Blockchain technology: A game changer?
What is blockchain technology?
Back in 2008, a person using the pseudonym Satoshi Nakamoto published a white paper that explained how a new peer-to-peer electronic payment system worked. The paper described how payments could be sent from one party to another without using the services of an intermediary like a bank.
The currency used for these transactions was called bitcoin and the technology underlying it was named blockchain.
It is important to understand that bitcoin is only one of several hundred applications that have been developed using blockchain. To draw a parallel with a concept that we are all familiar with – bitcoin is to blockchain as email is to the internet.
How does the blockchain work?
Blockchain functions by distributing information to a number of databases connected to the internet instead of storing it all at one place. This is a marked departure from the practice used by traditional financial institutions and government agencies who maintain data in a single location.
A blockchain is created when a number of digital transactions are grouped together. These are validated by members of the network and a “block” of transactions is stored in a “chain.” This chain is visible to all the members of a network making it almost impossible to hack.
A hacker would have to rework every block in the chain. These blocks could be residing on thousands of computers in the network.
Here is a representation of how the technology works.
Source: World Economic Forum
Blockchain has been hailed as one of the most disruptive technologies of recent times. This is because it offers two unique features. In addition to being very difficult to hack, blockchain technology does not require a central intermediary to function.
This makes it suitable for a wide range of applications where people need to trust each other to transact. Although financial transactions are an obvious area where the blockchain will find wide usage, there are a number of other applications where this technology can be used.
The use of blockchain in remittances
As the blockchain does away with the need for a central intermediary, remitting money across the world can be done in a matter of hours instead of several days. The person or institution sending the money also can avoid the high transfer fees that banks levy.
The use of blockchain technology simplifies the remittance process. Instead of several steps and multiple intermediaries, money can be sent from one country to another in a relatively effortless manner. Singapore-based CoinPip uses blockchain technology to allow transfer of money to various countries including Indonesia, the Philippines, and Vietnam.
CoinPip charges a flat 2% on money transfers and says that it can complete a remittance in 48 hours. It does not levy any foreign exchange conversion fees.
Realising the advantages that blockchain offers, banks are investing heavily in this technology. From a level of US$75 million in 2015, the amount being allocated by banks to blockchain in 2019 is expected to be US$400 million.
Source – World Economic Forum
Applications based on the blockchain are not restricted to the financial domain. Father and son duo, Don and Alex Tapscott, authors of Blockchain Revolution, describe how the technology can be used for purposes as varied as making politicians accountable to citizens and enforcing title claims on land.
They point out that blockchain is already being used in Georgia and the Honduras for registering land titles.
This new technology could also provide individuals with a greater degree of digital privacy. In the hyper-connected world that we live in, every action of ours can be recorded on remote servers. The route that you took to office in the morning, the places that you visited during the day, and the transactions that you carried out on your computer can all be tracked and the details stored in the cloud.
However, blockchain technology could allow individuals to keep all these details private and reveal only those that they wished to share.
World Economic Forum survey
It is expected that government agencies will start using blockchain in a big way in the coming years. A survey of over 800 information and communication executives and experts by the World Economic Forum found that 73% believed that the blockchain would be used to collect taxes by 2025. About 58% of survey respondents said that by this date, the equivalent of 10% of the global gross domestic product would be stored using blockchain technology.
The other changes that blockchain technology is expected to bring about include:
- Better property records in emerging markets.
- The usage of “smart contracts” linked to the blockchain.
- Disintermediation of financial institutions and banks.
- Access to the financial markets for anyone with a smartphone.
What are the potential downsides?
While the blockchain offers great advantages, it is not without its problems. One of its greatest drawbacks is also its strongest point.
A transaction that is recorded on the blockchain becomes a permanent record forever. It cannot be altered because that would involve accessing the block in a highly distributed network. But in financial institutions, there is a common practice of correcting errors that have crept into a transaction. This could be impossible in a system that uses the blockchain.
Another problem could be the legacy infrastructure that exists with the world’s banks. If it is possible to transfer funds from one country to another at a fraction of the existing cost, then who will use the services of traditional financial institutions?
But the blockchain is bound to cause disruption in financial services. Those banks that can adapt their processes to this new technology will survive and prosper while the laggards could see a sharp dip in their revenues from this line of business.
Writing in the Harvard Business Review, authors Don and Alex Tapscott say, “The unstoppable force of blockchain technology is barrelling down on the infrastructure of modern finance. As with prior paradigm shifts, blockchain will create winners and losers.”