Blockchain

The Power of Distributed Ledger Technology

1/21/2018

Distributed Ledger Technology (DLT) is a highly customisable and versatile technology that firms can use to underpin the issuance, trading and clearing of financial instruments, to keep and share records and to facilitate regulatory reporting or enhance transaction monitoring.
After a period of small scale testing, so called proofs-of-concept (POC), and various initiatives to develop more specific DLT systems for use in financial services, market participants are beginning to start deploying DLT systems.
Blockchain is just one type of distributed ledger. When we talk about blockchain it is usually the technology that is used for Bitcoin, a consensus of replicated, shared, and synchronized digital data.

Developing the DLT Regulatory FrameworkIn April 2017 the Financial Conduct Authority (FCA) published Discussion Paper (DP) DP17/03 on Distributed Ledger Technology (DLT) to stimulate a dialogue on the regulatory implications of current and potential developments of DLT in the financial markets.
The DP explored the potential risks and benefits of DLT applications in financial services and whether it could promote the FCA’s statutory objectives of promoting effective competition, financial market integrity and financial consumer protection.
FCA specifically asked about tested DLT use cases and whether the future application of this nascent technology could face undue regulatory hurdles or create undue risk.

In December 2017 FCA issued a Feedback Statement (FS)

a. Summarizing the feedback received on the DP

Respondents expressed particular support for maintaining FCA ‘technology-neutral’ approach to regulation and welcomed its open and proactive approach to new technology;
All respondents highlighted the global nature of DLT. Seeing a consequent need for international cooperation, they urged us to collaborate even more proactively with other national and international regulatory bodies and industry associations, to make possible a globally harmonised approach to DLT

b. Setting out FCA response to the feedback received, and its views on most recent developments, covering

Operational risk (including outsourcing and network security)
Digital currency (including digital currency derivatives and ICOs)
Digital asset trading and smart contracts
Regulatory reporting
Financial crime
General data protection regulation

c. Explaining FCA next steps

Observing DLT-related market developments
Engaging with financial services and technology firms that propose new ways of delivering financial services
Gathering evidence on ICOs
Collaborating internationally and domestically

Financial Services is only the beginning. In the next decade Blockchain will likely disrupt a large number of industries.Banking and payments aren't the only industries that could be affected by blockchain tech. As startups use blockchain to drive greater transparency and veracity across the vast digital information ecosystem, they are boosting awareness of the technology in sectors ranging from education to public policy.
Bitcoin, of which we have heard so much all through 2017, is only one application of this great innovation in computer science. The blockchain can hold any legal document, from deeds and marriage licenses to educational degrees and birth certificates. You might call it the “World Wide Ledger”. It enables smart contracts, decentralized autonomous organizations, decentralized government services, and transactions among things.
The Internet of Everything needs a Ledger of Everything: the blockchain is a truly open, distributed, global platform that fundamentally changes what we can do online, how we do it, and who can participate.
Following pages provide with a list and brief description of how blockchain technology could disrupt major industries, as well as highlighting most recent case studies and interesting resources from the web.
The Blockchain revolution is acting and performing every day at a faster pace, so the following information could be outdated already at the date this document is issued, but will still provide a fair overview how its disruptive potential.

1. Banking

Areas of banking (both retail and commercial) that stand a serious chance of being transformed by blockchain include the following:
1. Clearing and Settlement
2. Payments
3. Trade finance
4. Identity
5. Syndicated loans

The Blockchain “banks the unbanked”: it may be hard to believe, but two billion people in the world still do not have a bank account. With Blockchain, individuals can receive a digital identity for use in their banking. One of the biggest challenges banks face when trying to serve the unbanked is that many of them do not have clear identifying information, making it difficult to implement “Know Your Customer” practices

R3 consortium (launched in September 2015 and including more than 100 players) was born out of a common frustration amongst banks and other financial institutions with multiple generations of disparate legacy financial technology platforms that struggle to interoperate, causing inefficiencies, risk and spiraling costs. R3 is building a “new operating system for financial markets” with a distributed ledger platform (Corda), as well as fostering proofs of concept (PoC) for developing new trade finance tech.

