HOW IT ALL STARTED
The advent of the Information Age in the 1970s allowed humanity to evolve to a point where information flowed freely, unhindered by national borders, and without the need for intermediaries such as post offices, libraries and universities. We’re now moving into an age where not only information, but value can flow freely without the need for trusted intermediaries such as banks, deeds offices and central securities depositories (CSDs). The technology that has allowed this digital peer-to-peer value transfer revolution is called Distributed Ledger Technology (DLT) or, as it’s more commonly known, blockchain technology.
WHAT IS BLOCKCHAIN?
Blockchain initially emerged as the technology that allowed Bitcoin, the cryptocurrency, to operate without a trusted intermediary but through a network of participant computers (or nodes as they’re called), working together to validate peer-to-peer transactions. These transactions are time-stamped in a distributed ledger that all the nodes have access to and collaborate on. While blockchains are relatively new (the first was the Bitcoin blockchain in 2009), they are a product of technologies that have been developing over the last half century in the fields of computer science and cryptography. In essence, a blockchain solves the problem of “double-spending” – the ability to spend digital value more than once – without resorting to a trusted intermediary model.
WHY IS BLOCKCHAIN IMPORTANT?
The transfer of value – or payments – earns the global banking industry ~USD1.7 trillion , which is roughly 40% of total global banking revenues. Much of this revenue is earned due to the need to send payment instructions and reconcile ledgers where exceptions occur. To be sure, the cost of conducting payment transactions is a fraction of global banking revenues; however, many costly resources are still involved with clearing and settlement, exceptions and reconciliations. Blockchain technology portends to bring the marginal cost of transactions to almost zero, while eliminating many of the inefficiencies involved in the payment process, resulting in almost instantaneous and automated clearing and settlement.
Beyond payments, blockchain technology promises to revolutionise the transfer of any kind of value – from equities and bonds in a CSD, to title deeds managed by a government department, to currencies held in banks. Indeed, many trusted intermediaries understand that their roles are changing and are actively engaged in understanding what the new financial services ecosystem will look like.
WHAT ARE WE DOING ABOUT BLOCKCHAIN?
Our team is engaged in three main avenues of work:
- Understanding and education: As blockchain technology is nascent, we’re tracking all the latest developments and collating these learnings into a format that makes the content accessible to everyone. Our biggest obstacle right now is ignorance.
- In-house research: We have built our own blockchain prototypes, issuing mock assets (such as NCDs and a digital currency), trading these assets and deploying smart contracts. While most discussions about blockchain technology these days revolve around “use cases”, we prefer to focus on the platform that will allow a myriad use cases to emerge.
- Collaboration with other institutions: A blockchain is like a fax machine – if no one else has one, it’s not much use. So, we’ve taken an inclusive approach and share our learnings and engage with other institutions to progress South Africa’s collective understanding of this technology. We believe that by being inclusive and collaborative, a collective vision for a future financial markets infrastructure will emerge.
Blockchain technology is in its infancy and there is much work and learning to be done before it can be widely adopted and yield the tremendous benefits that have been promised for society. However, this technology is a double-edged sword for the banking industry (and the financial services industry overall). While it heralds a new age in the “value transfer business”, from a cost and efficiency perspective, it threatens some business lines that have up to now been lucrative for the banking industry. At the same time, other streams for value creation will emerge. What is important at this juncture is to understand the developments in this space and ensure we bring the benefits of blockchain to a broad range of stakeholders – customers and shareholders alike.
by Farzam Ehsani