David Shrier, Associate Fellow at Saïd Business School explains blockchain in simple terms.
The two questions I inevitably get, when people hear that I know something about blockchain, are:
1. Can you explain it to me?
2. What is it actually good for anyway?
Let’s start with the first question, and then we will delve into the second question as it relates to financial services. We are going to take a functional perspective focused on how to apply blockchain, rather than get mired in the technical details of how it works. You don’t need to know physics or how to design an electrical wiring diagram in order to turn on a light switch.
What is Blockchain?
At its very heart, a blockchain is a kind of database that is primed to resist attacks or change. This makes it harder to commit fraud, and it is less expensive to maintain records of asset ownership on a blockchain.
People often talk about a ‘ledger’, another word for a database. If you think about it for a minute, a bank or asset-management firm is essentially a giant ledger book. A client makes a deposit, and the entry is catalogued. The client transfers funds and another entry is made. The client withdraws money and yet another entry is made.
The problem with this system is centralization. If someone wants to steal money from the bank, particularly in the electronic era, they just have to change one entry in the ledger. Something similar happened to Bangladesh Bank in 2016, resulting in an US$81 million heist via the swift system.
What if, instead of one copy of the ledger book, we had hundreds or thousands of copies? What if all those copies talked to each other so that they updated each other automatically? And what if there were clever maths, so that you could not easily insert false or fraudulent information into the ledger?
That’s blockchain. Another name for it is DLT, or distributed ledger technology.
What is it Good For?
Many calories have been burned attempting to answer the question, “What is blockchain good for?”
It’s important to remember that this is still an immature technology. The killer app for blockchain might not have been invented yet.
Sitting here today, there are a few discrete financial services use cases that emerged that are now transitioning to commercialization, driving dramatic reduction in cost and improvements in transparency and efficiency.
• Cross-border payments.
• Inter-bank transfers.
• End of day settlement from securities trading.
• Anti-money laundering/Know our customer industry utilities to dramatically reduce cost and improve efficiency.
• Real estate property title management.
• Alternative methods of financing early stage innovation (so-called ‘Initial Coin Offerings’ or ICOs).
• Liquid, tradable, and fractional, limited partnership interests in private equity/venture capital.
• Tax payments and reconciliation.
• Company registration with government.
Numerous other ideas are being explored. Billions of pounds sterling have gone into blockchain companies.
And yet, it’s only the beginning...
Think of the evolution of the internet. In 1998, we were very excited about Yahoo and eBay, but we had no conception of Airbnb or Uber. Similarly, the next generation blockchain technology is yet to be invented. But many are working hard to do so.
With this proliferation of new ideas, governmental and nongovernmental organisations are trying to shape the new financial ecosystems that are emerging. Regulation is being adopted to engage with this technologically driven disruption. In this issue, you’ll hear from some of the thought leaders who are helping to shape this new world order.
David Shrier Associate Fellow, Saïd Business School, University of Oxford. He has many published articles in globally renown publications such as Forbes, Newsweek, and The Asian Banker.