Blockchain promises to transform our day to day life, influencing the way we trade, register our assets and use the money.
Fifteen years after leaving the recording industry and with a successful career heading large banks, a memory haunts you. On the morning of June 3, 2017, the newspaper reports the Central Bank of Russia is testing a digital currency. Six months earlier the U.S. Federal Reserve had announced that it is developing its Bitcoin version. England, Sweden, and India did the same. Even small nations in Africa, such as Senegal and Tunisia, joined the movement. It’s not the cryptocurrency that chills your spine, but the technology behind it: the blockchain. Yes, you are, again, dealing with transformations promoted by a peer-to-peer network.
A movie races through your mind. At the beginning of this century, you were there, at the top of a major record company, happy doing your cool job. At this point, you saw the business model of an entire industry fall apart when consumers – using systems like Napster – started sharing their music on the Internet without paying a penny to record labels. In simple steps, the music moves from one peer (computer) to another. This ‘piracy’ wiped out profits. The entire industry set out to attack, accusing them of criminal exchange.
While the studios barked, Steve Jobs launched the iPod (2001) and allowed consumers to carry songs into their pockets. Swapping tracks became even simpler. Friends sent their selections on the internet to fill their peers’ iPod. With the success of the equipment, Apple wasted no time and occupied the commercial space with iTunes. Jobs redesigned the music sales around the world. His business model destroyed the traditional distribution system, set a price, determined the profit margins. A dark time hovered over the music industry.
Years later, the blockchain promises a similar breakthrough in the financial sector. No expert can figure out how it will happen, or at what rate. But they assure that it will happen. The bank as we know it today will no longer exist. The financial industry needs to reinvent itself, find its part in a world that may not need it. “It is an unprecedented transformation,” says Robert Schwentker, president, and co-founder of Blockchain University.
The distributed ledger technology in the blockchain, for example, allows a father in the United States to send money immediately to his son in a distant country such as Japan or Brazil. To do so, he accesses his smartphone and carries out the transfer – no banks, no intermediaries, no expensive taxes. Just as taking 10USD out of his wallet and give it to his kid to go to a grocery store.
In addition to money, the customer will have at his disposal systems to facilitate asset sales and purchases, without relying on bank intermediaries to validate the transaction. As in the music industry, everything will happen through a peer-to-peer network. There is no time to lose. Your only chance for survival lies in understanding and mastering the beast.
But you are not alone, banks in all the world rush to figure out how to use blockchain as an advantage, a strategy to provide better and cheaper service. According to the World Economic Forum, in the last three years, venture capital funds have allocated more than USD 1.4 billion to distributed ledger platforms. Discussions on the use of the blockchain already involve more than 90 central banks around the globe, and 80% of financial institutions plan to start projects with the technology by the end of 2017. It is a global race.
Due to that, bank business teams arrived early to the discussion. Nitin Gaur, a director of IBM Blockchain Labs, was intrigued when faced an auditorium packed full of businessmen and businesswomen during his presentation at a Brazilian banking technology conference last year. Instead of the usual crowd of engineers, he glimpsed from the stage men in sharp suits standing up, looking for the best angle to see each slide. “Financial institutions will have to change the way they work. They must understand the technology to make decisions in their business models”, says Gaur, trying to figure out.
A typical lab guy, Gaur, is of Indian origin, slim body, dark skin, and hair. Strands of white hair show he witnessed many technology transformations in the last decades. He has over 16 years of experience just in IBM. He was the first executive I contacted to understand what blockchain is, how it works, the frenzy around its technology and their transformational promises.
In my 20 years covering tech and innovation, I have never noticed the fear in bankers eyes. They used to adopt technology as a strategy, a way to reduce costs and make money. But with blockchain, the financial industry does not know where to go. They must embark on an uncertain journey. “It’s not a question of whether this will happen or not, but when,” Gaur says.
Before talking about the blockchain, Gaur went back in time and explained how things work today in a business chain, highlighting how connected we are to the financial system. Purchase on Amazon.com, for example, starts a verification process for identity and credit. Bits and Bytes run through internet connections to digital fortresses full of data servers, where commercial and financial institution systems confirm the transfer of ownership. The servers store proofs of transactions and information on purchases. The systems are programmed to allow you to buy anything with your money.
These fortresses are required because in the digital world everything could be copied, replicated. And this cannot happen with money and assets. When we send as an email a PowerPoint file, a Word document or a picture, we are sending a copy, which means that we maintain the original in our devices. It is like going to a grocery shop, pay the bill and still keep the money in your wallet. Not a good idea. Until now, the internet was efficient to trade information, but e-commerce still depends on physical world – with money and a paper trail – to operate.
