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The Possibilities of the Blockchain

Wednesday 10 May 2017

With the growing emphasis on technology to meet rising compliance challenges, the use of blockchain stands out as a strong contender.

“The Australian Stock Exchange is conducting a very serious evaluation as to whether or not they will replace the Chess clearing system for their back end,” Nick Giurietto, Chief Executive Officer and Managing Director at Australian Digital Currency & Commerce Association (ADCCA) said, at the 3rd AML & Financial Crimes Congress. “Now, that is a ‘too big to fail’ implementation, so as a country, we can’t afford to let that go wrong, because if it does go wrong, then you are talking about very significant impacts.”

At the 2016 ASIC Forum, it was suggested blockchain could be used to lessen mandatory reporting costs between institutions and their regulators, which—in a way—could be an answer to the rising cost of compliance and complexity, particularly for organisations operating across multiple jurisdictions.

Not surprising, then, that 2017 has seen a heavy tech-focus from both ASIC and AUSTRAC, including the launch of a world-first RegTech Association.
Why blockchain is important for the future?
Giurietto said there are four core attributes to be considered, when it comes to blockchain:

  • Security
  • Accuracy
  • Transparency
  • Mutability.

Of those, the last two are most significant and have that potential to transform.

“Transparency boils down to this simple factor,” Giurietto explained. “‘I see what you see, and I know you see what I see’. When you think about that in relation to many business processes, it’s profound, because of that need to validate and reconcile records in order to confirm we are looking at the same set of facts.”

Containerisation and tokenisation

Giurietto used the analogy of how ‘containerisation’ has changed the way physical trading and transport works.

“Basically, anything can be put into a container and treated in an identical way to anything else.” he said.

The process itself does not vary according to whatever is being traded or transported; rather, “…it just handles theses common units of container freight.”

Giurietto added, “What blockchain allows you to do is a sort of ‘tokenisation’ of assets, where any asset, of any identity, can be handled in exactly the same way as any other. The way we buy and sell a house is different from the way we buy and sell a car, is different from the way we buy and sell insurance, is different from the way buy and sell private school education.”

There is no fundamental reason why they need to be different; thus, if they are reduced to the most fundamental level, they can be treated the same.

“This idea of tokenisation, or containerisation of information, is really where blockchain transformation is most revolutionary.”

Security and identity
“Fundamentally, the system we have today is broken. It’s very expensive, it’s cumbersome, and when it goes wrong, it very frustrating for the consumer,” Giurietto said. “So, you’ve got this disempowered consumer sitting in the midst of those identity silos, where information about consumer is held by all sorts of other organisations.”

Additionally, those intent on committing systematic fraud pose a serious risk.

”When you consider the duplication of sensitive data being sent to multiple people, the opportunity for that data to be hacked is increased.” As an example, Giurietto highlighted the case of the
Red Cross accidentally disclosing HIV status. The businesses are liable for the cost of that storage.

Giurietto said there is a need to build identity solutions, and added that such a thing can only occur with collaboration between consumers, institutions sand regulators. The cost of this is complexed, as the underlay of blockchain would only be possible with a kind of ‘critical adoption threshold’. This means building trust into the system, as well as establishing a social adoption of the idea from the public.

Other questions to consider, particularly regarding the economics, would be:

  • How do you rent access to identity?
  • Who do you pay?
  • What’s the insurance, if you make a mistake?

Regarding the social adoption aspect, Giurietto asked, “How do we give people confidence that all these benefits will be delivered, and that appropriate privacy protections are embedded in the system, as well?”
The question of identity is also very much a problem for developing and under-developed countries.

“The key to financial inclusion is to actually have an identity. So, you have a lot initiatives at that level, looking at ways to create identity for those who currently don’t exist in the legal sense.”

Envisaging global commerce
According to Giurietto, it will take a little while to see a full blockchain ecosystem develop, especially since, at this moment—at least, at a global level—collaboration is only happening in some jurisdictions, and only in varying degrees.

“Certainly, you can see innovation happening in this space already,” Giurietto said. “The Monetary Authority in Singapore is working there with banks, and the Canadian central bank has just announced its own pilot. I would argue there is enough of a business case to solve the domestic applications.”