Treasury Today Country Profiles in association with Citi

Blockchain: explaining the future

Bitcoin USB sticks in dock

With the 2015 EuroFinance International Cash and Treasury Management conference in Copenhagen swiftly approaching, a topic likely to be hotly debated is blockchain technology. Here is what you need to know about the nascent technology in advance of the event.

In 2009, bitcoin was launched into the market as one of the world’s first cryptocurrencies. Since its debut, the value of the coin has reached dramatic highs and experienced spectacular crashes; it has been used to facilitate criminal activity but also by consumers to purchase computers from Dell; and it has garnered attention from the media, regulators and the financial community alike. But in recent months, the focus has shifted away from bitcoin and onto blockchain – the technology that facilitates bitcoin transactions.

In the pages of Treasury Today a number of well-respected industry professionals have discussed the seemingly unlimited potential of blockchain technology and its ability to re-define not just how payments are made, but also how all electronic data is managed and shared. Yet, with limited real-life examples of this, treasurers cannot be blamed for thinking this is just hype. However, with banks such as; DBS, BBVA, Santander, ING, Goldman Sachs, Citi and BNP Paribas all publicly announcing that they are experimenting with the technology, it may not be long till we have some quantifiable evidence of its potential.

Connecting the blocks

At a basic level, the blockchain can be defined as a distributed public ledger which is built and maintained by individual nodes (user’s computers) and secured by mathematical algorithms. It works by adding new blocks following each transaction (of bitcoin for example) one-by-one in a linear fashion providing a full history of every transaction in the chain (see diagram one). It is a simple concept – a digital record of digital events that is shared between many different parties – but under the hood it gets very complex.

Diagram 1: Example of a blockchain
Diagram 1: Example of a blockchain


A digital record of digital events isn’t particularly spectacular, in fact web browsers do the exact same thing, collecting your browsing history as you surf the web. What makes blockchain special is the way that this information is processed and verified.

When a user wants to send something digitally to another user over the blockchain (bitcoin in this example), the data that is required (including the details of the sender, receiver and any supplementary information) to complete the transaction will be sent out into the ecosystem and scrambled, along with a number of other transactions that are made at a similar time. The nodes that maintain the network will then begin collating all these transactions into a single block.

Once complete, the block will be confirmed and then attached to the chain as the newest transaction block not only including the latest transactions but all transactions that have gone before it. For this to happen however, the block must be confirmed by all the nodes by being processed through a series of algorithms to create a proof of work number. Once this number has been created, it will send this out to the network which will recognise and confirm this number as being unique and the transaction will be confirmed and be irrefutable. The network will then begin to start work on a new block – following the same process.

What this means is that the blockchain can only be updated through the agreement of the majority of participants in the system. As Mike Gault, Founder and CEO, Guardtime, explained in a recent article for Recode: “imagine that you’re walking down a crowded city street, and a piano falls from the sky. As dozens of people turn to watch, the piano crashes down right in the middle of the street. Then, without a second to lose, every person who witnessed the event is strapped to a lie detector and recounts exactly what they saw. They all tell precisely the same story, down to the letter. Is there any doubt that the piano fell from the sky?” This is essentially what the blockchain does: creates irrefutable proof that an event happened in the correct way. This is different from how most digital transactions occur today when we rely on a single source of conformation (a bank, for example) when we make an online transaction.

The other revolutionary property of the blockchain is that its transaction history is extremely secure – if the crowd said that a piano fell from the sky originally, they won’t be able to change their mind at a later date. This is because the blockchain secures the chain by including the history of all previous transactions in the latest block meaning that if somebody wishes to change the chain, they would have to redo the latest work in the chain and do this at a quicker speed than the rest of the network. To do this, the user would need to have over 50% of the computing power of the overall network – not theoretically impossible but extremely difficult.

How it can disrupt?

So that is how blockchain works, but what are its practical applications? Today, the primary use of the blockchain is to enable cryptocurrency transactions, but the blockchain can actually facilitate the transfer of value of anything digital, be it cash, an invoice or even a contract and this will always be 100% irrefutable, irrevocable and fully visible.

In the digital age, the transformational power of this technology is, in theory, limitless. For example, it could be used to facilitate free and fair elections, carry public records such as passports, and even store more frivolous items such as coupons and movie tickets. But it is in the financial services industry where the majority of innovation is currently happening.

Possibly the most obvious example, and one being worked on by a number of parties, including three of Australia’s biggest lenders, ANZ, Westpac and the Commonwealth Bank of Australia, is how blockchain technology can be used to transact fiat (USD for example) currencies. At least one of these banks is using Ripple, a company advertised as the world’s “first open-standard, Internet Protocol (IP)-based technology for banks to clear and settle transactions in real-time via a distributed network.”

Ripple, a payments platform inspired by blockchain technology, believes that by using blockchain technology as the financial rails on which transactions are transported it can give banks the potential to make faster payments – in more currencies and into more markets – with lower cost and risk than is possible today. It is able to do this because the Ripple network is powered by participating users agreeing on changes to its ledger every few seconds. As such, banks are able to clear transactions on its network 24/7 365 days a year in real-time and (by avoiding third-parties) without the same level of cost.

Away from payments, the ability to transact anything digitally on the blockchain could mean that contracts can be exchanged on the blockchain. The benefit of this is that all parties involved will have a fully secure and visible digital record of the transaction and all the data that is associated with it.

True multi-bank eBAM is another issue that the blockchain has the potential to solve; as are agreements and certificate exchanges, such as bonds and share certificates. Transferring letters of credit, and all the instruments associated with this, could also be built around the blockchain moving forward.

What it means to the treasurer

As mentioned earlier, many of the current projects around blockchain are either locked away in banking labs, or yet to have the scale to make many treasurers stand up and take notice. Yet, the benefits for corporates are clear; transactions will be quicker, cheaper, irrevocable. Blockchain will also provide an opportunity to drive straight through reconciliation, and a full audit trail will be automatically created.

Despite the obvious advantages of instant payments at a low cost, banks may be unwilling to move away from current payment systems. This is primarily because funds settlement is completed by global correspondent banks and these have conducted detailed due diligence on counterparty banks to create trusted relationships. Moreover, a great deal of work will need to be done to ensure that the blockchain can be as secure as the current systems (hopefully even more secure).

Change is not going to happen overnight, but for now, blockchain remains a space to keep an eye on and one that no doubt will see plenty development in the coming months.