The disruptive nature of Blockchain and its impact in financial services was recently presented at GIBS by Farzam Ehsani, leader of RMB’s Blockchain Initiative.
He also helped establish The Foundery, RMB’s FinTech unit and believes that blockchain technology will become a new and necessary normal in our lives just like the internet.
The way we store and exchange content was completely democratized by the internet and so too blockchain will completely change the way we store and exchange value using digital currencies like Bitcoin.
The internet has taken nearly three decades to become a central part of daily life and Ehsani believes the same will happen with blockchain, but it might be even quicker and potentially more disruptive.
Implications of Blockchain on Banking
In 2015 the global payments industry was worth $1.7 trillion, and comprised 40% of total banking income, earned because banks are the trusted third party in most payments transactions.
Banks play an important role in the exchange of value, often cross border and involving a variety of complex financial instruments, different currencies and payment mechanisms.
Ehsani explains that sending R1m to New York might cost you R1000 and take a few days but could be done in ten minutes with blockchain and cost you only R6.
Such a process would also not go through a financial institution and thus represents a huge threat to the global banking system; through the blockchain, payments have become significantly quicker and cheaper.
It’s worth understanding how such a disruptive concept actually works; although its end user experience is simple and quick, the underlying technology is extremely complex.
The blockchain is a series of connected “blocks” of data containing records of transactions, the most common type in use at present is Bitcoin transactions.
These interconnected blocks form a “chain” of data which is effectively a database that is decentralised, fully distributed and publicly visible, thus open for scrutiny and acts like a ledger.
In a traditional non-blockchain transaction, usually there is a trusted third party such as a bank that independently verifies the transaction; with blockchain it is the network that verifies the transaction thus not requiring the third party.
Parties in the current global financial system would need to change their business models if Bitcoin or a more popular digital currency becomes widely used.
If this happens it could reduce the use of sovereign currency but the central and consumer banks in a country would need to include it as a legitimate form of exchange.
South African Bitcoin Exchanges
In South Africa there are already bitcoin exchanges and online websites can accept Bitcoin payments through Payfast.
Money can also be sent from other countries to a Payfast account holder in South Africa and consumers are already adopting these cheaper alternatives to making payments.
Another reason for adoption is the democratisation of trust; Bitcoin transactions are validated by other people using their own computers rather than big institutions.
This is the genius of the blockchain, validating other people’s transactions is called mining and is the process by which transaction records are added to the blockchain, or the Bitcoin public ledger.
Bitcoins are thus not actually created or printed like real cash, they are “discovered” when computers compete with each other to successfully add transactions to the Blockchain.
This is done through a computational process of trial and error called “proof of work” to find a particular number that satisfies an equation for a particular block, which is rewarded through the issuance of bitcoin and transactional fees.
The public scrutiny of a peer network of multiple computers using the same calculation for a series of interlinked blocks creates the tamper-proof integrity of the blockchain.
The incentive to perform bitcoin mining is that for every successfully created block, which contains a set of transactions, the miner receives 12.5 bitcoins or R127,000 at the current exchange rate.
Blockchain also changes the way customer data is handled in transactions and could provide a more secure approach than regulating current banking processes. Customer data does not have to be stored in the blockchain, and its use already in South Africa is not violating any data privacy laws.
Data in the blockchain can also be encrypted and users have different types of bitcoin wallets that offer varying levels of security protocols, eg desktop, mobile, online.
These wallets still require users to manage their passwords and it is virtually impossible to deduce the ownership of Bitcoin accounts from information on the network.
Additionally, no-one owns the bitcoin network, everyone who uses it has shared ownership and so there is no vested interest in manipulating it which in turn would require oversight from a governing body.
One can think of bitcoin in the same way as email; a useful digital service which can be secured and enables users to send and receive private information in digital messages.
Bitcoin vs Blockchain
Bitcoin is the first major use case of the blockchain protocol but it can enable the store and exchange of any digital asset.
Honduras in Central America is building a land title registry using blockchain; their current system has been hacked and corrupted so they are turning to the tamper-proof nature of blockchain and the project should be complete by the end of the year.
Blockchain is achieving widespread usage by major entities; the UK government is exploring how it could enable public services and Nasdaq announced last year it would be recording trades.
There is only upside for consumers, as Ehsani concluded in his talk;
“imagine the ability of buying or selling your house in a matter of minutes, blockchain is not some crazy theory, it will be a reality in the not too distant future.”