Blockchain featured heavily in the news this week, a sign of its growing popularity and influence. On Monday, the European Central Bank said it was experimenting with the ledger technology. The British government made a similar announcement the following day. For many, blockchain represents the future of financial transactions. It has growing support from banks, financial institutions and large corporations, all of whom believe it can slash the cost of payment transactions.
But how exactly does it work?
Blockchain is considered to be the world’s most popular bitcoin wallet. It is a decentralized ledger that is shared among a network of computers, and maintains a verifiable record of every transaction that has been made. It is essentially incorruptible because it can only be changed or updated by consensus of a majority of the contributors. Once information has been submitted, it can never be erased.
The benefits are clear to see - a secure and fully accountable record that eliminates the need for intermediaries. The following blog explores why blockchain has been making headlines this week.
ECB Experimenting with Blockchain
Blockchain can "heal the ailments of the financial industry." That’s according to Yves Mersch, an ECB executive board member, who spoke about blockchain technology at the Deutsche Bank Transaction Bankers’ Forum on Monday.
He says the European Central Bank (ECB) has been doing some ‘experimental work’ with distributed ledger technology (DLT) to see if it could lead to lower costs and a more resilient and legally sound market infrastructure.
"From a central bank perspective, in the context of our strategic reflections on the future of the Eurosystem’s market infrastructures, we are certainly open to new technologies and, like many market players, have launched some experimental work with DLT.”
You can read Mersch’s speech in full here.
This follows on from a report by the Bank for International Settlements in November, which said the technology could pose a "hypothetical challenge" to central banks.
No Pre-Emptive Regulation
On Tuesday, an EU parliamentary committee backed a report that called on the European Union to hold off from regulating blockchain. Jakob von Weizsaecker, the German author of the report, told Reuters it was important to have precautionary monitoring but no pre-emptive regulation.
Blockchain is primarily being used for bitcoin, which is also growing in mainstream acceptance. Online merchants and start-ups are using the digital currency because it allows them to cut overhead costs compared to credit or debit card transactions. The global bitcoin market is estimated to grow at a rate of 7.26% by 2020.
Although the report from von Weizsaecker is non-binding, it could help shape future EU regulation. In his report, he recommended that the EU set up a dedicated task force to monitor blockchain. He stressed this task force shouldn’t interfere with blockchain regulation, because this may disrupt the significant opportunities the technology is creating for consumers.
Not everyone agrees. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) says blockchain is “not mature enough to fulfill the requirements of the financial community.” However, these comments should be taken with a pinch of salt. Many in the financial sector believe Swift will be replaced by blockchain for interbank payments, and sooner rather than later.
Tracking Taxpayer Money
Outside of financial institutions, there are a number of governments exploring the possibilities for blockchain technology. Cabinet Minister Matt Hancock revealed the British government was examining how it could be used to keep track of the distribution of taxpayer’s money, including grants and student loans.
Speaking at a blockchain networking event in London, Hancock said “government cannot bury its head in the sand and ignore new technologies as they emerge.” He may well have a point. According to the Global FinTech Market Outlook, the legacy financial system is under serious threat from the likes of blockchain technology. The digitization of finances is the key growth factor for fintech disruption across the world.
But Britain hasn’t got the best record with government IT system. As noted by Reuters, IT problems have previously affected the passport agency, the tax credit system and the National Health Service (NHS). The latter being the most high profile. It led to the abandonment of a multi-billion pound scheme to computerize every patient record.
According to a recent report on the Global FinTech Investment Market, blockchain technology is already helping financial institutions, like banks, save millions. But blockchain is a phenomenon distinct from bitcoin and, in recent years, there is growing discussion on the potential applications for blockchains across various industries.
It’s still early days for blockchain, but the future certainly looks bright.
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