• Lawrence Cummins

How the Blockchain could change your life

Updated: Jan 4

What is the Blockchain, the technology and philosophy behind it, many people know it as the technology behind Bitcoin, but Blockchain’s potential uses extend far beyond digital currencies. So, what exactly is blockchain, and why are Wall Street and Silicon Valley so excited about it?

Currently, most people use a trusted middleman such as a bank to make a transaction. But blockchain allows consumers and suppliers to connect directly, removing the need for a third party. Using cryptography to keep exchanges secure, blockchain provides a decentralised database, or “digital ledger”, of transactions that everyone on the network can see.

This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded. In the case of Bitcoin, blockchain stores the details of every transaction of the digital currency, and the technology stops the same Bitcoin being spent more than once.

The technology is behind the blockchain is revolutionary and can work for almost every type of transaction involving value, including money, goods and property. Its potential uses are almost limitless: from collecting taxes to enabling migrants to send money back to family in countries where banking is difficult. Blockchain could also help to reduce fraud because every transaction would be recorded and distributed on a public ledger for anyone to see.In theory, if blockchain goes mainstream, anyone with access to the internet would be able to use it to make transactions. Currently only a very small proportion of global GDP (around 0.025%, or $20 billion) is held in the blockchain, according to the World Economic Forum’s Global Agenda Council.

But the Forum’s research suggests this will increase significantly in the next decade, as banks, insurers and tech firms see the technology as a way to speed up settlements and cut costs. Companies racing to adapt blockchain include UBS, Microsoft, IBM and PwC. The Bank of Canada is also experimenting with the technology.A report from financial technology consultant Aite Group estimated that banks spent $75 million last year on blockchain. And Silicon Valley venture capitalists are also queuing up to back it.

Banks are making big bets on blockchain and will invest an estimated $400 million into the technology—the digital public ledger that enables the usage of cryptocurrencies such as bitcoin by 2019, Financial institutions spent an estimate $75 million on the Blockchain technology this year. Most financial institutions argue that they’re not interested in crypto currencies. But many are increasingly focused on the potential usage of blockchain technology for functions such as settlement, the crucial but unglamorous moment when cash and securities are exchanged between buyers and sellers. While trading activity has become an increasingly high-speed, computerised function in recent years, settlement can still take days, exposing banks to the risk that their trading partners could become insolvent during the period after a trade is executed, but before it is settled.

This is known as settlement risk. Blockchain’s inherent cryptographic nature makes every transaction more transparent, secure, and irreversible, mitigating clearing and settlement risk.Goldman Sachs has developed its own cryptocurrency for a settlement system for trading stocks, bonds and other assets, JP-Morgan, the London Stock Exchange Group, Wells Fargo, and State Street recently announced they joined a consortium with IBM, Intel, and Cisco and blockchain start-up Hyperledger (now owned by Digital Assets Holdings) to develop blockchain technology.R3, a blockchain startup, partnered with 30 major banks like HSBC, Citi, and Bank of America earlier this year to build a blockchain system that would allow the banks to more easily transfer funds with one another. Of course, the ascent of blockchain is by no means assured.

For one thing, it’s unclear how some elements of the technology for instance its focus on anonymity can be reconciled with the heavily regulated nature of the US financial services industry. “Unless blockchain enthusiasts understand these inherent regulatory restrictions, massive adoption of blockchain technology within the financial services industry will not be possible.

Source: World Economic Forum and Financial Times

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