Were you to speak to any gathering of treasurers and ask them for their opinion as to what they would consider to be the most significant fintech development impacting the financial services industry over the past two years or so, there could be little doubt that blockchain would feature prominently among the responses.
Those who were thinking of themselves as a little more informed on the subject may just go on to suggest that blockchain is the transformative technology laying the foundations for a new generation of computing applications that will serve to improve the efficiency and interoperability of financial and financial services markets.
For anyone thinking even more deeply, they might even go so far as to point out a new world of opportunities for financial services and the possibility that blockchain technology will finally make it possible to provide banking services to the half of the world’s population who, it is believed, are currently unbanked.
Likely to be of most interest to the treasurer will be those areas of financial services that will make a huge impact on their daily lives.
On the wish list you would likely see cross-border payments and trade finance feature prominently, and then perhaps electronic bank account management (eBAM), an area of operations increasingly being highlighted as a source of frustration for the treasurer.
It shouldn’t come as any surprise then that we continue to talk about the extraordinary level of excitement that persists around blockchain and the promises that it brings.
We are now already looking forward to the next leg of the journey, or the ‘Blockchain Revolution’ as some have dubbed it, and those real-world use applications that are likely to make it beyond proof of concept and into the production environment.
Were we to look at payments as an example, SWIFT, through its global payments innovation (gpi), which leverages off its existing infrastructure, and Ripple, a Californian technology start-up, which utilises a new interledger messaging layer, are separately working in their own collaborations with the banks to modernise the mechanisms for making cross-border payments.
Both have announced successful trials of real-time transactions, while another provider, R3, has itself just announced a prototype solution – built in its Corda platform – that should enable fast, efficient and effective cross-border payments.
Before we look too far ahead, though, it might just be a good time for treasurers to take a moment to step back and reassess what they think they know and understand about blockchain.
Our overall knowledge and understanding of the principles of blockchains has certainly increased. Were you to drill down into it, you will find that a blockchain is essentially just a register, or ledger, of assets or transactions that can be replicated across a network.
Details of movements and transactions on the ledger are added in blocks to the end to form a chain and it is the blockchain protocols that govern the construction of the chain and ensure copies of the ledger are synchronised.
These protocols safeguard the integrity of the ledger and provide the necessary assurance that the version on show is the single immutable version of the truth of the state of the ledger.
The structure of the ledgers ensures users only see what they are entitled to see
Nothing particularly exciting about this, you might argue. Why, then, is blockchain being credited as having moved the game of distributed ledgers on somewhat?
The advance stems from the notion that, while ledgers may be distributed across a network thereby reducing the risks of any single point of failure, it is the application of modern cryptographic protocols – ie, ones originally applied to Bitcoin – that has been the key.
Cryptography helps provide much greater assurance over the accuracy and state of the ledger, allowing it to operate freely and without the need for oversight or control by any centralised authority or trusted intermediary.
This effectively facilitates the provision of access to a broader number of users who may not necessarily know or, perhaps more significantly, trust one another, and allows the ledger to be considered truly decentralised.
Notwithstanding this, it should be pointed out that there are actually marked differences between the blockchain protocols that underpin the operation of cryptocurrencies like Bitcoin and cryptographic protocols that are being considered for all those decentralised ledger applications being looked at through collaborations between the banks and major fintech providers.
For example, SWIFT, Ripple and R3, to name but a few.
Bitcoin by design operates very publicly, albeit the actors themselves are, in fact, able to remain relatively anonymous. Bitcoin’s open source code means anybody with access to the right tools may view ledger transactions and can contribute to the mechanism for adding the blocks that make up the ledger.
This open structure is something that is hardly likely to be deemed appropriate in the regulated world of financial services. With legal obligations around anti-money laundering and KYC, as well as privacy and data-protection issues, those fintech companies working with banks are being required to adapt their approach and follow a much more tailored set of rules.
In the banking environment, the rules for the operation of the ledger are set by the organisation and while the ledger may be deemed distributed, it effectively remains under the guardianship of a number of trusted intermediaries.
The structure of the ledgers ensures users only see what they are entitled to see and the validation and update of transactions is likely restricted to a limited number of accredited parties. These accredited parties perform a similar role to the one fulfilled by the miners of Bitcoin, although their incentive to undertake this role will be driven by a wholly different reward model.
While we might refer to such ledgers as being enterprise blockchains, they are perhaps better referred to as permissioned ledgers. They are to be viewed as a collaboration between parties who are prepared to buy into a set of rules that establishes a level of trust as to the validity of a transaction. These rules may be updated at any time.
This situation should be viewed as being very different to the fully decentralised consensus and trust environment that exists for Bitcoin.
For any application, there are certainly benefits to organising activities in a permissioned environment, not least the opportunity for quicker and more cost-effective deployment of code. Applying restrictions on who is authorised to see or validate transactions would certainly help to alleviate at least some of the likely concerns of regulators.
With such restrictions and tighter controls, many observers are just begging the question as to why you would choose to organise certain types of transactions into a lengthy chain at all?
While a blockchain might be an appropriate mechanism for managing transactions involving ownership of certain types of assets, for example, long-life assets such as digital money, or even diamonds, it would perhaps seem questionable why you would seek to maintain a blockchain for transactions that are likely to be short-lived, for example, trade finance transactions.
With all this in mind, shouldn’t we seek to clarify what technology path it is that the fintech companies and banks are following?
Is it really blockchain?
There has been much argument and debate on the subject and we are finally starting to see fintech companies, R3 to cite an example (ie those who are serious about their positioning at least) distance themselves from references to what they are doing as being blockchain.
They are again referring to it under the original and correct banner, ie distributed ledger technology (DLT), sadly a reference that serves up the prospect for much less excitement than an association with the Bitcoin blockchain.
The Bank of England has itself expressed a view on the matter and, while being upbeat on distributed ledger technology generally, in relation to the overhaul of its real-time gross settlement (RTGS) system and tests undertaken, it has concluded that the blockchain technology, of the type that underpins the operation of Bitcoin, is “not sufficiently mature” to support the core RTGS system.
So, when your banks next approach you with excitement about their fintech proposition and seek to promote it as blockchain, you may just want to quiz them a bit further. It might not be hugely relevant, but it could be that they haven’t quite got it and you may just know a bit more than them.
Charlie Barling is an ACT member, consultant and director of Chisoli Treasury Solutions.
This article was taken from the Nov/Dec 2017 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership