Once upon a bitcoin
25 May 2016
BNP Paribas recently gathered a handful of experts together to discuss what distributed ledger tech has in store for financial services
Image: Shutterstock
It may have been bitcoin that brought blockchain technology to mainstream attention, but increasingly, large institutions and start-ups alike are looking beyond digital currencies to other uses for distributed ledger technology. In some instances, they are straying from financial use cases altogether.
At a London breakfast event, Beyond Bitcoin, hosted by BNP Paribas, a panel discussed the various applications of the enigma that is blockchain.
Moderator Scott Riley, blockchain business lead at commodities technology company Kynetix, conceded that some elements of disbelief have to be suspended.
Riley went on to suggest that, actually, the concept of networks and distribution is not a particularly new one, and that the notion first appeared in theory papers as far back as 1962.
He said it is simply that “some components have come together and are being looked at in a slightly different way, which is what gives us a new look on that.”
Disruptive forces
While it’s a common assumption that institutions are approaching blockchain with caution, viewing it as a technology set to change the very fabric of their organisations, the panellists generally disputed this view.
Calogero Scibetta, head of operations and business development at Everledger, argued that his firm uses blockchain not to disintermediate players, but to improve the whole process. Everledger uses blockchain in the diamonds industry, creating a ‘digital thumbprint’ of individual diamonds in order to prevent counterfeit and fraud.
In this environment, Scibetta said, blockchain is “enabling the industry to do something that wasn’t possible before”.
“Instead of disrupting or carving out the middleman, we’re actually empowering every player on the buyer chain, because fraud and counterfeit … hurts the buyer chain itself, and everyone pays a price for it,” Scibetta added.
Despite the differences between the two sectors, a similar approach can be taken to blockchain in financial services.
Philippe Denis, chief digital officer at BNP Paribas Securities Services, drew attention to the bank’s strategic partnership with the direct investment platform SmartAngels. The pairing is intended to allow private companies to issue securities on the SmartAngels private market, allowing them access to a secondary market using blockchain.
According to Denis, BNP Paribas and SmartAngels are identifying niche areas of the industry that, so far, have been relatively untouched by technology, such as unlisted stocks.
“There was an opportunity to bring value to these kinds of activities,” he said.
“People then are going to use the blockchain not to disintermediate or to disrupt the market, but to use new types of technologies … to help the market to be more free and more efficient at the end of the day.”
Sean Murphy, partner and blockchain practice lead at Norton Rose Fulbright, suggested that the law firm is being actively approached by clients looking for blockchain solutions in areas such as post-trade settlements and identity.
Murphy also highlighted his interest in the “concept of central banks potentially issuing their own digital currency”, which he said could be “a pretty profound moment”.
The consensus appears to be that, rather than disintermediating sections of financial services, blockchain should actually be viewed as a solution to previously un-solved issues.
Gavin Wood, founder of blockchain technology provider Ethcore, suggested that one such issue will be that of provenance and supply chain tracking, “mainly because it’s already a latent problem”.
He said: “It’s not something there is a huge amount of regulation around; it’s not something that there is a vast number of incumbents that have offerings that can protect their territory already.”
On the other hand, while the technology is young, the industry should perhaps keep an open mind to the existing challenges blockchain could potentially address.
Scibetta said: “We’re still breaking out in a small market. The landscape of the technology will be changing dramatically in the next months or years. So from an implementation point of view it’s hard to commit on something today.”
The customer’s all right
For all the possibilities blockchain brings, the developments likely to take hold are those that bring value to financial service providers and those that improve the customer experience. Ideal solutions will do both.
Riley addressed three aspects of usability: the scalability of the technology; the latency of it and the fact that one bitcoin ‘block’ is only created approximately every ten minutes; and the potential effects on wider enterprise.
With regards to the issue of latency, Woods conceded that blockchain is a nascent technology, and that in use cases such in trading and matching engines that require a turnaround of milliseconds, blockchain, currently, won’t cut it.
