If 2015 was as many declared the “year of the blockchain”, the technology will have to go some way in 2016 to top the impact that it has had on financial services. BlockchainBriefing looks ahead.
Despite the excitement there is nothing new about ledger technology.
It has been used with much less fanfare quietly for decades, in areas such as the military and by other government organisations. According to Professor Michael Mainelli, the emergence of Bitcoin and the perceived threat of the crypto-currency to traditional finance models is behind the recent ignition.
Blockchain and Banking
The year ended with the 42nd banking name committing to a project to develop standards in blockchain by innovation experts R3.
Some are long-time rivals, but the unprecedented partnership has brought the likes of Goldman Sachs, RBS, UBS, J.P.Morgan, Deutsche Bank, Nordea and Mizuho to the same table. The collective is working on a standard for ledger technology, a blockchain or blockchains, which will allow for transfers of data, finance and other forms of value between the members via a network.
One strand of the group is a regulatory and legal outreach section which will spend 2016 working with lawmakers to understand how the technology can fit into the banking and finance world with minimal disruption.
R3 also waved goodbye to 2015 by proclaiming it had a broader remit, and would include clearing houses, stock exchanges and non-bank institutions in the next year. The project may be too big to succeed, but it is certainly too big to ignore.
Blockchain and Non-Banking
Outside financial services there are swathes of other industries now investing.
Mainelli co-founded Z/Yen, one of London’s leading commercial think tanks, in 1994 and has been building ledgers in one form or another for the last 20 years.
Details of R3’s proposals are scant, but with a standard being developed the group has indicated it is looking to create common ground, a single ledger, which is anathema to Mainelli.
“I don’t think many of the people who have discovered ledger technology, have really thought it through,” he said.
“We believe there will be hundreds of thousands, millions of these ledgers, not one true chain.
“I fundamentally disagree with the theory there will be only one blockchain, be it the Bitcoin blockchain or something else.
“Some slower members, naming no names, have copied these coin chains and wondered why they don’t work so well, but they are crypto-currency models, they work well, but not for everyone.
“If you come from the ‘just discovered’ group because it has to do with coins, and you copy that coin model, you are not going to get the same performance or characteristics in your distributed ledger; slow, cumbersome, not built for anything else.”
Mainelli believes in 2016 there will start to be a consolidation of many of the blockchain and ledger creators, which he breaks down into two different types — token and non-token.
Expect moves in the insurance and charity sectors following discussion papers in the latter part of 2015. Mainelli’s view is that should sectors use databases to verify, and a problem arises, insurance companies are often the first to start investigating.
Nasdaq opened the new year by claiming it had documented a successful private securities transaction via its distributed ledger platform Linq.
This proof-of-concept transaction was recorded on New Year’s Eve, and the exchange claimed this was the first real use case of blockchain technology.
Several weeks earlier, post-trade technologists at Kynetix conducted a real-time exchange of ownership of a single lot of pepper using blockchain technology. Kynetix chief executive Paul Smyth said the transfer unlocked opportunities to streamline financing, collateral, settlement of derivatives contracts and post-trade processes.
The arguments over who did what first are a sideshow to the issue that we are in a period where lab testing is now bleeding into real-time use cases. Depending on who you ask, widespread adoption is one year away (TABB analysts) to a decade away (Deutsche Bank).
The Institute of International Finance (IIF) believes there are numerous regulatory obstacles to overcome before we can all get too excited, although it has also said “when, not if”.
Disagreements over the length of adoption aside, a more common consensus is that Bitcoin use will start to fade through 2016. The crypto-currency has for many outlived its usefulness and will recede back into the shadows. Much of the problem centres on the subject of regulation.
Throughout last year the European Banking Authority and the European Central Bank did not move from their stance in 2014 that crypto-currency should be avoided at all costs. Both are expected to release papers in 2016 re-affirming this, as central banks and clearing houses begin to look at using ledger technology to assist with their own back ends and their own currency operations.
Industry Representation of Blockchain
Blockchain’s rise to prominence in 2015 triggered the emergence of several trade bodies.
One of the most interesting is the Wall Street Blockchain Alliance (WSBA).
The New York financial hub has had an uneasy relationship with Capitol Hill and Silicon Valley, particularly post-financial crash, but lies in a position where it can take the technology being created and apply it to financial markets.
The WSBA and others are to produce papers in the coming months as the slow road to regulatory appeasement begins in earnest.
[author title=”Mark Taylor” image=”http://thefintechtimes.com/wp-content/uploads/2016/01/mark.png”]News Editor, PaymentsCompliance – BlockchainBriefing Mark’s regulatory coverage of the payments industry touches on a wide variety of subjects from cryptocurrency, international sanctions and anti-money laundering laws to innovation and emerging markets. He has been part of three award-winning editorial teams in regional newspapers across the UK, holding positions of political, business, transport, crime correspondent and assistant digital editor during that time. He has also reported for the Sun newspaper and the Guardian’s night and breaking news teams. [/author]