Block(chain) 'n' Roll

 Reposting an article posted by our CEO and Founder, Oliver Andersen, a few weeks ago. Happy reading folks :) 

Throughout 2017, there has been an increasingly popular and sophisticated understanding of the revolutionising applications of blockchain technology, with the focus shifting beyond the bitcoin buzz. I therefore figured now to be as good a time as any, to write a reflection on why I think blockchain is one of the most intriguing technologies and why it will be the focal point of many promising companies of tomorrow.

 First, some context: Blockchain technology is a globally distributed electronic ledger, that runs on millions of devices, enabling reliable transactions between parties. Blockchain technology is capable of recording anything of value, from money, equities and deeds to contracts to peer-to-peer transactions. What this means, is that centralised and powerful authorities such as banks and governments, who traditionally have needed to be present to facilitate and validate these transactions, are removed from the equation. Trust is instead distributed and ensured through cryptography, consensus algorithms and innovative code.

Now, take a second to digest this, potentially read it again and think about the true impact: Individuals and organisations (and however many parties they choose to engage with) can agree, transact and create value as part of a given system (blockchain) without relying on centralised authorities to provide the ‘trust’ (through identification verification and transaction formalisation) historically needed to complete a transaction.  

Not all are positioned to explore innovation at this scale

The exponential leaps of technology throughout the last few decades, coupled with widespread commercial adoption of digital tools, has somewhat diluted the meaning of ‘digitalisation’ and instead turned it into a buzzword that only carries a vague connotation to what the actual act of digitalisation refers to. Particularly within the financial services industry, there are many inefficient business legacy processes in place, all involving paper, call centres and/or in-person meetings. Such processes are disguised as being ‘digital’, however the only digitalisation taking place at these companies, is to wrap a non-digital cluster and half-solved solutions inside a digital shell. The underlying nature of these organisations is fueled with a vast number of non-digital backend processes, significantly impacting customer experience and, not to forget, customers’ wallets.

Many of these financial services companies in digital disguise possess vast amounts of sensitive customer data, hold strong market positions and have gone largely unchallenged… until blockchain. Sure, there are regulatory efforts being employed to strengthen and facilitate a global payments climate through the Payment Services Directive (PSD) and PSD2 regulation, attempting to consolidate payments markets across Europe, however, the single strongest card in enabling a truly global financial community, is blockchain technology.The World Economic Forum, Deloitte and McKinsey (to name a few) all estimate at least 10% of global GDP to be stored on blockchain technology within 10 years, leaving room for an increase that will be more than 100-fold from the current value of global GDP stored through blockchain technology.

The applications of blockchain reach across several industries and encompass everything from the way governments store public records and health data to decentralised peer-to-peer communities to instant global transfer of value at a fraction of the cost of that with a centralised intermediary. 

Potential financial services applications of blockchain technology

In my view, financial institutions can choose to take two different approaches to applying blockchain technology (that is, if they at all acknowledge the need to take a position). Option one is to treat the technology as a means through which it will be able to streamline payment processing, security compliance and decrease cross border payments (Santander forecasts bank costs associated with cross border payments and compliance to be reduced by $15 to 20 billion by 2022).

Option two involves viewing blockchain technology as the underpinning blueprint for the future of financial services, as opposed to a mere cost savings tool. Blockchain doesn’t have to overthrow financial institutions as we know them, but for that not to happen, will require the large industry players to adapt, keep at pace with the rapid innovation taking place and embracing the new paradigm dawning upon us. Once financial institutions start applying blockchain to big ambitions, the prospects are very appealing: Smart contract (programmable contracts that are capable of automatically enforcing themselves when predefined conditions are met) application to financial transactions and identity verification are two concepts that should be explored further by financial institutions. Imagine a world where signing up for a new bank is as easy as signing up for a new Facebook account, yet safe, or where you would be able to participate in crowdfunding for private equities through smart contracts.

Speaking of start-up funding and the power of decentralised technology, allow me provide a slightly different perspective, a perspective from the inside of a blockchain start-up. 

Deciphering Initial Coin Offerings — what’s all the hype about?

To truly understand the cumbersome and distracting rigour a start-up must go through to be able to raise money the traditional way, let me illuminate the standard trajectory: A typical start-up goes through several phases of funding, including bootstrapping (self funded), a family and friends round, a seed round (typically angel investors) and then finally onto the big leagues: Venture Capital (VC) funding (for the lucky few). After VC funding shines a weak light at the end of the tunnel of an Initial Public Offering (IPO), such as the one Snap Inc. went through earlier this year, opening up the company to public scrutiny, and investment.

Private fundraising at large falls prey to capitalistic short-termism, seeking immediate return on investment (ROI) as opposed to having an in-depth look at the company roadmap and to have the company’s long term interest in mind — two key factors leading to sustainable growth. This in turn lead companies to spend several months (and sometimes years) at distraction from what really matters; the product and the end-user experience. 

Initial Coin Offerings (ICOs) present an innovative alternative to raising money through private funding for start-ups working with decentralised technology. At the same time, this nature of fundraising allows for popularisation of the world of venture capital through a globally distributed peer-to-peer model. 

There are however still barriers to ICOs becoming the preferred channel for startup fundraising. Few companies ruin it for the many through dishonest initiatives and taking advantage of the lack of regulatory maturity in this area, moreover, many ICOs exclude American investors due to fear of the SEC striking down. Finally, many cryptocurrencies are wildly volatile and therefore pose a significant risk to investors’ money. 

A brief look at some of the most interesting blockchain start-ups would in my opinion include Storj (decentralised data storage), ICONOMI (simplifying investing in ICOs),Ahoolee (decentralised search engine) and Pally(decentralised social travelling — no biases here at all).  

What’s next?

Let’s remember that despite all the blockchain noise, it’s still early days. The total industry capitalisation is still lower than the net worth of the world’s richest individuals. For the technology to enter sustainable long-term growth, it is imperative that we keep a cool head, our eyes on the prize (that is, blockchain technology as a whole, not the chance of a quick pay-day through market speculation as multiple mainstream news outlets and several subreddits would indicate) and come to reasonable solutions through the current growing pains, such as BIP148 and the impending fork on the bitcoin blockchain. Let’s ensure that the industry keeps growing for the right reasons — we are still years from popular adoption.

The final thought I will leave you with is this: There are several examples of developing countries skipping steps in the technological evolution of the 21st century. due to late adoption and missing infrastructure (think mobile vs. landline cell phone service and mobile payments). The exclusionary nature of centralised, powerful financial authorities, is leaving many global citizens unable to obtain access to basic financial services such as a bank account or the transfer of money. Blockchain could very well hold the answer to issues such as these through its decentralised nature. We have a unique opportunity to democratise a groundbreaking technology and to make it accessible to anybody and everybody…so let’s get to it. 

About the guest author: Oliver F. Andersen is CEO of Pally and a proud technology geek, who’s on a mission to bring the world closer together through the application of innovative technology. With a background in Behaviourism and Financial Services, Oliver’s perspective unites human behaviour and hard logic, often leading to a wealth of borderline over-the-edge ideas, passionate research and interesting discussion. But hey, if nobody challenges the status quo, how will it change?