use of blockchain for real estate in July last year. At the time, the Swedish Land Registry partnered with blockchain startup ChromaWay to test how parties to a real estate transaction – the buyer, seller, lender, government – could track the deal’s progress on a blockchain.

Other countries at the forefront of blockchain for real estate include The Republic of Georgia, Honduras, and Brazil which announced a pilot program earlier this month. While this might seem like a disparate list, it’s in these countries where the long-term potential of a blockchain for real estate are most significant.

Systemic corruption and insecure database management in these countries, and many other emerging economies, is seen as a major constraint on growth and prosperity. Why would you invest in a house, or any other asset, if there is a distinct possibility that the record of your ownership could simply disappear?

With ever increasing demands for improvements to transaction efficiency and local real estate industry giants like CoreLogic appointing research teams dedicated to new technology applications, it might not be long before we see a real estate blockchain system in Australia.

Author: Danika Wright, Lecturer in Finance, University of Sydney

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