Bitcoin offers international payments, direct peer-to-peer, with zero (or very low) fees, and using military grade encryption technology. For all its qualities, Bitcoin is yet to catch on as a mainstream method of payment and its value has fluctuated massively over the last 2 years since it won the attention of the general population.
Whether or not Bitcoin makes ground as a widely accepted currency, there is a new opportunity emerging from the technology behind Bitcoin – the blockchain.
Blockchain offers a decentralised register of ownership by recording every transaction in the system, from creation of a block and through any number of transfers made. Every computer tapped into the system stores a copy of this blockchain, and before a transaction can be made the system checks that their version of the blockchain is in sync with all other versions in the network.
By use of blockchain, all users know who owns every block, at any time.
The potential for a decentralised register this powerful goes beyond use only in digital currencies. There is a potential to revolutionise the security of ownership for an enormous range of high value transactions.
NASDAQ, the second largest stock exchange in the US, are currently trialling blockchain technology. The process of clearing and settlement will be revolutionised by allowing instant transfer of shares from one party to another without risk of default as these transactions happen simultaneously. Currently trades are sent through brokers, custodians, clearing houses and central depositaries in order to minimise counterparty risk. Paper trails and multiple transaction systems are needed to talk to each other and often have the involvement of lawyers and accountants. With the implementation of blockchain technology this could be a direct peer-to-peer transaction settled immediately and with very low transaction fees.
It’s not only in the trading of shares that re-defining the clearing and settlement process can be used. Blockchain could be used to power the large inter-bank transfers, such as the foreign exchange market where trades often reach into the billions of units.
One startup that is attracting a lot of attention in the insurance industry is Everledger. Fraud is a very real problem for insurance companies. High value assets can be fraudulently registered as stolen, insurance companies pay out, and then the asset registered with a new insurer for the process to be repeated. By using blockchain to create a decentralised ownership ledger for these high value assets, registered using certificate number and laser inscribed ID number on the diamond itself, it will be possible to recover these items once they resurface.
Piracy can also be combatted by tracking ownership of digital assets. Current DRM technology often requires that a song you purchased from iTunes can only be played through an Apple device. By using a decentralised ledger for ownership of digital content the ownership of digital assets can be authenticated across platforms, and can be transferred securely to new parties when sold.
The possible applications of blockchain technology are vast, and only time will tell what sticks. The power is there and companies are only just starting to sink their teeth into it.
Trying to apply blockchain to existing problems will likely not be what changes the world. As with the computer and the internet, no one knew from the off how they could be relevant to our everyday lives because the possibilities had never before existed. Blockchain intertwines value ownership and value transfer in a secure and fast system that is visible for the world to see. This could be just the beginning.
Written by Andrew Wood