Case studies, suggested readings and resources from the web:

2. Payments and money transfer

Payments is increasingly seen as an area that is ripe for disruption, having the potential to enhance payment processing. To overcome the current structural weaknesses in the payments area including low speed, high expenses, financial institutions are increasingly adopting the idea of blockchain or distributed ledger technology (DLT). This may allow to offer (near) instant cross-border payments at lower costs, higher security and more reliability.

Blockchain is the technology behind cryptocurrencies like Bitcoin and Ethereum, but it does not limit its application to them.

While the level of privacy associated with blockchain payments has raised concerns among many in the finance community, Blockchain technology removes the need for a central authority to manage transactions, making these transactions highly secure and impenetrable for hackers.

After developing its own version of the bitcoin technology over the past couple of years, Mastercard recently announced that it is now opening its blockchain to certain banks and merchants as an alternative—and potentially more efficient—method of paying for goods and services. Like IBM, Mastercard is also targeting cross-border payments between businesses as the primary purpose for its blockchain, which can only be used by invitation. The Mastercard blockchain, however, differs from the tech giant’s in an important way: While the IBM blockchain only transmits money in the form of Lumens, a virtual currency created by the non-profit Stellar, Mastercard’s blockchain operates independently of a cryptocurrency, and instead accepts payments in traditional local money.

Central banks are actively investigating and in some cases even experimenting with blockchain including those of the United States, Canada, China, U.K., France, Germany, the Netherlands, Singapore, South Africa, and Sweden. Central banks’ interest in blockchain represents further recognition of the technology’s potential to transform many aspects of financial systems worldwide, including international payments.

With the proper regulation, banks will be able to offer their corporate clients interesting propositions based on the blockchain.

Case studies, suggested readings and resources from the web:

3. Cybersecurity

Blockchain resolves the ‘lack of trust’ problem between counterparties at a very basic level: it is a distributed database used in both private and public applications rather than a centralized structure where all the information is stored in few very large databases. The data pertaining to each batch of valid transactions is stored within its own block. And every block is connected to the block which is situated in the position before it and grows continuously, as new blocks of information are appended.

Owing to their distributed nature, blockchains provide no ‘hackable’ entrance or a central point of failure and, thereby, provide more security when compared with various present database-driven transactional structures.

Case studies, suggested readings and resources from the web:

4. Supply Chain Management

Traceability and transparency are some of the most important foundations of logistics. Blockchain allows to optimize business transactions and trading relationships with robustly secure business networks —both at scale and globally.

As Blockchain offers a shared ledger that is updated and validated in real time with each network participant, it enables equal visibility of activities and reveals where an asset is at any point in time, who owns it and what condition it’s in.

Benefits allow for easier monitoring of time, costs, labor, waste, emissions, etc.

Case studies, suggested readings and resources from the web:

5. Forecasting

An emerging application for Blockchain.

With seemingly everything focused on big data, the world of research, statistical analysis and forecasting has gained more attention. By incorporating blockchain to decentralize prediction markets, just as blockchain has decentralized payments and financial transactions, a predictions market could develop.

The result could imply radical changes to how people place bets, purchase and sell stocks, and make determinations about the potential for certain events related to everything from elections to weather patterns.

The act of decentralizing what always followed a traditional model allows various other models to be considered and used that were previously not allowed.

Case studies, suggested readings and resources from the web:

6. Internet of Things (IoT)

The convergence of blockchain and the Internet of Things is on the agenda for many companies and there are existing implementations, solutions and initiatives in several areas, outside of IoT and financial services too.

By merging Blockchain with IoT it is easier to implement confidentiality and integrity - vital factors to ensure reliable connections and secure the processing between the devices. This allows the connected devices to respond to fabrication and modification attacks and enhances the trust between the parties in communication.

According to International Data Corporation (IDC), by 2019 20% of all IoT deployments will have basic levels of blockchain services enabled.

As Internet of Things applications are by definition “distributed”, it’s only normal that the distributed ledger technology, which blockchain is, will play a role in how devices will communicate directly between each other (devices could communicate directly, update software, manage bugs and monitor energy usage).

