Chain reaction

Turning the hype about the blockchain into reality

Finance

Is there a problem to which the blockchain is not the answer? The technology that underlies bitcoin, a digital currency, has won adulatory attention from banks, businesses, investors and regulators over them past two years. But 2017 is the year when the potential of the blockchain will start to be properly tested in the real world.

First, a recap. The blockchain is a “distributed ledger”, an online record of transactions that is shared and authenticated through a series of cryptographic steps. If that sounds dull, it isn’t. A trusted register has the potential to cut fraud by verifying who actually owns an asset, whether it be a wodge of digital currency or a plot of land. It dangles the promise of huge cost savings: why spend time and money reconciling lots of proprietary databases when a single public version can do the job? And because it can have instructions embedded within it, the blockchain opens the door to “smart contracts” that can be executed automatically without the need for pesky humans to get involved.

That has got lots of people excited. Imagine clinical medical trials whose results can be stored on the blockchain, so that they cannot be selectively reported by drug firms. Or blockchain-based voting systems that guard against electoral fraud or e-commerce transactions that are programmed to release customers’ payments only once a package has been tracked to its destination. Governments will keep cautiously experimenting with the technology in 2017. Australia and Russia both have plans to try out voting systems, for example, and Britain will review the results of a controversial pilot programme that uses the blockchain to deliver payments to welfare recipients and then track what they spend the money on.

But the real action will be in financial services. Oliver Wyman, a consultancy, reckons that banks spend more than $200bn a year on IT and fees in their capital-markets businesses alone. In an industry that is struggling to pay its way, the blockchain offers juicy savings. A recent report from the World Economic Forum reckoned that 80% of banks will have started work on blockchain-related projects in 2017.

Some are already pretty advanced. The biggest blockchain consortium, R3 CEV, whose members include JPMorgan Chase and Citigroup, will launch a platform for settling financial transactions in the coming year. Japanese banks are working with an American startup called Ripple on a ledger for processing payments that is due to launch in the spring of 2017. Another cluster of big banks, including UBS and Deutsche Bank, are beavering away on a digital coin which can be used to process transactions between them more quickly, and which can then be swapped for physical currency at central banks.

The back office of a bank is not an obvious place to look for a glimpse of the future. But the test cases for the industrial use of the blockchain are in finance. If enough go well in 2017, the broader hype about the ledger will seem less Utopian.

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