End of January 2016, the UK Government released a report on the opportunities of Blockchain and the importance for the British economy and government to make full use of these opportunities. The UK Government wants to align with investments and R&D taking place especially in the financial sector. In the Financial Times, articles on Blockchain are being released frequently discussing the possibilities and threats of this new technology. High time the subject gets more attention in Belgium as well and not solely in the financial sector.
Block chain promises to be equally disruptive as the advent of the internet and has the potential to disrupt all markets where business goes through established intermediate, regulatory or validating players. Think of banks, notaries, public registries, money transfer,…
Kunstmaan is experimenting and exploring the possibilities of this new technology.
But what is blockchain and how will it affect us?
Blockchain: equally disruptive as the advent of the internet.
Blockchain is an internet technology that was already around in the previous decade. And that’s quite long in ICT terms. It’s a decentralised internet-based ledger (a log book that structures and stores all transactions) which registers and enables the exchange or trading of digital money (cryptocurrency). Bitcoin is the most well-known example of a cryptocurrency, already dating from 2009. However, Blockchain is much more than digital currency. The decentralised ledger is ultimately able to facilitate and validate transactions involving anything that may have value. The fact that it is decentralised means that no intermediaries are necessary and transactions can occur faster and without interventions or commission, reducing the number of intermediate and back-office steps.
A totally new way of doing business is just around the corner. For the Financial Times (“Ten developments in digital finance”, 13 December 2015), Blockchain ranks number two on the list of expected developments in digital finance. According to a survey by McKinsey (“Beyond the Hype: Blockchains in Capital Markets”, December 2015) Blockchain is highly promising: fast transactions at lower costs with fewer intermediate steps and lower risks of fraud, a unique consolidated track of all past transactions (who, what, when), etc.
In the meantime, banks are not biding their time. R3 is a worldwide consortium of over 40 banks around the world which focuses on R&D related to the use of Blockchain as part of the financial system.
There’s still lots of hype and ambiguity, but the impact of Blockchain may be as disruptive as the advent of the internet itself. And just like when the internet arrived, it’s difficult to fully understand today what the effects of Blockchain will be in the near future. Drawing parallels with three existing phenomena may help us understand.
1. The money parallel: Blockchain delivers a digital trading protocol
Money was invented to facilitate trading. Money is in fact a generally accepted “trading protocol” to facilitate and enable transactions. It expresses the value of a good in a simple and generally accepted way. The introduction of paper money was actually quite virtual. It was literally a promise that the note could be exchanged for the value ‘in gold’ at the central bank. The value of money was linked to the physical underlying gold reserves for a long time. The promise on the piece of paper was sufficient for everyone to trust the financial system. The link with the central gold reserves gradually disappeared and the significance and value of paper money became even more virtual.
Blockchain translates that existing and accepted trading protocol to the digital world. It’s a digital protocol to facilitate transactions.
2. The internet parallel: Blockchain makes intermediaries and central institutions redundant
Before the internet, knowledge and information were basically centralised in libraries and universities. From there it was distributed via books and articles. The internet decentralised all of this. The internet provided a “communication protocol” that enabled information that was distributed worldwide on computers and servers to be linked: knowledge is collected and managed via an infinite network of nodes and in a decentralised manner.
Blockchain applies the concept of a decentralised, ‘infinite’ network to performing and managing transactions. The ledger that registers which transactions occurred and for which value, is no longer managed centrally ‘at a single location’. The ledger is modified continuously at the different nodes in the network. The ongoing checks and corrections between all these distributed ledgers provide the guarantee for the transactions and value.
Blockchain makes central institutions and recognised intermediaries redundant by using the existing network of nodes on the internet. It makes transactions reliable, transparent, faster and cheaper, and consequently more suitable for the real global economy.
3. The Wikipedia and Wikinomics parallel: the power of the network
Wikipedia is an excellent example of what the internet means for knowledge and information. Knowledge used to be collected mainly in outdated books which were distributed through central hubs. Today, this knowledge is updated by an infinite network of unknown authors who contribute and make corrections on a continuous basis.
However; Wikipedia was initially also conceived as a centralised system. The ambitious plan was to make the ultimate internet encyclopaedia with contributions from ‘the world’s smartest people’. The project (Nupedia) wasn’t very successful until the founder, Jimmy Wales, opened it up to everyone. Wikipedia is known as the encyclopedia for and by everyone. A survey carried out by Nature in 2005 revealed that the most prestigious traditional encyclopaedia, Encyclopaedia Britannica, contained as many errors as Wikipedia, but the mistakes in Wikipedia were corrected by its users within an average of four minutes.
