Blockchain is here to stay

Blockchain is here to stay and in The Australian the reasons why this distributed ledger system will revolutionise banking, finance and many other industries are discussed.

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Blockchain, the technology that underpins Bitcoin, is the talk of the town at the moment. The financial services industry can’t get enough of it. The enthusiasm essentially boils down to the technology’s potential to reduce the financial transaction costs while ensuring robust security.

While Bitcoin is unlikely to be make traditional currency extinct, blockchain has provided the impetus needed for new and innovative research into how the slow and often expensive centralised financial transaction systems that dominate banking, so what is this blockchain? Put simply, blockchain is a data structure that can be used to create digital ledgers of transactions shared among a distributed network of participating organisations.

Financial institutions currently using clearing houses where participating organisations send financial transaction details to be recorded in a centralised registry before the transaction occurs. This approach can be slow, lacks flexibility and increases costs.

While blockchain based financial transaction systems remain experimental there is worldwide interest in the technology and how it might be used to facilitate faster, more flexible and cheaper financial transactions between participating organisations without a central authority.

The promise of a peer-to-peer electronic financial transaction system has led major technology companies to invest in the development of open source distributed ledgers that will allow business and government to implement custom solutions that do not rely on open, public blockchains.

In late 2015, IBM contributed “thousands of lines of existing code” to the HyperLedger Project, which is a major international effort to develop a distributed ledger system suitable for business and government. Australia’s Commonwealth Bank, Westpac and NAB joined the HyperLedger Project team last year.

In December 2015, IBM Fellow Jerry Cuomo told Fortune “I don’t have a strong opinion on cryptocurrencies, but I have a strong opinion on the blockchain as a solution for contracts and supply chains and the Internet of Things. I think Bitcoin is an interesting application for blockchain but there are thousands of applications and wider use cases beyond that.”

The blockchain data structure is stored within a distributed digital ledger and cryptography is used to allow participating organisations to manipulate the ledger without a central authority, hence it is identified as a peer-to-peer system.

The key to why a distributed blockchain based digital ledger can be used for financial transactions with some level of confidence that the digital ledger will not be corrupted is the extreme difficulty of changing or removing data from the digital ledger.

When data is to be added to the ledger the participating organisations have copies of the blockchain and run complex algorithms to verify the proposed transaction before the new data is added to the ledger.

A majority of the participating organisations that hold copies of the blockchain must agree that the transaction is valid before the new transaction is approved and the block of data associated with the transaction can be added to the registry.

There are two types of blockchain ledgers in use today. The blockchain ledger used for Bitcoin is an example of a public and “permission-less” distributed digital ledger, which means that anyone can gain a copy of the ledger and contribute to the ledger’s upkeep including by adding new blocks of data.

Business and government are more interested in development and use of private distributed digital ledgers where organisations with “permission” have a copy of the ledger and contribute transactions to the ledger.

Private and public distributed digital ledgers operate in different ways and sorting out how blockchain can be used on an “industrial scale” is where current research is focused because one of the problems with Bitcoin is the restricted number of Bitcoins that can exist while there can be no limit to the number of financial transactions processed by a practical financial transaction system.

Start-up companies seeking to capitalise on the potential of blockchain based distributed ledgers includes Everledger, which was mentioned in a recent UK government report (PDF) on how blockchain can be used. Everledger was founded by Australian Leanne Kemp and aims to provide a permanent ledger for diamond certification, fraud detection and related transaction history that can be used for verification purposes by insurance companies, diamond owners and claimants and law enforcement agencies.

Everledger is seeking to capitalise on the urgent need to reduce the $90 billion lost annually in the US and Europe due to insurance fraud and approximately $200 million paid out annually for jewellery theft.

The recently announced collaboration between Treasury and Data61 is a big positive for the proponents of blockchain. The initiative will provide government with a current assessment of blockchain based distributed ledgers, drive the take up of blockchain within government and business and take Australia into a new era of digital financial transactions within the global digital economy.

After the announcement Data61 CEO Adrian Turner highlighted the “opportunity to collaborate with industry experts and across government to demonstrate how blockchain technology could be used to enhance the services of both government and industry, and to improve productivity.”

This is a rapidly emerging area and now is definitely the right time to look at what it could mean for our economy,” Mr Turner said.

It’s the first step in a grand cycle of exploration that just might redefine the financial services sector as we know it.

Mark Gregory is a senior lecturer in the School of Engineering at RMIT University.