The Blockchain evolution
Blockchain technology isn’t the new kid on the block anymore – so as the technology matures, what does the Blockchain evolution look like? Here we recap on the technology and its benefits, along with the latest developments coming out of the FNZ Chain Clear initiative.
Blockchain solves a problem as old as money itself – double payment. Take this article as an example. When we published it on the internet, we were really taking and sharing a copy of some information while retaining the original. That’s a model that works for all sorts of things, but when it comes to financial assets like money, stocks or bonds, clearly the model falls apart. If we could all easily take and keep copies of financial assets, we’d break the system itself.
In the past, we’ve used intermediaries to help solve the problem. They are used to establish trust, verify identities, clear and settle transactions and keep records. Intermediaries take many different shapes and forms – obviously banks, and increasingly digital conglomerates like Facebook, UBER, Apple and Google act as arbiters for online transactions.
Intermediaries generally do a good job, but they have limitations:
- Centralised systems are open to hacking, attack or failure.
- They tax the system – for example, sending money across country borders can cost as much as 5-15% of the transaction’s value.
- They exclude significant chunks of population: globally over 2.5bn people can’t use financial services because they are outside the banking system.
- They’re slow – systems like SWIFT are 20-30 years old and run on mainframes from the 70s and 80s. IFDS, the UKs largest transfer agency, runs FAST which was designed and written in 1996.
That’s where Blockchain came in
In 2008, with the global financial system on the brink of collapse, Satoshi Nakamoto authored a white paper called ‘Cash for the Internet’, posing the idea of digital cash or cryptocurrencies: simply put, a way to make peer-to-peer payments without using an intermediary.
Cryptocurrencies are based on a technology called Blockchain. For the first time, parties don’t need to know or trust each other to complete a financial or business transaction. That’s because trust is native to the technology itself. It was big stuff – The Economist claimed Blockchain was one of the most important developments of the past 200 years. Ethereum (a Blockchain started by Russian/ Canadian college dropout Vitalik Buterin) now has a market value in excess of $20bn and supports around 3,000 Distributed Applications (DApps).
In this Blockchain, transactions are validated by a community (miners, in the case of this Bitcoin example) who commit resources to solve a problem and reach a consensus. They are then rewarded with new Bitcoin. Every so often the transactions on the network are captured into blocks. Once each block is validated, it refers to the preceding block in the Blockchain, and to every block all the way back to the beginning of time.
The Blockchain evolution
Blockchain technology has been harnessed more and more effectively and it will soon be possible for investors to treat fund holdings in a similar way to their current account, with transactions and settlements taking place in real time. That’s because of the ‘tokenisation’ of cash and assets, which are replaced with a surrogate, or token, so parties don’t need to wait days for money to move or for funds to be reconciled.
This has the potential to transform financial services, making mass-market investments more accessible by removing costs and barriers to entry. It means more of consumers’ money can work for them, rather than sitting in low interest rate accounts, as well as reducing liquidity headaches for fund managers.
This has the potential to transform financial services, making mass-market investments more accessible by removing costs and barriers to entry.
Big players such as the French Central Securities Depositary and major German exchange provider Deutsche Börse have already endorsed and made great strides towards the tokenisation of assets, whilst the Utility Settlement Coin project has engaged with some of the largest commercial and central banks in the world to determine how cash payments can be made more efficiently using Blockchain. And that’s before even mentioning Facebook’s potentially world-changing gambit to produce a new, Blockchain-based currency called Libra, in conjunction with global firms like Uber, Visa, Spotify and eBay.
Combine all this with signs of a sustained reduction in the price volatility which was probably ‘the’ major criticism of cryptocurrencies, and it’s a real indicator that blockchain is finally finding its natural place and utility in the global economy.
At FNZ, we process £500m in mutual fund orders every day in the UK alone – over a billion pounds on peak trading days. Our blockchain solution, FNZ ChainClear, has been up and running for six months now and exploits the potential of Blockchain and tokenisation to help us move data and money instantly, with the aim of being interoperable with existing banking systems as well as other Blockchain initiatives like those mentioned above. Not only does that reduce costs and generally take pain out of the system, it improves transparency, because the whole lifecycle of each individual payment and fund settlement is visible for all participants at all times.
Ultimately, this means consumers benefit from a smoother, simpler, more efficient and cost-effective system (although it doesn’t hurt the industry either). It’s clear that Blockchain is starting to come good on its promise to deliver the most significant developments for the asset management sector since the introduction of platforms almost 20 years ago.