However, while bitcoin blocks are slow in the making, the Ethcore product Ethereum, which Woods called a “second generation blockchain”, can create a block every 15 seconds.
Woods said: “As you move to more semi-centralised architectures where, maybe, everything is sitting in a single data centre because it’s actually a consortium change, I think we can reduce block times even further, probably into the sub-second.”
He added: “In terms of latency I think it’s early days, but I don’t think it’s a sizeable problem.”
Woods also accepted that scalability could be a potential issue, suggesting that ideally, transactions would be split and directed around the network, coming to a “magic consensus” where “everything works perfectly”.
In computer science, he said, such networks have been in use for several years. The challenge is “trying to apply those same principles with some degree of decentralised consensus”.
Finally, on the issue of creating enterprise-ready solutions, Woods suggested that as blockchain is a decentralised technology, there is no single point of failure or single point of control.
By definition, therefore, blockchain removes some of the worries that businesses face in the everyday.
He added that the aim is to “remove this notion of mining and get rid of all this stuff from the public chain … and actually boil it down to the bare essentials.”
While Riley pointed out that solutions should not come as a replacement to existing infrastructure, but in niche areas of the market where “needs aren’t currently catered for”, Murphy agreed that consumer applications should be at the forefront of companies’ plans.
In fact, Murphy suggested that in ten years’ time, “most consumers won’t even know they’re using distributed ledger technology”, and that this will be the real measure of success.
Regulation, regulation, regulation
For a technology in its infancy, there is some debate over how harshly blockchain should be regulated, and what such regulation could, or should, entail. However, Murphy suggested that some of the hesitation to adopt distributed ledger solutions comes from inside institutions, not from regulatory barriers.
Currently, the majority of firms are in a ‘proof-of-concept’ phase, as innovation teams explore and experiment with the possibilities. “Before you can move from proof-of-concept to deployment phase, particularly if it’s a financial institution, you have to get, at that point, approval from your legal team, your regulatory team, your compliance team,” said Murphy.
“They, understandably, will want to really understand what the implications of the use case, or implications of the technology, are and satisfy themselves about the legal, regulatory and compliance issues.”
Murphy went on to suggest that, in fact, regulators such as the Financial Conduct Authority in the UK are waiting for companies to present potential applications of blockchain before they consider what their response may be, a “great open-mindedness on their part”.
Ultimately, the technology is still simply a tool, and regulators will be unlikely to impose any restrictions on the blockchain itself. Rather, they will focus on the way in which it is used, and whether these activities would typically be controlled.
Equally, Murphy pointed out that regulators could benefit in their own right, using blockchain for monitoring transactions, for example, or for ensuring compliance with anti-money laundering rules. He explained: “Regulators have a two-fold interest in distributed ledger technology, both in terms of [the fact that] the entities they’re regulating use it, and also in terms of [the ways] they can use it themselves.”
Building on this, Riley agreed that regulations should be appropriate to the use case at hand, pointing out the differences in regulatory requirements between financial contracts and currencies, digital or otherwise. If the blockchain is simply serving as an enabling technology, “it won’t be regulated as a financial service provider.”
While bitcoin and other crypto currencies may have been at the centre of the hype for a time, institutions are now looking beyond the concept of financing in itself and paying more attention to the technology that makes it work. And if they’re not, they definitely should be.
Woods said: “The important thing about bitcoin is not the currency, it’s the underlying technology that allows there to be a currency at all,” while Denis summed it up concisely, instructing attendees to “forget currency; think protocol”.
However, no matter how many initiatives are underway, few are outwardly peddling blockchain solutions. It is still a relatively unknown entity, and no firm has yet stuck its neck out to become the first mover. Riley pointed out that it is currently difficult to identify any front runner in the distributed ledger race, suggesting that they may be wary of risk to their current operations, or more importantly, their reputations.
