What is blockchain?

“In the coming years, we will witness the growing popularity of blockchain technology.” This is one of my prognostications over a year ago, when I delivered a talk about technology trends in finance during the National Finance Summit. Now, almost all financial services institutions are talking about it, and still a lot of them are thinking of implementing it.

What is blockchain exactly? Don and Alex Tapscott, authors of Blockchain Revolution, define it as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial
transactions but virtually everything of value.”

Imagine a giant spreadsheet that is duplicated millions of times across a network of millions of computers across different places. This network is then designed to regularly update the file. Then information in this file is shared across different users and continuously reconciled. This is how blockchain works.

The spreadsheet analogy is actually a digital ledger that is created through a data structure and shared across a network of computers across the globe. The blockchain database is not stored in any single location; hence, the data it keeps is truly public and easily verifiable.

First conceptualized by Satoshi Nakamoto in 2008, the first blockchain was implemented the following year as a core component of the digital currency bitcoin, where it serves as the public ledger for all transactions. Today blockchain is not only used for bitcoins and is a software protocol on its own.

A key feature of blockchain is its state-of-the-art cryptography, which is changing and challenging the existing security paradigm. Established security models, such as those used in credit card payments, are building walls to lock people out of the network, handing out encryption keys only to people who are allowed access to certain information.

Blockchain’s model, on the other hand, allows each participant on the network to have access to the ledger and manipulate it in a secure way without the need for a central authority. It is all about letting as any people in as possible. In fact, the more people who have the ledger and participate in the validation, the harder it gets to hack or break the system.

Blockchain has a huge potential to transform the financial services sector. Already, many financial institutions globally and a few ones locally are exploring distributed ledger technology, while others have been actively investing time and funds in this area.

As an example, Deutsche Bank has been exploring various cases of blockchain use in areas such as payments and settlement of fiat currencies, asset registries, enforcement and clearing derivative contracts, regulatory reporting, KYC, AML registries, improving post-trade processing services, etc. The bank has been experimenting on these technologies at its innovation labs in London, Berlin and Silicon Valley.

Blockchain can disrupt and overhaul a legacy global banking system and lead to much faster payments by removing intermediaries. There is, likewise, huge potential for blockchain to streamline business-to-business (B2B) payments and address the persistent long-standing issues in cross-border friction and large payment volumes that are often exclusive to B2B. Other examples of potential blockchain technology applications include currency exchange and foreign exchange.

Despite the potential benefits, financial institutions need to carefully prepare for it by bringing together the whole ecosystem of stakeholders, such as regulators, governments, banks and academics, along on the journey to ensure successful implementation. Institutions should collaborate to explore and develop new uses for blockchain that could deliver expected and needed business value.

The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX. The author is a senior executive at an information and communications technology firm. He is the Chairman of the ICT Committee of the Financial Executives Institute of the Philippines (FINEX). He teaches strategic management in the MBA Program of De La Salle University. He is also an adjunct faculty of the Asian Institute of Management. The author may be emailed at reylugtu@reylugtu.com.

Source: https://www.manilatimes.net/2017/02/03/business/columnists-business/what-is-blockchain/310320/