Blockchain, the technology behind cryptocurrencies like Bitcoin, is making waves as its potential to be a next generation platform technology starts to emerge from the all the hype. It did not start out with the cleanest reputation, given its first use cases were all based around cryptocurrencies, many of which have crashed after the peak at the end of 2017. In our view, however, the blockchain technology base itself could have very widespread use across every part of the economy in the near future.
What is blockchain?
Blockchain is a technology that allows for the transfer of assets (for example money) in a trusted and secure environment without the need for a central trusted third party like a bank – it automates the process of trust. The first use cases were in cryptocurrencies where the technology allowed the transfer of money in digital form, like Bitcoin, without the need for a trusted counterparty. To gain an understanding of the potential for future use, imagine being able to transfer money peer to peer without a bank, or buying a concert ticket without using a platform like Ticketmaster while knowing that the transaction is totally genuine, safe and secure.
Blockchain technology can also be used to ensure the validity of assets such as land registries, artwork and even our personal identities. Driven by the internet and network effects, blockchain utilises a number of technologies that exist today – networks, ledgers and cryptography – and combines them to achieve this effect. Multiple computers worldwide can each hold a copy of a complete transaction ledger and, through a verification process, are able to make sure that every copy of the ledger is identical and constantly updated for each new transaction. The ledger of record is immutable, meaning it cannot be changed retrospectively – once a record is written to the blockchain it is there forever.
The process of maintaining multiple copies of a transaction history creates a very high degree of security, trust and auditability. It is the integrity of this distributed system that could well change the landscape for trust-based activity in the future like banking or national identity management. While still in its infancy, blockchain could be the next foundational technology creating a huge new computing cycle in the technology market.
Major technology shifts have occurred on about a 20-year cycle starting with mainframe computing in the 1960s. Each cycle has driven change in central and decentralisation as the chart above shows. The cloud computing cycle, while appearing in many ways to offer us a much more democratic world, actually centralises the control of technologies. While we can all have a bigger say and our voices can be heard over platforms like Facebook or Twitter, the actual platforms themselves are centralised and all powerful. It is no surprise that the top five companies in the world are now all leading technology companies – Apple, Amazon, Google, Microsoft and Facebook. Each has a strong grip on its specific area of use.
The interesting and exciting development that blockchain may bring could be the decentralisation of this platform strength – allowing many users to effectively own and manage the platform in a federated system. This part of the opportunity is very much driven by the development of edge computing: the ability to manage, store and compute at the edge of the network rather than at the core.
Where could blockchain be used?
The possible use cases for this technology are endless but it is likely that in most cases, the user will never know they are part of a blockchain technology application. In the same way that we do not think about email being a cloud-based application (it is just “email”), blockchain will be operating in the background allowing a trusted network for its applications. The key umbrella feature of any application using blockchain is that it will involve the transfer of something of value – that could be money (fiat or digital), a concert ticket or a work of art, or the secure registration and transfer of identity information.
An example of this, that will resonate with many in the financial world, would be the management of the KYC (know your client)/AML (anti-money laundering) process. Research and Markets estimated that over USD 8 billion was spent globally in 2017 on KYC/AML. One of the biggest problems is that every institution gathers, checks and logs information on each individual or organisation with which it does business. As an individual, supplying information to multiple different providers like banks, accountants and lawyers is time consuming and irksome. If there was a trusted repository for the base information required for KYC/AML then duplication of process could be avoided. Imagine if Bank A collects the identity information required to approve a client and then places that information on a blockchain database. When Bank B needs to perform the same process, it can get approved information from the blockchain database, know it is trusted and avoid the cost of replicating the process. It might pay a fee to Bank A for doing so but would still likely save overall.
To take it one stage further, imagine that an individual was prepared to submit the information directly to the database via a portal and keep it up to date; Bank A and Bank B could access the approved information and pay the individual a fee. The banks would make savings and the individual would generate an income. The process of removing the need for a trusted counterparty may create significant cost benefits and income opportunities.
On the consumer side, we believe concert ticketing would be a perfect blockchain opportunity. The annual cost of chargeback alone due to ticketing fraud is estimated by Riskified to be over USD 9 billion – this could be entirely eliminated through a blockchain-based ticketing system. Concert and sports venues would ensure that tickets reached the correct owner with total control over the path of that ticket from issuance to event. Additional controls can easily be added to the system; if an artist did not want tickets to be resold, then that could be written into a smart contract on the blockchain for that particular event. If the artist was happy to have resale, but at a maximum of two times the face value, the same would apply. Tickets would be digital and could be unavailable on a device until a pre-determined time ahead of the event or when the ticket holder is within a certain radius of the event, adding even more security to the process. The ways to secure and manage the ticketing system are numerous, adding more and more layers of security.
A case of when, not if
Blockchain is still at a very early stage, probably akin to the internet in 1995, and broad adoption is many years away. One of the key barriers to its development is the need for governments and legislators to adopt new laws and processes to allow for its use. By their very nature these organisations are slow moving, although it is already clear that they see the value inherent in using it. Estonia, for example, has adopted a blockchain-based national identity scheme and Singapore is looking to do the same. These are small countries where the barriers to adoption are more easily surmountable. However the opportunity is so great and the ability to prevent or reduce financial fraud, crime and terrorism so clear that, in our view, it will be a case of when, not if. At present, there are few ways to gain exposure to blockchain investments directly but we believe there will be a slew of opportunities in time. Much like Software as a Service (SaaS) saw multiple opportunities emerge just after the great financial crisis, a full 10 years after mass adoption of the internet, blockchain as a Service (BaaS), will likely follow a similar path and we estimate it will be another five to 10 years before there is a real sub-sector. However, fortune favours the brave and we believe there will be early opportunities to be had in the same way that Salesforce led the SaaS revolution.
Author: Mark Hawtin is an Investment Director responsible for investing in the technology sector (for global long only and long/short funds GAM funds), www.gam.com.To find out more about GAM talk to your financial adviser.
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