There is no real rush of firms “hoisting [a] flag up the totem pole”, commented Riley, adding: “I think there’s a good reason that lots of the start-ups and lots of the enterprises are operating in stealth mode.”
At a London breakfast event, Beyond Bitcoin, hosted by BNP Paribas, a panel discussed the various applications of the enigma that is blockchain.
Moderator Scott Riley, blockchain business lead at commodities technology company Kynetix, conceded that some elements of disbelief have to be suspended.
Riley went on to suggest that, actually, the concept of networks and distribution is not a particularly new one, and that the notion first appeared in theory papers as far back as 1962.
He said it is simply that “some components have come together and are being looked at in a slightly different way, which is what gives us a new look on that.”
Disruptive forces
While it’s a common assumption that institutions are approaching blockchain with caution, viewing it as a technology set to change the very fabric of their organisations, the panellists generally disputed this view.
Calogero Scibetta, head of operations and business development at Everledger, argued that his firm uses blockchain not to disintermediate players, but to improve the whole process. Everledger uses blockchain in the diamonds industry, creating a ‘digital thumbprint’ of individual diamonds in order to prevent counterfeit and fraud.
In this environment, Scibetta said, blockchain is “enabling the industry to do something that wasn’t possible before”.
“Instead of disrupting or carving out the middleman, we’re actually empowering every player on the buyer chain, because fraud and counterfeit … hurts the buyer chain itself, and everyone pays a price for it,” Scibetta added.
Despite the differences between the two sectors, a similar approach can be taken to blockchain in financial services.
Philippe Denis, chief digital officer at BNP Paribas Securities Services, drew attention to the bank’s strategic partnership with the direct investment platform SmartAngels. The pairing is intended to allow private companies to issue securities on the SmartAngels private market, allowing them access to a secondary market using blockchain.
According to Denis, BNP Paribas and SmartAngels are identifying niche areas of the industry that, so far, have been relatively untouched by technology, such as unlisted stocks.
“There was an opportunity to bring value to these kinds of activities,” he said.
“People then are going to use the blockchain not to disintermediate or to disrupt the market, but to use new types of technologies … to help the market to be more free and more efficient at the end of the day.”
Sean Murphy, partner and blockchain practice lead at Norton Rose Fulbright, suggested that the law firm is being actively approached by clients looking for blockchain solutions in areas such as post-trade settlements and identity.
Murphy also highlighted his interest in the “concept of central banks potentially issuing their own digital currency”, which he said could be “a pretty profound moment”.
The consensus appears to be that, rather than disintermediating sections of financial services, blockchain should actually be viewed as a solution to previously un-solved issues.
Gavin Wood, founder of blockchain technology provider Ethcore, suggested that one such issue will be that of provenance and supply chain tracking, “mainly because it’s already a latent problem”.
He said: “It’s not something there is a huge amount of regulation around; it’s not something that there is a vast number of incumbents that have offerings that can protect their territory already.”
On the other hand, while the technology is young, the industry should perhaps keep an open mind to the existing challenges blockchain could potentially address.
Scibetta said: “We’re still breaking out in a small market. The landscape of the technology will be changing dramatically in the next months or years. So from an implementation point of view it’s hard to commit on something today.”
The customer’s all right
For all the possibilities blockchain brings, the developments likely to take hold are those that bring value to financial service providers and those that improve the customer experience. Ideal solutions will do both.
Riley addressed three aspects of usability: the scalability of the technology; the latency of it and the fact that one bitcoin ‘block’ is only created approximately every ten minutes; and the potential effects on wider enterprise.
With regards to the issue of latency, Woods conceded that blockchain is a nascent technology, and that in use cases such in trading and matching engines that require a turnaround of milliseconds, blockchain, currently, won’t cut it.
However, while bitcoin blocks are slow in the making, the Ethcore product Ethereum, which Woods called a “second generation blockchain”, can create a block every 15 seconds.
