Why blockchain matters

Blockchain could become the ‘go to’ technology to settle financial transactions and carry out day to day business processes. Can you afford to ignore it?

Fintech geeks have been banging on about blockchain for years as the next big thing to transform the way we do business. Now it’s beginning to happen.

While many senior executives may be secretly hoping this much hyped and little understood technology will fade away into oblivion, blockchain has the potential to completely transform the financial world as we know it.

This is not just the realm of fintech start-ups. Major financial institutions and some of the world’s biggest companies are investing heavily in blockchain, convinced it’s the future.

An eye-opening 90% of major North American and European banks are said to be exploring blockchain solutions according to a recent article published on Forbes online. Research giant Gartner predicts the business value-add of blockchain will grow to $176 billion by 2025 and will exceed $3.1 trillion by 2030.

What is blockchain?

Blockchain is a form of Distributed Ledger Technology (DLT) comprised of digitally recorded data. It is a set of algorithms that allows transactions to be verified electronically over a network of computers without a central ledger.

The technology allows anything to be recorded, including financial transactions, contracts and physical assets. Each record or block can be seen by everyone in the chain but can only be edited by the person who owns it, via a private key. When a block is changed, the entire system is updated.

Benefits include:

  • No intermediaries
  • Reduced complexity
  • Faster transactions
  • Increased security

Originally designed for the cryptocurrency Bitcoin, blockchain is now used to underpin many new and emerging cryptocurrencies, each promising faster, easier and more secure payment systems than the traditional form of government-guaranteed money and bank-controlled payments.

Bill Armstrong, International Tax Partner at US accounting firm Moss Adams, says: “Cryptocurrency is just the pinhead of the technology behind blockchain. When a company sells something, there will be no purchase order or invoice. Instead, the customer will pay with a digital currency and they will have a private key to access data confirming the sale, payment, time and when it is received.”

How is blockchain being used?

Arguably the most interesting use of blockchain to date is Ethereum, a decentralised platform designed to run ‘smart’ contracts and fuelled by the digital currency called Ether. This is currently the second biggest digital currency in use. Like Bitcoin, it is growing in both popularity and value.

Bill Armstrong believes Ethereum, not Bitcoin, will be the key driver behind blockchain’s development. “Everybody thinks blockchain is only about Bitcoin but it isn’t. The real story is Ethereum,” he says.

The creators of Ethereum claim the technology allows applications to run on a custom-built blockchain exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference. The technology has attracted interest from global companies who share knowledge via a new organisation called the Enterprise Ethereum Alliance.

In another blockchain development, a new “utility settlement coin” has been created by Switzerland’s UBS bank. This is due to ‘go live’ in 2018 as part of a multi-bank project involving Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street.

Commenting in the Financial Times, Lee Braine, from the chief technology office of Barclays’ investment bank, said: “The distributed ledger is one of the most innovative technologies out there. From reducing risks to improving capital efficiency in financial markets we see several benefits of this project.”

How will it change business?

Anything recorded on a blockchain cannot be altered and there are records of where each asset has been. This should, in theory, promote trust between participants. Another attraction is the fact everyone in the network has the ability to access data in a secure way and nobody has overall control.

“Because no one person controls a blockchain, it becomes super, super powerful,” Bill Armstrong explains. It’s still early days but in future blockchain could reduce the time needed to access information, settle disputes, decrease overheads and alleviate risk of collusion, tampering and fraud.

This article was written for Praxity Global Alliance, the world’s largest alliance of independent accounting firms.