Blockchain explained

We began the year by announcing we had acquired startup blockchain platform BC Gateways, founded by Andy Hutchings Broso and Gordon Little. With so much written about the technology, including its potential in managing the current coronavirus epidemic, how and why is it being applied to real use cases in financial services? We spoke to Andy to find out.

Andy, thanks for joining us today. Let’s start with the basics - what is blockchain and why should we care?

A: At the most simple level, blockchain is a record of data between people or organisations on a shared network. The 'block’ represents the data stored and the ‘chain’ is the network of blocks and together they ensure the data remains unchanged. If anyone tries to change a record by altering the blockchain that incidence will be out of sync with the rest of the network, so it’s almost impossible for one person to hack or fraudulently change the data.

That’s important for everyone who needs to prove ownership of something or relies on accuracy of data. Blockchain can prove that whatever one party downloads is identical to the data that was uploaded. It provides a direct line of sight to the person who published the data, providing an audit trail to enable many risks to be mitigated.

There’s been so much written about blockchain over the years. It’s hard to separate fact from fiction. What is the history in brief terms?

A: Originally, with digital currencies like Bitcoin, people just wanted to avoid the FX issues, restrictions and costs when dealing with all kinds of central counterparties, such as banks, when trading on the internet.

An enigmatic character, or group, known as Satoshi Nakamoto developed the cryptocurrency bitcoin and to prevent fraud, the first blockchain. So blockchain’s original use was to underpin the bitcoin, and the two became joined in the common consciousness. Even today you hear them linked together - but they are fundamentally not.

As blockchain became more widely understood, the technology became skewed by two opposing forces. On the one side you had a new generation who wanted to revolutionise and be quite anarchic - on the other side you had the banks trying to work out how it could be used.

If blockchain is incorporated into the infrastructure, it really has the potential to underpin a heap of efficiencies, and reduce needless costs through automation.

Why is it becoming more relevant to our industry now?

A: We are seeing broader adoption across the financial services industry because blockchain helps provide trust. People are realising that blockchain technology can help them move data across borders or industries without any compromise to the data’s accuracy or security. Lots of parties can track and trace where their information is coming from. And with a private blockchain, everyone can share the responsibility for the integrity of the data.

How does this make life and business better for the industry and our clients?

A: Our blockchain operates in the back end of financial services, in the administration and management of investment funds. This is a place where lots of people handle and pass around data, and at the moment this work is largely manual. That brings with it issues of accuracy and risk. Thinking about pricing data inaccuracies over the long term, the consequences could be huge.

At the moment with a pricing feed distribution is inefficient - even chaotic. If it was automated using the blockchain it could be available to all the stakeholders simultaneously, in real time accurately and audited.

If blockchain is incorporated into the infrastructure, it really has the potential to underpin a heap of efficiencies, and reduce needless costs, through automating tasks you couldn't before.

From there, you can start to build many other high integrity services off the blockchain because the trust in the data is so high. What business owner doesn't want to operate the same quality services at a lower cost base?

So do cryptocurrencies like bitcoin still fit in?

A: That is a question the central banks need to answer, and Facebook’s Libra will probably bring that to a head. However, if you build the infrastructure then transactions of information or services can be remunerated with any kind of currency: be it a crypto or other kind of token from say, the bank of England. As long as it has global application and does not require FX, why not a crypto? The whole thing is evolving.

In the future there may not be limitations to blockchain's value across multiple environments.

What is the difference between blockchain and Distributed Ledger Technology (DLT)?

A: Generally, with DLT there is a tendency to use the technology but for it to be less mutual and more centrally controlled. We have a private and a public element to our blockchain which means every player has a partial responsibility for it. DLT can be a central authority using your computing power to build a blockchain but not actually sharing the responsibility for the integrity of the blockchain.

Are there certain regions or sectors of our industry that will get more from this technology than others?

A: I think there are huge benefits for many industries, not just financial services. In fact, anywhere there are high-risk transactions in a trustless environment, dependent on legacy processes, especially if they are underpinned by manual and mechanical processes.

We are not yet at a place where blockchain can solve and process high volume financial transactions. In the future, there may not be limitations to its value across multiple environments.

We’ve recently heard that blockchain technology could help combat the impacts of coronavirus. What’s your take on that?

Well, why not? There is certainly the potential for blockchain solutions to help track pharmaceutical drug supply chains and medical supplies, even hold medical data which can then be shared among insurers or other bodies tracking and monitoring infection rates.

Iress acquired BC Gateways in January 2020. If you want to hear more about what this means for your business contact our team here.