Everyone got very excited a few years ago about blockchain technologies, the ledger system that was spawned by the arrival of bitcoin in 2009. It allows the recording of transactions to be automated and completely trusted, as the ledger system is tamperproof. The resulting excitement was that this could therefore replace many systems of contracts that are paper-based with smart, digital contracts. This would be transformational as it would allow us to replace everything from clearing and settlement systems to passports to land deeds registries to supply chains that are paper-based, with a new software structure that would reconcile and manage everything without a human hand involved. Just in clearing and settlement, this was estimated to deliver savings of over $20 billion a year, due to the inefficiencies of the current systems.
This excitement then plateaued as firms started to realise the challenges of developing blockchain-based systems or, as it is better known today, distributed ledger technologies (DLT). Distributed ledgers are just that, a ledger system shared across the network. Everyone has a copy of the ledger and the ledger is updated in real-time automatically. In recent years, many firms trialled these technologies for their robustness and trustworthiness, and many firms concluded that the technology is not quite ready yet. For example, the Bank of England looked at using DLT to replace their Real-Time Gross Settlement (RTGS) system, the core system for monetary transactions across Britain’s banks, at the start of 2016. However, in May 2017, the Bank concluded that the technology was too immature and issued a statement saying:
“The Bank has decided not to build the renewed RTGS service on Distributed Ledger Technology, in light of its findings that the technology is not yet sufficiently mature to provide the exceptionally high levels of robustness required for RTGS settlement.”
Those high levels of robustness are pretty important, as the Bank processes over £500 billion of payments per day, and it is clear that blockchain and DLT is still in early days. We could see that when one of the most popular corporate DLT systems, Ethereum, had to restart after a hack in 2016. At the time the hack occurred, the founder of Ethereum stated that you have to remember this is still “an experiment”. You cannot develop the next generation of systems for government and finance on an experiment.
Equally, many blockchains are based upon cryptocurrencies such as bitcoin or ether. These cryptocurrencies have risen dramatically in value over the last year, and become the hot topic at many parties: “have you brought some bitcoin?”; “how much will bitcoin be worth this time next year?”; “what’s the next hot currency I should buy?” These cryptocurrencies are not valuable of themselves, but are valuable if they become the backbone of tomorrow’s structures, such as our clearing and settlement systems. That is why they are of interest. Equally, there may well be new digital currencies based upon these cryptocurrencies, issued by governments. For example, Estonia, Sweden and China have all announced that they are testing digital currencies to replace their paper currencies, using these DLT and crypto technologies.
In other developments, we are also seeing some governments commit to change. The Australian Stock Exchange has committed to replace its current settlements systems with DLT, as has the Dubai emirate. Dubai has actually gone further in its commitments than any other city, vowing to replace all government systems with DLT-based digital structures by 2020. This would mean that all visa applications, bill payments and license renewals, which account for over 100 million documents a year, would be transacted digitally using blockchain DLT. According to Smart Dubai, this will save the emirate over 25 million man hours a year and over $1.5 billion per year in reduced costs. Equally, it will be the world’s first paperless government and, with savings of this magnitude, you can see that many institutions will migrate toward DLT over time. In fact, returning to the Bank of England’s RTGS investigations, they did state that DLT was not mature enough in 2017 for their needs but probably would be by the time they need to implement their next refresh in the 2020s.
This is why many refer to DLT as a foundational technology as important to our future as the very basics of the internet: TCP/IP, HTTP and HTML. In fact more so, as DLT is the foundational technology for tomorrow’s governmental and financial systems. Maybe. There is one small spanner in the works that may change the future of DLT and blockchain and it is quantum computing.
Quantum computing is in very early research today, although IBM did recently announce the Q Network, a group of Fortune 500 companies, academic institutions and national research labs that are working with the firm to experiment with potential real-world applications on its quantum bit (qubit) processor. This includes some big banks, such as JP Morgan and Barclays, who can see that quantum computing could rethink the way in which financial institutions implement security and encryption in the future. The fact that one of the mainstream use cases of blockchain DLT is around digital identities and encryption means that quantum computing could therefore replace the very systems being developed today in DLT.
Quantum computing is some years away however, and most forecast that DLT and quantum computing will be complementary technologies, rather than competitive systems. It just shows how difficult it is to predict the future. For me, the one thing that has always held true with technology is that we usually over-estimate the speed and under-estimate the impact. It is clear that blockchain DLT is a transformational technology that will reimagine most of the ways in which we currently trade and transact. It will rethink our government, finance and commercial systems within the next five years, and that is the fundamental reason why we all need to invest time in this space.
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