Woods said: “As you move to more semi-centralised architectures where, maybe, everything is sitting in a single data centre because it’s actually a consortium change, I think we can reduce block times even further, probably into the sub-second.”
He added: “In terms of latency I think it’s early days, but I don’t think it’s a sizeable problem.”
Woods also accepted that scalability could be a potential issue, suggesting that ideally, transactions would be split and directed around the network, coming to a “magic consensus” where “everything works perfectly”.
In computer science, he said, such networks have been in use for several years. The challenge is “trying to apply those same principles with some degree of decentralised consensus”.
Finally, on the issue of creating enterprise-ready solutions, Woods suggested that as blockchain is a decentralised technology, there is no single point of failure or single point of control.
By definition, therefore, blockchain removes some of the worries that businesses face in the everyday.
He added that the aim is to “remove this notion of mining and get rid of all this stuff from the public chain … and actually boil it down to the bare essentials.”
While Riley pointed out that solutions should not come as a replacement to existing infrastructure, but in niche areas of the market where “needs aren’t currently catered for”, Murphy agreed that consumer applications should be at the forefront of companies’ plans.
In fact, Murphy suggested that in ten years’ time, “most consumers won’t even know they’re using distributed ledger technology”, and that this will be the real measure of success.
Regulation, regulation, regulation
For a technology in its infancy, there is some debate over how harshly blockchain should be regulated, and what such regulation could, or should, entail. However, Murphy suggested that some of the hesitation to adopt distributed ledger solutions comes from inside institutions, not from regulatory barriers.
Currently, the majority of firms are in a ‘proof-of-concept’ phase, as innovation teams explore and experiment with the possibilities. “Before you can move from proof-of-concept to deployment phase, particularly if it’s a financial institution, you have to get, at that point, approval from your legal team, your regulatory team, your compliance team,” said Murphy.
“They, understandably, will want to really understand what the implications of the use case, or implications of the technology, are and satisfy themselves about the legal, regulatory and compliance issues.”
Murphy went on to suggest that, in fact, regulators such as the Financial Conduct Authority in the UK are waiting for companies to present potential applications of blockchain before they consider what their response may be, a “great open-mindedness on their part”.
Ultimately, the technology is still simply a tool, and regulators will be unlikely to impose any restrictions on the blockchain itself. Rather, they will focus on the way in which it is used, and whether these activities would typically be controlled.
Equally, Murphy pointed out that regulators could benefit in their own right, using blockchain for monitoring transactions, for example, or for ensuring compliance with anti-money laundering rules. He explained: “Regulators have a two-fold interest in distributed ledger technology, both in terms of [the fact that] the entities they’re regulating use it, and also in terms of [the ways] they can use it themselves.”
Building on this, Riley agreed that regulations should be appropriate to the use case at hand, pointing out the differences in regulatory requirements between financial contracts and currencies, digital or otherwise. If the blockchain is simply serving as an enabling technology, “it won’t be regulated as a financial service provider.”
While bitcoin and other crypto currencies may have been at the centre of the hype for a time, institutions are now looking beyond the concept of financing in itself and paying more attention to the technology that makes it work. And if they’re not, they definitely should be.
Woods said: “The important thing about bitcoin is not the currency, it’s the underlying technology that allows there to be a currency at all,” while Denis summed it up concisely, instructing attendees to “forget currency; think protocol”.
However, no matter how many initiatives are underway, few are outwardly peddling blockchain solutions. It is still a relatively unknown entity, and no firm has yet stuck its neck out to become the first mover. Riley pointed out that it is currently difficult to identify any front runner in the distributed ledger race, suggesting that they may be wary of risk to their current operations, or more importantly, their reputations.
There is no real rush of firms “hoisting [a] flag up the totem pole”, commented Riley, adding: “I think there’s a good reason that lots of the start-ups and lots of the enterprises are operating in stealth mode.”
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