February 18, 2016
It was the buzz at the recent World Economic Forum in Davos. Wall Street banks are pouring money into it. And Mark Andreesen has called it the most important technology since the Internet itself.
What is it? The blockchain, of course.
Created by the mysterious hacker known as Satoshi Nakamoto, the blockchain—the distributed ledger technology that underlies the Bitcoin virtual currency — has the potential to upend industries from finance to real estate to entertainment. That has Silicon Valley titans, global finance leaders and even indie artists scrambling to grasp the implications of the technology—and make sure they aren’t broadsided by it.
Tim Swanson, head of research at R3, a New York technology startup backed by a consortium of big banks, has described the blockchain as being “a bit like gluten—everybody is talking about it but no one knows what it is in great detail.”
In the simplest terms, the blockchain transfers value from one party to another over the Internet. That could be money, a share of stock, a property deed, a digital royalty—even a vote cast in an election.
Today, such transactions often pass through multiple intermediaries to be validated, cleared and processed, and are stored in central ledgers maintained by an authority, such as a central bank in the case of financial transactions or the Mortgage Electronic Registration System (MERS) for mortgages.
The blockchain distributes the validation and storage of transactions over many computers in a secure and public way, eliminating the need for a middleman. In doing so, it drastically reduces the time and cost to process a transaction to close to zero.
Alex Tapscott, CEO of Northwest Passage Ventures, an advisory firm in the blockchain space and author of an upcoming book on the subject, says blockchain technology represents the next generation of the Internet, what he calls the Internet of Value.
While the technology—both the original Bitcoin blockchain and new variations of it—has sweeping potential to transform vast sectors of the economy, says Tapscott, the first blockchain applications are taking root in two areas: financial services and creative industries such as music and media.
As a ledger system, the blockchain’s most obvious application is in finance, and banks have awoken to the threat and opportunity it poses. R3CEV, a blockchain technology company owned by a consortium of banks, has grown from nine members at its founding in September 2015 to more than 40 today. By one estimate, Wall Street spending on blockchain could reach $400 million in the next few years.
Consider stock trading. In a market where competitive advantage is measured in nanoseconds, trades can still take up to three days to settle, notes Tapscott. Blockchain-based systems could cut that to seconds or minutes. That’s especially attractive for complex trades such as derivatives, where market conditions can change before a trade is settled, creating substantial counterparty risk.
The Commodity Futures Trading Commission is studying the potential application of distributed ledger technology to the derivatives market. And Nasdaq recently conducted its first trade using the blockchain.
“Through this initial application of blockchain technology, we begin a process that could revolutionize the core of capital markets infrastructure systems,” said Nasdaq CEO Bob Greifeld in announcing the milestone. “The implications for settlement and outdated administrative functions are profound.”
Another financial market ripe for disruption is foreign exchange and cross border remittance. Nearly $500 billion a year is transferred between countries, often by people working abroad that send money home to relatives. That process is slow and cumbersome, with high fees that take a painful bite out of hard-earned savings. A start-up called Abra has created a mobile app that uses the blockchain to streamline the remittance process, allowing individuals to transfer money from one continent and currency to another instantaneously and without hefty fees.
Music and Media
By collapsing the time and cost of a transaction, distributed ledger technology paves the way for true micropayments in increments as small as a penny. Such micropayments are seen as the Holy Grail for creative industries such as music and media that have been pummeled by the harsh economics of the Internet and an outmoded royalty payment system.
Blockchain-enabled technology could allow new artist-friendly business models to flourish. For example, musicians might be paid, say, a nickel every time someone listens to a song. Journalists, likewise, might be paid a few cents every time someone reads an article. Artists, most notably Grammy award winner Imogen Heap, are exploring the use of blockchain for music distribution and compensation.
Many creative assets, from films to songs, are produced by a team, and the blockchain could make tracking and paying royalties to these contributors more efficient and transparent.
Blockchain technology is still new, and like gluten, it has received a fair amount of hype. There are issues to be worked out—such as whether blockchain ledgers will scale without being overwhelmed. But these are “implementation challenges” that can be solved, says Tapscott. Blockchain, he says, “is a big breakthrough that could ultimately change the nature of business and the corporation itself.”
Amy Cortese is an award-winning journalist and the author of Locavesting (Wiley, 2011), about the local investing movement and its potential to rebuild the economy, one community at a time. Her coverage of business, technology and social/environmental issues has appeared in Business Week, The New York Times, The New York Times Magazine, Mother Jones, Plenty, Wired, The Daily Beast, and many other publications. Used with the permission of ‘The Network, Cisco’s Technology News Site.’ http://thenetwork.cisco.com/.