Distributed Ledgers are the future
Australia is a particularly ripe environment to lead the adoption of permissioned ledgers. While the ecosystem of technologies, participants, regulations and standards is still evolving, blockchain has the potential to help build a more efficient, productive and innovative Australia.
Over the past few years Bitcoin has been the subject of much attention in the media and blogosphere, and in conversations across boardrooms and barbeques. Yet despite all the hype about virtual currencies disrupting fiat currencies, the reality is that digital currencies are the tip of the iceberg. Part of the technol¬ogy that underpins Bitcoin is a distributed ledger known as blockchain, which has much greater potential to change business.
More specifically, the implementation of “permissioned” distributed ledgers that can be applied usefully within the existing regulatory framework will be the big disruptor.
But how does it all work?
Bitcoin is the most recognised application of a distributed ledger. It is a record of the Bitcoin transaction history that is duplicated across all the computers participating in the protocol. It uses a consensus algorithm to maintain consistency across all the individual records and applies cryptographic security to ensure that past transactions cannot be changed.
As such, it provides an immutable transaction record without the need for a centralised trusted authority. It is this element that is of increasing interest to financial institutions and investors around the world.
Centralised vs distributed
There are several benefits that a distributed ledger can have over a traditional centralised system:
- It can clear and reconcile transactions in almost real-time, and so much faster that many traditional mechanisms such as international wire transfers that can take days
- It provides an unchangeable record which is potentially more trusted than one which can be modified by a central agent with sufficient authority
- Its distributed nature by definition removes the risk of a single point of failure, as the ledger is essentially “backed-up” by many participants
- And by virtue of being virtual and less complex, such a ledger can be built and operated for far lower cost than many traditional centralised systems.
Disruption and innovation?
How can distributed ledgers be put to use in a way that enables something new, or materially improves on what we already have?
Dozens of use cases have been mooted.
While most are still in early development stages, some examples include:
- Payments in various contexts – perhaps the most developed use if only because the Bitcoin phenomenon focused a lot of attention early in this area
- The international correspondent banking system, which often requires four banks to exchange payments messages and funds across cross-borders are particularly vulnerable to disruption
- Bitcoin can address this directly, but still requires exchanges on either end of the transaction for users to convert their bitcoins to more usable fiat currency
- Several blockchain-based remittance services are being developed, including Air Pocket, which also leverages a P2P network to function as a kind of “Uber” for remittances.
However, the application of distributed ledgers extends far beyond payments, as they can be applied in any instance where there needs to be a record of transactions or asset ownership.
- The fact that there is a permanent record means that a distributed ledger could be used to maintain a virtual record of digital identity, providing a single course of authentication. It could remove the need for paper-based records which would be particularly useful in volatile situations where such identity systems could be destroyed by war or strife
- In normal environments distributed ledgers could facilitate any asset transfer, including real estate or vehicles
- The NASDAQ exchange has invested in a venture to apply a distributed ledger to exchanging securities and the Australian Securities Exchange recently confirmed it was also investigating the technology
- Registries to certify documents, diamonds and even organic food are being developed.
As a result, interest in this technology has overcome initial scepticism and has swept across the financial services industry. More than 20 global banks, including National Australia Bank and the Commonwealth Bank of Australia, have invested in a venture to define common standards and experiment with applying distributed ledgers to financial services use cases.
Around $2 billion in venture capital funding is estimated to be attracted in 2014-15 by start-ups in this space. Numerous ventures have been founded globally by entrepreneurs hoping to own a piece of the next unicorn.
But as the technology is developed further, it is increasingly becoming clear that the fully distributed, anonymous model exemplified by Bitcoin is unlikely to be viable in regulated industries such as financial services.
As a result, we are likely to see more distributed ledgers developed that are “permissioned” as opposed to ones that are open and accessible by anyone, such as the Bitcoin blockchain. The likely model will be one that connects a limited number of trusted counterparties such as banks.
These permissioned ledgers would require less computing power to maintain security because security is dealt with by managing access, while also making it much easier to comply with existing Know Your Customer (KYC), Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) and other regulations.
Permissioned ledgers are likely to preserve the benefits of speed, efficiency and virtualisation, but without many of the risks.
Deloitte is participating in the development of distributed ledgers, building blockchain-based systems for clients and developing applications for use in audits and client service. See http://rubixbydeloitte.com to discover more on applications in reporting, ticketing and loyalty.
Also, Deloitte is assisting the World Economic Forum’s research on The Future of Financial Services with regards to distributed ledgers and their disruptive and their innovative applications globally.
As part of an effort to position Australia in a leadership position in this space, Deloitte is also chairing the committee seeking to define relevant accounting standards through the Australian Digital and Crypt-Currency Association.
While the ecosystem of technologies, participants, regulations and standards is still evolving, blockchain has the potential to help build a more efficient, productive and innovative Australia.
Australia is a particularly ripe environment to lead the adoption of permissioned ledgers, given its rich history as an early adopter of technology and its understanding that “the best way to predict the future is to create it”.
This article was first published in Asia-Pacific Banking & Finance.