Case studies, suggested readings and resources from the web:

Samsung and IBM ADEPT project (Autonomous Decentralized Peer-to-Peer Telemetry)
Watson Internet of Things

7. Insurance

The global insurance market is based on trust management, and blockchain is a new way of managing trust.

Insurers, like Banks, are intermediaries and there is great potential for insurers to use Blockchain technology to streamline payments of premiums and claims.

Smart contracts powered by a blockchain could provide customers and insurers with the means to manage claims in a transparent, responsive and irrefutable manner. Contracts and claims could be recorder onto a blockchain and validated by the network, ensuring only valid claims are paid. For example, the blockchain would reject multiple claims for one accident because the network would know that a claim had already been made. Smart contracts would also enforce the claim, for instance triggering payments automatically when certain conditions are met.

“Auto Payout” can be based on a Trustless Smart Contract: customers know that payout is automatic and immediate (no more hassling for payout during the most stressful times when the bad event has actually happened), and Insurance companies get two benefits, (i) elimination of fraud. And (ii) elimination of claims processing cost. For this to work, it has to be binary simplicity, and one example of application is flight insurance (i.e. the flight was either cancelled or it was not). Blockchain systems use external data sources (see the Oraclize service) to get this proof of what happened.

Case studies, suggested readings and resources from the web:

8. Private Transportation

Smart transportation is about maximizing already-existing infrastructure and resource rather than adding new ones. Better use of existing resources creates affordable transportation without the need for more roads or vehicles. Real-time ridesharing is one key, enabling people with private cars to share their journey with others traveling in the same direction. Blockchain can be used to create decentralized peer-to-peer ride sharing apps.

Setting your own rates and transacting directly with customers (with no middle man) are amongst main points attracting rideshare drivers.

Development of “Car e-wallets” will allow for automatic pay for parking, tolls and fuel.

Case studies, suggested readings and resources from the web:

9. Online Data and Storage

There is no shortage of projects that are using Blockchain technology and cryptocurrencies to make decentralized storage possible. However, it is also worth noting that DLT is still in its early stages and it is possible that other, more advanced technologies can replace it with respect to specific use cases.

Currently decentralized blockchain applications have few options to store data. Decentralized storage options are:
1. Storing everything in blockchain itself
2. Peer to peer file system, such as IPFS (Interplanetary File System)
3. Decentralized cloud file storages (such as Storj, Sia, Ethereum Swarm, etc.)
4. Distributed Databases (such as Apache Cassandra, Rethink DB, etc.)
5. BigChainDB (high throughput, sub-second latency and powerful functionality to automate business processes)
6. Ties DB (A public, distributed and decentralized database with one common thread: trust. Enforced by integrated fault tolerance, incentive schemes and smart contracts)

Decentralized cloud file storages: when it comes to a mutualistic relation between Decentralized Ledger Technology (DLT) and data storage, the most common use case (so far) for the Blockchain is as an “incentive layer”. This means that data isn’t stored on the Blockchain itself, but the network at hand is able to leverage the Blockchain as a ledger for automatic payments and/or for value exchange, enabling users to pay for storage or access to files. In this case, the advantages for using the Blockchain over any other technology are clear. These include faster settling times, lower transaction fees (which enable microtransactions), higher privacy and the ability for transparent and immutable record keeping. While the Blockchain isn’t being used for data storage, it is providing the foundation on which the decentralized network is built, allowing it to run with no central authority whatsoever.

Case studies, suggested readings and resources from the web:

10. Charity

Common complaints in the charity space include inefficiency and corruption, and Blockchain can help donations to get where they are meant to go: the future of philanthropy is real-time tracking of funds and driving more outcomes on the ground.

New models of digital 'cryptocurrencies', such as Bitcoin, could present both major opportunities and challenges for charities, such as the potential for ‘radical transparency’ of donations, the possibility of making it easier to get aid money to where it is needed and the challenge of anonymous cryptocurrency donations.

Case studies, suggested readings and resources from the web:

11. Voting

There is a common misconception that voting cannot be done online in a secure way. However, the introduction of blockchain technology is changing the conversation.

