Wednesday, 13 January 2016

Blockchain In 2016: Keys Trends And Themes

If 2015 was  as many declared the “year of the blockchain”, the technology  will have to go some way in 2016 to top the impact  that it has had on financial services. BlockchainBriefing looks ahead.

Despite the excitement there is nothing new about ledger technology.
It has been used  with much less fanfare quietly for decades, in areas such as the military and by other government organizations.
According  to Professor Michael Mainelli, the emergence of Bitcoin and the perceived threat of the crypto-currency to traditional finance  models is behind the recent ignition.



The year ended with the  42nd  banking name committing to a project  to develop standards in blockchain by innovation experts R3.
Some  are long-time rivals, but the unprecedented partnership has brought the likes of Goldman Sachs, RBS, UBS, J.P.Morgan, Deutsche Bank, Nordea and Mizuho to the same table.
The collective is working  on a standard for ledger technology, a blockchain or blockchains, which will allow for transfers of data, finance  and other forms of value between the members via a network.
One strand of the group  is a regulatory and legal outreach section which will spend 2016 working  with lawmakers to understand how the technology can fit into the banking and finance  world with minimal disruption.
R3 also waved goodbye to 2015 by proclaiming it had a broader remit, and would include  clearing houses, stock exchanges and non-bank institutions in the next year.
The project may be too big to succeed, but it is certainly too big to ignore.



Outside financial  services there are swathes of other industries now investing.
Mainelli co-founded Z/Yen, one of London’s leading commercial think tanks,  in 1994 and has been building  ledgers in one form or another for the last 20 years.
Details  of R3’s proposals are scant, but with a standard being  developed the group  has indicated it is looking  to create common ground, a single  ledger, which is anathema to Mainelli.
“I don’t think many of the people who have discovered ledger technology, have really thought it through,”  he said.
“We believe there will be hundreds of thousands, millions of these ledgers, not one true chain.
“I fundamentally disagree with the theory  there will be only one blockchain, be it the Bitcoin blockchain or something else.
“Some slower members, naming no names, have copied these coin chains  and wondered why they don’t work so well, but they are crypto-currency models, they work well, but not for everyone.
“If you come  from the ‘just discovered’ group  because it has to do with coins, and you copy that  coin model, you are not going  to get the same performance or characteristics in your distributed ledger; slow, cumbersome, not built for anything else.”
Mainelli believes in 2016 there will start to be a consolidation of many of the blockchain and ledger creators, which he breaks down  into two different types  — token and non-token.
Expect moves in the insurance and  charity sectors following discussion papers in the latter part  of 2015.
Mainelli’s view is that  should  sectors use databases to verify, and a problem arises, insurance companies are often  the first to start investigating.


Wider  Adoption

Nasdaq opened the new year by claiming  it had documented a successful private securities transaction via its distributed ledger platform Linq.
This proof-of-concept transaction was recorded on New Year’s Eve, and the exchange claimed this was the first real use case  of blockchain technology.
Several weeks earlier,  post-trade technologists at Kynetix conducted a  real-time exchange of ownership of a single  lot of pepper using blockchain technology.
Kynetix chief executive Paul Smyth said the transfer unlocked opportunities to streamline financing, collateral, settlement of derivatives contracts and post-trade processes.
The arguments over who did what first are a sideshow to the issue that  we are in a period where  lab
testing is now bleeding into real-time use cases.
Depending on who you ask, widespread adoption is one year away ( TABB analysts) to a decade away
(Deutsche Bank).
The Institute of International Finance  (IIF) believes there are  numerous regulatory obstacles to overcome before we can all get too excited, although it has also said “when, not if”.
Disagreements over the length of adoption aside,  a more  common consensus is that  Bitcoin use will start to fade  through 2016.
The crypto-currency has for many  outlived its usefulness and will recede back into the shadows. Much of the problem centres on the subject of regulation.
Throughout last year the European Banking Authority and the European Central  Bank did not move from their stance in 2014 that  crypto-currency should  be avoided at all costs.
Both are expected to release papers in 2016 re-affirming this, as central banks and clearing houses begin to look at using ledger technology to assist with their own back ends and their own currency  operations.


Industry Representation

Blockchain’s rise to prominence in 2015 triggered the emergence of several trade bodies. One of the most  interesting is the Wall Street Blockchain Alliance (WSBA).
The New York financial  hub has had an uneasy relationship with Capitol Hill and Silicon Valley, particularly post-financial crash, but lies in a position where  it can take the technology being  created and apply it to financial  markets.
The WSBA and others are to produce papers in the coming  months as the slow road  to regulatory appeasement begins in earnest.

Written by:
Mark Taylor
News Editor, PaymentsCompliance

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