“Wikinomics” (Tapscott & Williams, 2007) expands this idea to the entire ‘new economy’. We are actively connected with so many people on the internet causing the law of large numbers to take full effect: there will always be more smarter people out there than in your own physical organisation or environment. The ‘crowd’ is so large and active at all times, and so wide and dynamic, and gives rise to ongoing co-creation, validation and correction. This results in a higher probability of correct information than when the information is managed by one single (private or public) authority. It may seem awkward but it is in fact highly logical.
Blockchain follows the same reasoning. A ledger which is distributed across the entire internet will automatically be more correct than a register left in the hands of a single or limited number of established institutions.
Addressing global needs
In its simplest incarnation, Blockchain-technology has a lot to do with money. It is money. It enables fast digital payments around the world, and easier and cheaper money transfers. We can illustrate that Blockchain is not just a hype for geeks with one of the largest current world events: the migration flows. These are the times of worldwide migration ... and worldwide money transfers. More money is being sent to developing countries through money transfers (remittances) by migrants than via centralised development aid (just another sector, where the decentralised and informal network is moving faster than the central authorities...).
Money transfers by migrants to their home countries are currently estimated to be three times higher than of official aid for developing countries, according to figures of the UN organisation IFAD (International Fund for Agricultural Development)). In 2013, worldwide money transfers by migrants to their home countries amounted to 430 billion USD.
“We must ensure that this money can be sent home cheaply, and more importantly, that it contributes to building a better future for the poorest rural communities in the south” (K. F. Nwanze, chairman of IFAD, 2015).
Many migrants and their family and relatives at home do not have bank accounts, and money transfers through intermediaries are often very expensive. IFAD estimates that 70 billion euros extra would be available worldwide for investments if working migrants and their receiving families had more options for using the funds.
“Remittance (Money Transfer Service) has always been dominated by companies like Western Union and MoneyGram. But new players and startups are trying to make the scenario competitive by offering different forms of money transfer services. With the advent of digital currency and Blockchain technology, companies are not holding back in adopting currencies like bitcoin to enable remittance services. With this service, companies are trying to solve multiple issues such as high transfer cost, limited money distribution methods, limited brand options, limited ways to deal with money, etc. The cryptocurrency market is still in a nascent stage to reach the migrant population masses but promises massive potential in the future.” (Let’s Talk Payments, 23 okt 2015)
Link this with the efforts of players such as Facebook and Google to give the whole world internet access and to put four billion more people on-line. In combination with Blockchain, people and companies from every corner of the planet would be able to carry out on-line transactions fast, securely and at a low cost.
Thanks to technology, this could all be done without the traditional centralised, intermediate and regulatory entities. The latter could become an anachronism considering the current possibilities of Blockchain. You can compare it with what Estonia did after the fall of the Eastern bloc. They had no pre-digital legacy systems but were able to reverse their disadvantage into a leading position in comparison with Western European countries. They skipped the phase of a modern but pre-digital government and financial administration.
“This historical accident, which left Estonia without any banks, meant it had to establish new systems with new people and technologies, enabling the country to leapfrog nations with established back-office systems for finance and government.” (Financial Times, june 5th 2015).
In this context, it shouldn’t be surprising that Estonia is already largely experimenting with Block chain pilots, a.o. in the domain of identification and authentication (“Estonian block chains transform paying, trading and signing” in “Distributed Ledger Technology: beyond block chain”, 2016, Government Office for Science, London)
The new way of doing business with Blockchain
And it’s about a lot more than money transfers. Further down the road, Blockchain will be used for the decentralised ‘regulation’ of the financial economy. The decentralised ledger system will be used to enable and record transactions in shares, funds, bonds, loans, as well as property rights. This will cause a disruption of all established institutions whose essential purpose (or rather ‘cause’) is often the ‘indisputable’ recording of the rights, and facilitating and ensuring the transactions thereof. This represents a revolution for (central) banks, land registry and registration services, notaries, lawyers, etc. And it’s just around the corner. Financial institutions are testing blockchain technology today. R3, the worldwide consortium of 30 banks, was set up to focus on R&D in the use of the blockchain in the nancial sector.
