The Era of Blockchain and Fintech

Cyberattacks is ranked the 3rd and 6th among the top 10 global risks both in terms of likelihood and impacts, according to the World Economic Forum’s Global Risk Report (2018). Among recent big highlights we have heard on cyberattacks are:

Verizon communications, which acquired Yahoo, announced in 2017 that every one of Yahoo’s 3 billion accounts was hacked in 2013, threefold than what was first thought.

Equifax, one of the largest US-based consumer credit rating company announced that it was hacked, potentially impacting approximately 143 million U.S. consumers in September 2017.

WannaCry ransomware attack targeted businesses running outdated Windows software and locked down computer systems in May 2017. The hackers behind WannaCry demanded money to unlock files. More than 300,000 machines were hit across numerous industries, including health care and car companies.

Earlier this year in March, 2018, Facebook faced data-privacy scandal, stemming from reports that Cambridge Analytica, a British political consulting firm, had siphoned data from tens of millions of Facebook users.

Blockchain is a developing area of intense interests not only for banks and other financial institutions (including insurance companies) with potential applications in financial transactions including securities settlement and payments, but also for shipping industry, supply-chain management, and health care industries.

The word “Bitcoin and Blockchain” has been extremely popular these days. Google search for “Bitcoin”, for instance, surged to record high in December 2017 and more interestingly, companies associated with the word “Blockchain” had seen their market capitalization soared immediately following their announcement (even though most have settled back down), including

(i) Kodak Eastman Co, that announced it used blockchain, the technology behind digital currencies such as Bitcoin, to create a new platform for digital photography with its own digital currency, called KodakCoin;

The Republic of Estonia, for instance, launched its “e-Residency” program, a blockchain-based residency program, in October 2014, which offers anyone, anywhere a digital identity issued by the government of Estonia which empowers entrepreneurs around the world the potential to start and operate a business online under Estonian regulations.

Monetary Authority of Singapore announced (in November 2016) that it would be partnering with R3, a Distributed Ledger Technology company and a consortium of financial institutions on a proof-of-concept project to conduct inter-bank payments using Blockchain technology.

Blockchain is based on a distributed ledger technology (DLT) — a database of transactions that is shared and synchronized across multiple computers, each have the exact same data records (distributed ledger) and are collectively maintained and controlled by a distributed network of computer servers (nodes), geographically spread across numerous sites, countries, or institutions — without any centralized control.

As a transaction is validated and saved one of the chain block, it cannot be modified or tampered with, as it is cryptographically secured by “hashing algorithm” and due to its widely witnessed property, blockchain technology makes it near impossible to change the data already on the blockchain.

Typically, proponents of Distributed Ledger Technology underscore several potential advantages over traditional centralized ledgers including:

(i) immutability characteristics, (ii) decentralization and disintermediation, (iii) better transparency and auditability, (iv) cost reductions, (v) speed and automation.

In financial industry, Blockchain technology is believed to be able to mitigate several forms of financial risks of financial institutions, such as: (i) settlement risk (Herstatt risks) and (ii) counterparty risk.

The Australian Securities Exchange (ASX) announced December 2017 that it will adopt blockchain technology to manage the clearing and settlement of equities. This makes ASX the world’s first global exchanges to commit to the technology.

Blockchain offers the potential of improving speed and concurrently boosts efficiencies by removing frictions in transactions or in clearing / settlement processes by eliminating intermediaries and automating processes.

Note that the above-mentioned examples are often described as permissioned DLT (private blockchain) — Blockchain technology built by an institution and only to be used and operated by certain restricted parties, whereas, Bitcoin, Ethereum, and Litecoin, for instance, are categorized as permissionless DLT (public blockchain), whereby everyone has the ability to access.

In financial inclusion context, approximately 2 billion people do not use formal financial services and more than 50% of adults in the poorest household are unbanked or do not have access to bank accounts (World Bank data). This clearly indicates that there are tremendous untapped market for those who can marry the technology and financial instruments to serve the unbanked population.

As the case for all other emerging technological developments, despite all its opportunity and potentials, the technology is still at its developing phase and may pose new risks and challenges, many of which are yet to be resolved. Risks related to Distributed Ledger Technology in connection with technological, legal and regulatory aspects include (among others): Scalability, Inter-operability / integration, and Transaction disputes & recourse frameworks.

Despite these challenges, the future of blockchain, especially public blockchain is extremely bright and more importantly, it will continue to grow technologically as it continue to attract high-caliber developers around the world.

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