Blockchain can be used for voter registration, verification and vote counting – immutable, publicly viewable ledgers of recorded votes would make elections more fair and democratic.

Using their vote account, the voter can go into the “secure blockchain based ballot box” and verify for themselves that their vote was cast as intended. The voter can even audit each ballot box to confirm the election results are accurate, while retaining privacy and top-level security. Depending on laws and election rules, if a voter changes their mind, it is possible to have the ability to change their vote at anytime in the days leading up to the election.

Adoption of Blockchain technology for voting could actually drastically reduce the costs of public elections and free up taxpayer money to be spent on other extremely important aspects of society.

Case studies, suggested readings and resources from the web:

12. Government

Blockchain can reduce bureaucracy and increase security, efficiency and transparency of governmental operations, much of enhanced productivity stemming from moving to a “paperless government”.

Management of Public Benefits: blockchain technology can help assess, verify and distribute benefits securely (for instance, unemployment benefits).

Preventing frauds, for example, upon issuance of a death certificate, Blockchain could enable that person to be removed from voting polls, or from receiving certain benefits; while similarly, when a baby is born they can automatically be enrolled onto a benefits programme. With specific focus to UK, NHS, HMRC and the Department for Work and Pensions (DWP) are all huge areas which could exploit Blockchain.

Case studies, suggested readings and resources from the web:

13. Healthcare

Healthcare authorities, governments and the provider community globally are equally excited about the new possibilities presented by blockchain. Nevertheless, the industry needs to focus on establishing blockchain consortia to foster ecosystem partnerships and create standards or frameworks for future implementation on a large scale across healthcare use cases.

The Hyperledger Foundation, an open-source global collaborative effort created to advance cross-industry blockchain technologies, is one great example among many developing small blockchain consortia models in the healthcare space.

Application of blockchain technology would allow to build up complete indexed history, patient’s unique identifier and an encrypted link to his/her health record. Each record is time stamped, and all patient records are together and “stay” with the patient, this having control over the permissions on whom to share with.

Patient generated data (wearables, smart implants, apps, peripherals, other IoT smart devices) and Clinical generated data will feed Health Analytics and MI.

One of the stopper to the development and implementation of the Personal Health Record was, on top of a need for cultural change, lack of a secure platform: blockchain can now help hospitals and healthcare Institutions to safely store medical records and share them with authorized doctors, patients, other third-party industry players. Because of all of the above, this can increase accuracy and speed of diagnosis.

Case studies, suggested readings and resources from the web:

14. Energy Management

Keeping track of renewable-energy certificates is one of dozens of potential applications of blockchain technology that could solve data management challenges in the electricity sector without disrupting business as usual.

Many believe that in the long term, the technology could help transform the very architecture of the grid itself, where energy producers and users could buy it directly from each other, with no need to go through the public grids.

Blockchain technology strengthens the market role of individual consumers and producers. It enables prosumers (i.e. households that not only consume but also produce energy) to buy and sell energy directly, with a high degree of autonomy. The current legal and regulatory framework for consumers and prosumers in the energy sector is clearly defined and provides protection on many levels to consumers in particular. However, in the medium to long term, this framework will probably have to be adjusted to reflect the requirements of decentralized transaction models.

The anonymity underlying the blockchain concept also entails the risk of the system being used for the purpose of illegal activities, so this being one of main risks.

Case studies, suggested readings and resources from the web:

15. Online Music

New technology could make the music industry work a lot more efficiently and transparently, as blockchain startups are coming up with ways for musicians to get paid directly from their fans (avoiding fees and charges from intermediaries).

Smart Contracts can solve licensing issues and catalog songs with their respective creators.

Case studies, suggested readings and resources from the web:

16. Retail

Blockchain based retail utilities connect buyers and sellers without a middle man and associated fees (for instance Amazon, e-Bay, etc.)

One application of Blockchain is to help ensuring that retailers’ products are legitimate (Goods are tagged and verified at the point of manufacture and then certified on the blockchain. When customers buy a product, they can check the authenticity and then be registered as the official owner).