And more drastic revolutions can still be expected by focussing on the decentralised ledger and the power of decentralised validation and registration. This will enable us to go beyond the financial domain. In the public sector a lot of processes (and personnel) are established to register, guarantee and audit transactions. Blockchain holds the promise to guarantee and register the (transactions of) property of parcel, house, car, idea, patent,... Blockchain can guarantee the right distribution and use of allowances and subsidies. Healthcare is another sector where opportunities are traced e.g. to record medical communication and claims between patient, doctors and social security.
The UK Government report lists several opportunities for Blockchain use in the public sector, a.o. public savings through prevention of fraud and mistakes in socials security: the Department for Work and Pensions pays out roughly £166 billion in welfare support per year. Because of fraud and mistakes some £5 billion is overpaid, or 3%. The same exercise could be done in Belgium. (“Chapter 6: Applications in Government” in “Distributed Ledger Technology: beyond block chain”, 2016, Government Office for Science, London)
Risks related to Blockchain
Will such a decentralised transaction network bring new risks? The established intermediaries are not free but at least they should provide security. They will be replaced by an anonymous network of decentralised nodes. Criminal forces will also discover the opportunities of this new technology, just like they did when the internet came along. We will have to adapt once again to these new threats. And without hesitation or delay because there’s no stopping Blockchain trade, as the advantages will be too big.
And we shouldn’t assume that the old way of doing things is by definition the safest way. The comparison with Estonia and its digital lead applies here as well. “Estonians have used their digital signatures 218m times since the scheme’s inception in 2002, with no serious breach of security so far.” (Financial Times, June 5th 2015)
The mentioned survey by McKinsey (“Beyond the Hype: Blockchains in Capital Markets”, December 2015) reveals many benefits in terms of the audit trail, verification of transaction information and ownership, etc. The survey also discusses the limitations and challenges of the implementation, including energy consumption (a logical consequence of the built-in algorithm complexity that requires lots of computer power and energy).
Blockchain trade: doing business in the new global economy
Blockchain is a technology that makes trading easier and as such it is much better adapted to the ongoing globalisation and digitisation. It undermines the registration and validation processes of a previous age and replaces them with methods that use the new digital possibilities.
It opens a totally new perspective for global trading based on the decentralised, intuitive and mobile network of Blockchain: fast, secure, simple, inexpensive, validated and registered transactions with anyone in the world using the worldwide, decentralised network provided by the internet.
The financial sector is actively pursuing the opportunities, but is not the only sector. Use-cases from multiple sectors start to exist. The UK report advises the UK Government to be quick in taking a leading role in the use of Blockchain in the public sector and in keeping the momentum and grasp the opportunities, a.o. through research. The report advises to start pilots in the domain of social security and local government.
Kunstmaan and the blockchain
Kunstmaan pioneers in this new technology and the opportunities of Blockchain trade.
Kunstmaan is working together with Bolero (KBC Securities) in a pilot program regarding the Blockchain technology. Kunstmaan has already developed a working web interface and mobile application which is built on Blockchain technology, and which makes it possible to trade unlisted securities (shares and bonds) in a virtual currency via a private Blockchain, hosted in 3 continents (USA on Amazon AWS, Japan on Azure, Europe on Digital Ocean). Besides the technological features, the demo also illustrated the economic value: the possibility of a new market in unlisted securities. The demo was shown during the KBC inspiration days client 2020 in the beginning of December 2015.
The technology aligns perfectly with the history of Kunstmaan. The Belgian communications, design and digital development agency has been a technological leader from the outset in 1998. The agency already focussed on communications and technology in 1998. The agency has continued to play a pioneering role.
For example, Kunstmaan developed the open-source Kunstmaan CMS bundles, based on Symfony 2, to create and manage websites easily and intuitively. In the meantime it is being used in nearly twenty countries around the world.
Kunstmaan developed the highly innovative Bolero on-line investors platform in collaboration with KBCS.
The on-line crowd-funding platform, Bolero Crowdfunding, was also developed with KBCS and recently won the EFMA Accenture innovation award in a contest of 500 projects from sixty countries.
Together with the on-line insurer Corona Direct, Kunstmaan built the first platform where you can actually conclude an insurance policy completely on-line. Recently Kunstmaan built the CARO-app and website for Corona Direct to support their research into the impact of rewards and coaching on driving behaviour.
In line with its tradition of active participant within the open source communities, Kunstmaan established the meetup-group Blockchain Vlaanderen to exchange ideas and expertise on the subject
We have made this article available as PDF for your reading pleasure. This paper is also available in Dutch.