But, it is not only on the internet that centralized operations ensure commercial and financial transactions can be automated. Every time a credit or debit card goes to a POS, the engines of this controlled environment swing into action. To get access to your money in the bank, the financial institution runs a piece of the solution, either transferring the value or writing down debt on your credit card. The operation generates a fee we pay to have security and convenience.
In their book “Blockchain Revolution: how the technology behind bitcoin is changing money, business, and the world,” Don Tapscott and Alex Tapscott explain that, in the blockchain, assets – digital assets from money to music as well as everything in between – are not stored in a central place. They are distributed across a global ledger, enhanced by a high level of security. When a transaction is conducted, it is posted globally, across millions and millions of computers. In that network, a group of people, called miners, work to validate, check and ensure any trade. “They have massive computing power at their fingertips – 10 to 100 times bigger than all of Google worldwide”, said Don Tapscott at a TED Talk speech.
Each transaction creates a piece of information, or a block, that will be connected to a network, or a chain. To confirm the trade, it is necessary to put all pieces together like a Lego puzzle. As soon as the miners settle it, all the network is updated, and it is not possible to reverse the transaction. For example, if you transfer USD100 in a digital currency for someone, you will no longer keep the money, which will be placed in the recipient’s wallet. To post a fake the transaction, a hacker must invade all information blocks in the chain. Instead of attacking a single server, it is required to break in hundreds of computers. “Blockchain allows a safer exchange of values and products,” remember Gaur, with pride. He adds that personal or corporate data can be embedded in the blockchain, providing security and privacy.
Blockchain can also save a lot of money. An International Report, published by Santander Bank (The Fintech 2.0 paper: rebooting financial services), estimates the use of decentralized ledger technologies can result in savings for banks of between USD 15 billion and USD 20 billion per year by 2022. Bankers are excited about this opportunity. But if blockchain is safer and cheaper, why banks are afraid of it? “It is not about technology. It is about trust.”, remember Gaur.
The centralized model is the result of an age-old crisis of confidence. We rely on an institution to lend, borrow, and save money. There is historical evidence the Phoenicians initiated what we call a bank. But it was in the Middle Ages that an institution we can recognize as a bank appeared. And with its growth, the concept of validating transactions, certifying asset ownership and verifying people’s identity has spread to other branches.
We need such institutions to keep our money, assert our ability to pay, register the ownership of our assets and confirm our intentions in contracts. We do not trust each other without reservation. We delegated this function to banks, notary offices, credit card operators and marketplaces. These institutions approve and verify actions as a debit card payment at Starbucks.
Centralization brought control and made us willing to outsource trust. As consumers, we pay billions of dollars annually to support a large infrastructure of computers and digital security systems. We protect ourselves from fear and from each other. But blockchain promises to change everything.
The blockchain emerged in 2009, embedded in Bitcoin. In that year the world was struggling with a financial crisis. Transactions with this currency grew fast, so the financial market and governments tried to sideline Bitcoin, relegating its use to the criminal underworld without success. Bitcoin persevered, and other digital currencies also became mainstream.
Then banks and governments started flirting with the powerful encryption algorithm underneath it, trying to copy it to protect their own transactions over the internet. Digging into the technical security features, they bumped into Bitcoin’s gold nugget: a distributed accounting system capable of reducing financial transaction costs, improving security, and enabling the creation of a global business network – reliable, automated and ready to certify ownership of any asset. At that moment, the bankers realized that understand and dominate the beast is the only way to survive. “The technology eliminates intermediaries. That changes everything. We will no longer need banks or cash”, adds Schwentker.
The need to jump into the blockchain bandwagon promoted investments in solutions throughout all the world. Schwentker follows initiatives in The United States, Europe, Asia and Latin America. Even in Africa, blockchain is being used. Senegal and Tunisia, for example, launched their digital coins.
The money invested seeds start-ups and promotes blockchain adoption in different areas, thus benefiting the society. Besides financial market, Schwentker sees multiple uses of a distributed ledger. “It is a chance to transform our society, to build a better and trustful world,” says. Among the possibilities, he highlights the usage of the distributed ledger to protect intellectual property, reduce bureaucracy and protect people.
As a San Francisco Bay guy, Schwentker is a visionary that believes in technology as a way to help people. In his vision, blockchain fits purposes as help women refugees, assuring that they no longer will lose their identity, which will be registered in a globally distributed ledger instead of in ID cards or passports. It seems that a marginalized digital currency began a revolution.