Blockchain & the future of finance
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Blockchain is hardly new, but it’s certainly being talked about a lot more – and in increasingly excited tones.
What is blockchain?
For those unsure as to exactly what blockchain is or how it works, here’s a quick breakdown:
Blockchain works as a digital ledger of transactions, agreements, contracts and just about any transference that has to be independently stored, verified and recorded.
It works by digital information put together as “blocks” being housed and distributed across any number of separate computers, from a few to a few thousand sometimes.
Any time a new action or transaction occurs it creates a new block of information that is bound together into a “chain” using complex algorithms.
Lots of different computers carry out this encryption process known as “hashing”, and if all the computers agree on the mathematical answer, each block is then given a unique digital signature.
The ledger itself then simultaneously updates everyone on the network with the new hash of the transaction that can’t be amended or altered, only added to.
Why has that gotten everyone so excited?
Because the algorithms have to match and the new chain of data is shared simultaneously across a network, it means it’s much more difficult for a would-be hacker to change or manipulate the data. It’s also much faster, and for its banking applications at least, it cuts out the need for the middle-man verification.
Is blockchain just for finance?
Blockchain may have started out as a mechanism to support bitcoin and it undoubtedly has natural applications in the world of finance and trading, but the system of storing and sharing information has plenty of other applications. Just recently CB Insights shared a list of the top 20 industries where it could be used with great effect, including music, voting and cybersecurity.
But it’s the financial implications that’s really got people excited. Most recently because Bank of England’s governor Mark Carney has come forward as a strong advocate for fintech and blockchain, announcing that the Bank of England are piloting a central bank digital currency project using blockchain.
At a time when we need forward thinking and innovative ideas to bolster our Brexit economy, he has stepped up as one of the most innovative and influential figures.
Two weeks ago in his speech at the Lord Mayor’s Banquet in London, Carney discussed the benefits of fintech and of using Distributed Ledger (DL) technology, in other words a blockchain mechanism, within the central banking system.
One benefit he highlighted was that “Distributing the ledger means multiple copies of the system. It can continue to operate if parts get knocked out. That removes the single point of failure risk inherent in a centralised system.”
Back in 2014, the current settlement system used by the BoE experienced an outage lasting approximately nine to 10 hours. This caused “considerable inconvenience”, and according to a review by Deloitte, 51% of housing transactions were delayed by several hours as a consequence, so it’s easy to see why blockchain is so appealing.
Another benefit mentioned in a paper the Bank of England published recently, stated that replacing 30% of the currency in circulation with a central bank digital currency would “permanently raise GDP by as much as 3%” and “substantially improve the central bank’s ability to stabilize the business cycle.”
The BoE are not the only bank who are looking into using a DL, both UBS and Barclays are also considering similar usage. In fact, the company R3 have 11 banks in its consortia who have already tested a private blockchain open-source solution.
Of course there is a risk that with faster transactions, in the instance of a drop in the markets, people could withdraw their funds much faster, increasing the risk of market panic. But the benefits in this case would appear to be worth the added risk.
Could blockchain be utilised by the crowdfunding industry?
The simple answer is yes, definitely, there are several applications across all areas of altfin and P2P lending where a blockchain solution would be of benefit. There are already a few finance groups looking into its application, including French investment platform Smart Angels, in partnership with BNP Paribas Securities Services.
Within CrowdBnk we are already considering how blockchain as a DL solution could be used to benefit our service for both small businesses and investors. We are optimistic that in time the blockchain system will become regulated and could replace current system we use to further improve our alternative finance platform.
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CODE Investing has entered into a strategic collaboration with City of London Group to originate SME loans
CODE Investing has entered into a strategic partnership with BNP Paribas Asset Management to originate SME loans.
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