Technology / How blockchain technology is changing the way we do business
How blockchain technology is changing the way we do business
11 July 2016 |
The technology that ensures the security of cryptocurrencies can also be turned towards other uses when it comes to recording and keeping information safe.
Blockchain technology may have been developed by mysterious Bitcoin creator Satoshi Nakamoto, but its potential uses span far beyond his original cryptocurrency.
Simply put, the system serves as a digital ledger. Records of transactions – “blocks” – are added to a central list of all transactions – the “chain”. Complex algorithms and encryption are applied, and copies of the blockchain are kept in many places. Forged entries will not match up with the other versions and therefore will not be accepted by the system.
While until now it has primarily been used to process Bitcoin transactions, in future experts say blockchain could be used by banks and for recording trades of physical goods.
“It proposes to be a platform of truth and trust which could replace the systems that exist today, which provide a similar trust across banking transactions,” says Rahul Singh, president of financial services at HCL Technologies. “It is potentially a platform that can provide some kind of system of recording trust in transactions across enterprises.”
One of the advantages of blockchain is that it cuts out the middle man. While a traditional banking transaction involves a series of smaller transactions between various parties, blockchain provides a way for buyers and sellers to do business directly.
“The banks and the financial institutions or the intermediaries in the middle have to undergo costs to move these transactions through,” Singh says. “And that’s what they provide – they provide the system of trust between you and the seller. Now the trust can be replicated almost entirely through alternative mechanisms which the blockchain provides.”
While blockchain’s most famous application is as the system behind Bitcoin, Singh explains that it also has the potential to be used for the trade of real-world goods – essentially anywhere a reliable and secure record of transactions between parties is needed.
“People hypothetically say that it could also be used for keeping records of other kinds of assets,” he says. “The commonly cited examples are of transactions involving physical assets, like, for example, a land record… Whether it’s transferring money, whether it’s transferring trade documents, whether it’s keeping land registry records – these are all potential applications where blockchain could be used in future.”
At present, banks incur costs during their confirmation and settlement processes when processing deals like foreign exchange trades, but blockchain technology could allow them to simplify this process and complete deals more quickly.
“Evidence of that [transaction] can be stored on the blockchain,” Singh says. “It tends to reduce the risks involved in that transaction. So the transaction between traditional institutions goes to the blockchain, thereby reducing time and reducing cost settlement risk.”
Although the technology has great potential, financial institutions are still working out exactly how it could be used and addressing issues surrounding security and regulation. Despite moves towards payment trials, Singh says there are two main issues that need to be tackled before the use of blockchain for transactions outside of Bitcoin becomes widespread.
“Traditional banking transactions have always had institutional governance,” Singh says. “Now blockchain, at this point in time, tends to be less governed, and therefore there’s a whole issue around security and governance – and until people get more comfortable with the security and governance aspects of blockchain it will take time.”
“The second is in terms of standard protocol. There are multiple practices on how the protocol can happen in blockchain and again, until there is a standard understanding of what protocols they’ve got, it will take time.”
Singh adds that the parties involved also need to better understand the risks associated with blockchain before they will buy in and begin to use it, but he believes that eventually the technology will have a huge effect on the way we buy and sell.
“The blockchain will perhaps revolutionise the existing business processes in financial services,” he says. “It will be almost synonymous to what the internet has done in terms of democratising information – it will be almost similar to that.
“So it can have a large impact. The adoption of that and the understanding of that will be subject to a certain amount of time and governance and risk management that has to happen, but the concept itself is very strong. This is why we are finding a lot of financial institutions are starting pilots and coming together to see how it can be brought into use.”