What is blockchain?

What is blockchain?

Blockchain is a new piece of financial technology that has got experts excited with its potential to transform transactions. Imagine the paperwork for all our transactions, scattered everywhere, easily lost and susceptible to fraud. Blockchain stores these deals in an unalterable digital space where anyone can access them to track transactions. It is not held in a single location but spread across multiple networks.

It is rising fast, with over a billion dollars invested in blockchain start-ups since 2012¹. One key advantage is that it ensures transparency in the financial services industry. The distributed ledgers that store the blockchain record can be viewed by anyone without giving away confidential information. This means that if somebody wants to sell a product, the seller can find out if the buyer has the funds at their disposal.

This helps to solve the issue of trust, as third parties are no longer required to verify the validity of transactions. Flows of money can be reconciled in real time. This improves operational efficiency as it reduces the amount of paperwork and people to manage the process. Each transaction holds information about its history, potentially transforming the auditing industry, as transparency becomes the norm. The unalterable nature of the ledger means that fraud is much harder.

Blockchain has become closely associated with bitcoin. Bitcoin is based on the principle of virtual currencies that use these systems to track currency exchange. However, blockchain has evolved beyond being just a platform for virtual currencies, with the negative associations of Silk Road and the illegal dealings in guns, human trafficking and drugs of the dark web. It is now a software protocol that can facilitate a wide range of types of transactions and innovations.

An interesting example of how blockchain could be applied to the financial services industry is through smart contracts². These digital contracts use blockchain to automatically execute its clauses when they are activated by a signature. For example, if a person is looking to sell a product when the market price rises above a certain value, the contract can automate this price. Its foundation is a layer of logic that can include functions such as ‘if this, then that’.

A good case study of how the blockchain has been implemented in real businesses is the diamond industry. It is one notorious for the value of its products and the importance of keeping good records of authenticity and ownership to avoid fraud. However, the documentation for the industry has traditionally been unreliable, with records kept on paper, which is easily lost.

Everledger is a fraud detector system for the diamond marketplace that uses the blockchain to tackle this issue. It records the serial number of each product on the distributed ledgers, which allows interested parties such as the law enforcement agencies and insurance companies to access and track the valuable gemstones. Over 800,000 diamonds in circulation are being tracked using their systems.

The political impact of these developments has already been felt and will increase. Virtual currencies are not reliant or attached to a single country. This weakens the role of monetary policy, which has traditionally affected the rise and fall of currencies. London mayoral candidate George Galloway included blockchain in his policies when he ran in 2016. He suggested using the system to record the city’s budget so that citizens could see where money has spent.

Nevertheless, blockchain has many potential applications in the financial services industry and beyond. It could be used to verify the ownership of property and manage our personal identities and finances. Social enterprises could use it to verify the use of foreign aid to ensure it isn’t used corruptly or use the ledgers to check that supply chains and industrial processes satisfy criteria such as human rights and standards such as Fair Trade.

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