Back on the Chain Gang
BlockChain: it’s a concept that has garnered tremendous attention over the last few years and now seems to be the hottest new buzzword with its constant coverage in various papers, media outlets and talk around the water cooler. However, to most it is still an unknown and often confusing concept that has something to do with Bitcoin. This technology has seen enormous investment flows from the private sector, and those who are intimately involved in its development maintain that it will revolutionize our world even more than the internet has.
One of the most difficult and often frustrating things about BlockChain technology is the jargon attached to it, particularly when you delve deep into its implementation. However, the conceptual aspect of BlockChain is fairly straightforward, and once understood it is hard not be excited about its potential, especially in the financial sector. So, what is it?
BlockChain is often directly associated with Bitcoin, which is a digital currency or “cryptocurrency”. However, BlockChain is NOT Bitcoin. BlockChain is the technology that enables movement of digital currencies, like Bitcoin or other financial assets, from one individual to another. This is quite different to the traditional mode of transferring a financial asset through a trusted third-party. For example, if I wanted to send money to a friend in Hong Kong I would have my bank instruct the trusted thirdparty to move the money. The third-party is trusted by both the sender and recipient and it verifies who the money is being sent to, their bank account details, and that the transaction is authentic. The funds typically take three days to send. In contrast, BlockChain technology attempts to eliminate the third-party, making transfers nearly instantaneous, less expensive and more secure.
How does BlockChain accomplish this? It utilizes what is called a “distributed open ledger”. This ledger can be inspected and looked at openly by all parties involved in the transfer unlike third-party transfers, which involve a high degree of integration. BlockChain uses one databasewhere each party can participate in a secure, verifiable way. If a detail of the transfer needs to be changed or updated, each party is involved as they are working from the same ledger.
Although the implementation of BlockChain technology is somewhat complicated, it is still in its infancy and will have hurdles to overcome in order to become widely accepted. However, given the potential benefits, this concept is gaining significant attention within the financial industry as it is poised to be an initial benefactor. The current system of trading assets is a hodgepodge of proprietary systems and integrations that do not have visibility with one another and therefore have much inefficiency. The idea that two parties can make an exchange without oversight of costly third-parties while simultaneously reducing counterparty risk is a game changer. Securities will now have the ability to ‘trade on the chain’. Securities can be created directly on the BlockChain instead of through a database that goes on the stock exchange or clearing house. Users are more empowered with control of all the information in their transactions with data that is complete, consistent and accurate all while lowering costs, which is something any company CEO would be delighted to hear.
The increasing use of BlockChain will bring forth a multitude of investment opportunities not only in the technology itself, but also in new asset classes such as new cryptocurrencies, in addition to existing financial assets. Companies that have significant costs exchanging financial assets are thought to be the initial benefactors, as they seek to increase efficiencies and reduce costs. New businesses that adopt this leading technology should accrue benefits immediately.
In this first of a two-part series, we have provided an overview of this impressive technology. In the next issue of The Artisan, we will dive deeper into the implementation of it and why you may be casting your vote through it in the future.