The benefits and also the malevolent use of the Bitcoin peer-to-peer crypto-currency is rarely out of the news.
Recent press coverage around the most recent individual's claim to be the creator of Bitcoin, Satoshi Nakamato, once again highlights the mystery and intrigue around the development of Bitcoin. However, big business has woken up to the potential value of blockchain, the distributed ledger technology underpinning Bitcoin that has the potential to revolutionise global commerce.
Larry Summers, the former US Treasury Secretary, has recently stated that the use of blockchain is 'overwhelmingly likely' to change the financial industry. It is suggested that over a billion US dollars have been invested in blockchain start-ups, reflecting the potential market seen by investors.
Here in the UK, the use of third party intermediary clearing houses is ingrained in our financial service systems. Services such as the CHAPS payment system, providing same day bank transfers, the more recently launched Faster Payments Scheme, providing real time interbank payments for low value transaction, the use of card scheme-backed payment cards, such as VISA and Mastercard, and the trading of shares via the London Stock Exchange, all involve the use of a clearing house to seek to identify the transacting parties and minimise fraud. The use of clearing houses carries an administrative overhead and an associated cost. For example, a CHAPS payment will typically incur a £35 charge and a credit card payment will cost the retailer several per cent of the transaction value, a cost which is ultimately passed to the consumer.
The key benefit of blockchain technology is that it enables two parties to transact directly with each other without the involvement of the third party intermediary, saving time and cost and therefore making micro payments much more viable. While the card schemes and merchant acquirers have been offering lower transaction charges for contactless payments in order to accelerate adoption of the technology, the use of blockchain technology to support peer-to-peer transactions must give the card schemes significant cause for concern. Indeed, whilst card schemes are quick to highlight the potential weaknesses of blockchain, the card schemes are also exploring how the technology can be used to support the remittances business.
A further benefit of blockchain is the distributed ledger technology provides an indestructible digital record of actions. A helpful analogy used by others is that blockchain is like a beaded necklace, each bead (or 'block') is a record of an action (whether a payment or otherwise) and that action is proven by the beads immediately before and after it. Within the payments industry, blockchain effectively proves where the money came from and where it has gone to (albeit the identity of the individuals who have received and sent payment can be hidden, hence the use of Bitcoin for illegal activities such as the well known "Silk Road" online black market). As the ledger of transactions is distributed in duplicate to the computers of users around the world and updating in real time, that ledger is not susceptible to attack in the same way as a single ledger held by a single institution.
Blockchain can be used not only for digital currency, such as Bitcoin, but also to enable individuals to verify their identity by capturing information such as the individual's birth certificate, National Insurance number, passport details, driver's licence and other pertinent information to enable the individual to create a Legal Entity Identifier (LEI) to readily prove their identity, dramatically speeding up the "know your customer" and anti-money laundering identification checks, so that signing up for financial products can be much more straightforward. This also strengthens the enforceability of electronic signatures, an increasingly important process in our digital world.
Whilst the press have readily leapt on stories showing the use of blockchain technology for illegal purposes (such as the use of Bitcoin on the Silk Road), there are many possibilities for using this technology for positive socio-economic benefit.
Being able to prove your identity using blockchain could make significant inroads into getting the 'unbanked banked'. Immigration is a key issue facing Europe at present and getting immigrants housed, into work and integrated into modern life, including obtaining a bank account, could be made so much more straightforward if the individual has a personal blockchain to prove that individual's identity.
Only a few weeks ago, BlockCrushr Labs also unveiled a solution using blockchain technologies to ensure that funds given to buy meals and other necessities are spent for their intended purpose. The solution addresses the reduction in the number of people who carry cash, by allowing people to anonymously load "digital food wallets" of homeless people through common payment methods such as smartphones, credit cards and Paypal. The "smart wallets" can be spent securely at participating food retailers.
On a less serious note, blockchain is triggering the proliferation of digital currency such as the recent launch of 'Sweatcoins' awarded using an iPhone app to track the user's steps. Reminiscent of the introduction of in-car telematics to reduce car insurance premiums, Sweatcoin's co-founder is in talks with health insurers about using Sweatcoin stats to calculate health risks for policy premiums.
Whilst blockchain technology may not be straightforward for the consumer to understand, the resulting convenience and ease of use means that mainstream adoption can only be a matter of time. Stay on that station platform, the blockchain train is arriving soon.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.