Emerging players are building on creating a “new digital dimension” on top of labelled products, this giving verified information about their producers, origins and ingredients.

Applications in Supply Chain Management have been treated separately.

Case studies, suggested readings and resources from the web:

18. Real Estate

Issues in buying and selling real estate usually involve bureaucracy, lack of transparency, fraud and mistakes in public records: blockchain technology can speed up transactions by reducing the need for paper based record, as well as tracking, verifying ownership, ensuring accuracy of documents and transferring property deeds.

Industry players realize that blockchain-based smart contracts can play a much larger role in commercial real estate (CRE), potentially transforming core CRE operations such as property transactions (purchase, sale, financing, leasing, and management).

Considering blockchain for real estate leasing and purchase and sale transactions would potentially allow to:

Building up a common asset database, a key example being multiple listing service (MLS), which collates property-level information from private databases of brokers and agents. MLS is highly fragmented and can be difficult to access and parse for people outside of the industry. Access to information is restricted and may not be up-to-date, which can make it difficult to make comparisons and identify patterns.
Managing multiple entities/stakeholders to modify database, such as owners, tenants, operators, lenders, investors, and service providers, who provide, access, and modify a variety of information.
Providing all stakeholders with digital identities, reducing risks connected to “lack of trust” and allowing for more transparent record keeping systems for real estate titles, entitlement, financing and tenancy.
Opportunity for disintermediation
Transaction dependence, where for instance the conclusion of a purchase transaction (dependent on mortgage approval or title clearance) represents a conditional clause that can be executed through smart contracts.

Case studies, suggested readings and resources from the web:

19. Crowdfunding

Crowdfunding is a process of raising funds for a project or venture from the masses, where people pool in smaller contributions/investments to create a significantly larger investment to meet the requirements. The burden of investment is distributed across the masses.

Blockchain technology is perfectly capable of managing value exchange under contract. The feature that will come handy when it comes to managing rewards based and equity-based crowdfunding campaigns. The whole process of assigning relevant rewards and equity against their contributions can be automated, using blockchain based smart contracts for crowdfunding.

New projects can release their own tokens that can later be exchanged for products, services or cash. Many blockchain startups have now raised millions of dollars through such token sales (see token generation event (TGE) and initial coin offering (ICO)).

Even if regulatory and speculations issues are clearly there, this is still at an early stage and further interesting developments might soon occur.

Case studies, suggested readings and resources from the web:

20. Climate Change

The Climate Ledger Initiative started out of a research project of the Zurich-based Cleantech21 (C21) foundation. At the international climate negotiations in November 2016 in Marrakesh (COP 22), C21 has consolidated its initial findings on Distributed Ledger Technology potential for climate action. Climate Ledger Initiative’s (CLI) mission is to accelerate the momentum for climate action under the Paris Agreement by systematically strengthening the intersection between the field of climate change and blockchain/ distributed ledger technology.

There is plenty more players that believe that blockchain technology can be used to solve the major environmental problems we are facing today on our planet and, if adopted globally, it can even help stop or reverse climate change. This is because this technology makes it possible to track and verify transactions and interactions without a centralized authority, and this can significantly increase transparency, efficiency, and accountability of environmental projects.

Understand the environmental impact of products

Case studies, suggested readings and resources from the web:

21. Blockchain in the recruitment sector: Crypto CVs

Blockchain technology is a powerful change agent for broker based industries, and the recruitment sector, after all, is a broker industry. The technology can assist in expediting commodity processes undertaken by intermediaries, unlocking valuable capital to be put to better use by employers in growing or optimizing their businesses. The blockchain technology ensures that the verification activity only happens once and is stored securely and permanently for any person or organization that wishes to view it. The technology also eradicates double handling and processing by multiple verification providers.

Corporates, Schools and Universities are also looking into the benefits of these “Intelligent Profiles”, storing every aspect of a career profile on a blockchain – from GSCEs to degree classifications, and even volunteering positions. And every assertion added is automatically verified by the native organization, making the CV extremely credible for employers.

Case studies, suggested readings and resources from the web:

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Distributed Ledger Technology

The Power of Distributed Ledger Technology

Maurizio Paolella

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