What is Blockchain… And Why Should I Care?

Blockchain provides a decentralized 'digital ledger' of transactions that everyone on the network can see. Essentially a chain of computers, participants approve an exchange before it can be verified and recorded. But why should retail banking executives care?

The reference architecture for blockchain was originally conceived as Bitcoin, where “electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

Satoshi Nakamoto, the unknown person or persons who designed the cryptocurrency, went on to say “digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending” in the original whitepaper.

In the proposed solution, the “network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed.” He further described the concept of miners where “a majority of CPU power” would generate the longest chain and outpace attackers or malicious intent.

Today, blockchain is no longer just about bitcoin or the broader category of cryptocurrency; it’s an exploded view of the underlying technology. It’s unique and differentiated in that it’s an immutable ledger with a single version of the truth of the transaction.

And unlike other immutable datastores, it is also a shared or distributed ledger across a peer-to-peer private or public network. It leverages a consensus mechanism to create permanent records of transactions through a distributed and decentralized network, removing the need for a central authority.

Ultimately it intends to create a trustless exchange of goods, services and/or real assets in a more trustworthy way. And with a potentially much lower cost of transaction.

Blockchain is a Fintech

In January of 2017, Venture Scanner was tracking 891 blockchain and bitcoin technology companies across 12 categories, appearing in 73 countries, with a total of $1.9 billion in funding.

Our PwC team is digging deeper into the blockchain ecosystem and finding that it is evolving quickly. Several consortia are attempting to drive proofs-of-concepts and nearly every major financial institution is actively researching, coding PoCs, and building on their talent.

Yet, big banks and other financial services firms are not only ones. The PwC DeNovo strategy platform is also tracking 378 blockchain-specific startup companies, across 31 industry sub-sectors, that are creating solutions across the different aspects of the market.

These startups are positioning to build-out these blockchain ecosystems, which will require four layers of technology. These include; 1) application, 2) application development and APIs, 3) protocol/business logic, and 4) distributed messaging.

Associated with this distributed ledger stack are hosted services that encompass all aspects of the technology in the cloud. This type of cloud computing environment enables startups to enter the fray as blockchain still requires further experimentation and development.

Read More: Why This Bank Is Betting Its Future on Blockchain Payments

Hype to Reality

In 2016, venture capital funding in blockchain rose to $450 million. In 2017, the technology is progressing from hype to reality with additional business use cases becoming more and more common.

While blockchain was initially explored by the financial services industry, the realized potential of this emerging technology has expanded to include energy, telecoms, healthcare, automotive, and even voting systems.

Moreover, these simplified transactions facilitated by blockchain will become the basis for smart contracts, with the promise to automate complex processes while making them legally binding and self-enforcing at the same time.

By the mid-2020s, PwC expects blockchain-based systems will be leveraged by leading enterprises with the aim of reducing or eliminating categories of validations and verification friction to streamline all kinds of transactions.

The Next Frontier

In the 2017 PwC Fintech survey, more respondents become familiar with the technology – with 24% very or extremely familiar versus only 17% the year prior. North American participants were the most familiar with the technology, and globally 55% are planning to adopt it as part of a production system or process by 2018. That number increases to 77% by 2020.

Some are already are making use of the technology. One example was a large European bank that completed instantaneous payments between two of its clients on a cross-border basis using blockchain technology. This highlighted the benefits of using the technology that can eliminate unforeseen charges, delays, and processing mistakes.

Read More: 4 Tech Trends That Will Massively Transform Banking

So, while progress is being made, implementing this technology will not come without uncertainty and risks. So as a business leader, how do you know if blockchain is for you?

There are a number of assumptions that need to be met before moving forward to help ensure blockchain is a strong potential solution for a problem you are trying to solve or the value-added opportunity you intend to create.

  • Are multiple parties involved that need a common view of information?
  • Do multiple parties take actions that need to be recorded and change the data?
  • Do the parties need to trust the actions recorded are valid?
  • Would removing record keeper intermediaries reduce cost (e.g. fees) and complexity (e.g. multiple reconciliations)?
  • Would reducing delays provide business benefit (e.g. reduce settlement time or risk, enhance liquidity)
  • Do transactions created by different parties depend on each other?

If you can check at least four out of these six assumptions, it might be worth the time to further explore blockchain as a solution.

While there are still risks, most of the technological risks are currently being addressed by developers, academics, businesses, and solution providers. But still, there is a number of regulatory and legal uncertainty for some of the emerging business use-cases.

Why Should I Care?

Why should we all care? While financial services is the sector most likely to be disrupted, blockchain technology is poised to improve customer experience, streamline product features, and enable our global economic system to reshape market structures that will impact us from Wall Street to Main Street.

Financial services marketers, retail bankers, product managers and customer service executives will all be impacted by the progress of blockchain technology. One of the first overarching impacts could be in the development of a system of universal identity verification, that will impact everything from new account opening to cybersecurity.

Leaders must be prudent and act now in evaluating blockchain as the types of deployments evolve, while regulators need to re-evaluate policies and processes given the enhanced transparency the technology promises.

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