BLOCK CHAIN
IT’S THE BUZZWORD PROMISING TO DISRUPT EVERYTHING FROM FINANCIAL MARKETS TO THE WAY WE VOTE, BUT WHAT IS A ‘BLOCKCHAIN’ AND WHAT DOES IT DO?
OVER THE LAST 20 years, the internet has gone from an o ce curiosity for sending emails and downloading shareware so ware to all but running the global economy. In fact, it’s become such an economic driver, a recent PricewaterhouseCoopers report estimates that connecting the world’s remaining four billion people not yet on the internet could add as much as US$6.7 trillion to the global economy ( tinyurl.com/tla55-economy).
But while the internet has spawned a new globally-connected economy, it’s also attracted its fair share of crooks. According to the Australian Cybercrime Online Reporting Network (ACORN), more than $127 million was reported lost by Australian consumers to online scams in 2015 ( tinyurl.com/
tla55-scam). Australian businesses don’t appear to be faring much better with PricewaterhouseCoopers’ recent 2016 Global Economic Crime Survey suggesting Australia has become a hotspot for cybercrime. In the report, 65% of businesses surveyed reported cybercrime over the previous two years, double the global average ( tinyurl.com/tla55-crime).
And not even central banks are immune — not a er the hacking of the Bangladesh Bank in February netted thieves some US$81 million through fake inter-bank money transfers. According to reports, the only thing that stopped the crooks from nabbing a massive US$1 billion haul was the lack of a spell-checker ( tinyurl.com/tla55-heist).
But there’s a technology that underpins new digital or ‘crypto’ currencies like Bitcoin that not only has the potential to slash banking costs, it could disrupt much of the nancial sector and even revolutionise the way we vote in general elections. It’s called ‘blockchain’ and you’ll be hearing more of it in the years to come.
CRYPTOCURRENCY ORIGINS
Cryptocurrencies have enjoyed a high pro le in geek circles since the 2009 launch of Bitcoin and dozens of variations since. But while digital currencies can be either de ationary (only a xed number of coins can be produced, like Bitcoin and Litecoin) or in ationary (no limits on currency production, like Peercoin and Dogecoin), they all invariably use a unique method of storing the currency’s transaction histories.
Transactions between banks typically take place through a central register or clearing house, ensuring that each dollar is accounted for. But the developer(s) of Bitcoin (just who created Bitcoin is up for debate) went the other way — they chose an open system of networked or ‘distributed’ ledgers or databases called the ‘blockchain’ to keep track of every Bitcoin transaction. ink something along the lines of ‘peer-to-peer networking’ and you’re on the right track. But what’s more, the system’s checks and balances, combined with the peer-to-peer decentralisation used to protect the blockchain, ensure that no one person can take control of it — at least in theory. ese days, reports are as much as 80% of bitcoin processing activity or ‘mining’ occurs in four main mining groups or ‘pools’ in China ( tinyurl.com/tla55-bitcoin).
WHAT IS THE BLOCKCHAIN?
Bitcoin explains the blockchain as a ‘shared public ledger’ that keeps track of and proves ‘who owns what’ when it comes to bitcoins. Any time a bitcoin is spent, a transaction is created, logging essential details such as the spender, the receiver and the bitcoin amount spent. But to ensure its legitimacy, the transaction itself is digitally encoded with a secret signature called a ‘private key’, which is kept in the user’s Bitcoin wallet, along with their bitcoins. It generally takes ten minutes for the system to con rm a transaction but, once con rmed, it is then added to a ‘block’. ese blocks are linked chronologically to maintain the system’s consistency and integrity, creating a chain of blocks, which becomes the ‘blockchain’ ( bitcoin.org/en/how-it-works).
What makes cryptocurrencies like Bitcoin unique is that anyone can set up and begin processing these transactions to continue the blockchain, a process called Bitcoin ‘mining’. You may have heard of geeks setting up banks of computers to ‘mine bitcoins’ for pro t — they’re not mining actual currency, but rather, they’re processing or con rming these transactions and receiving a fee in bitcoins for their work. In addition, bitcoins can also be obtained through traditional currency
exchange. e other important thing is that the Bitcoin blockchain is accessible to anyone. at’s because, once the blockchain is written, the system’s cryptographic and peer-to-peer nature means it’s all but impossible to change it, making it a permanent record.
WHY BANKS ARE INTERESTED
Governments and nancial institutions are mostly lukewarm on the idea of cryptocurrencies, but enthusiasm amongst leading global nancial players for blockchain technology appears to be spreading at bush re-speed.
While early reports suggest blockchain is separating the top-tier institutions from the smaller players, the technology is seen as a way of slashing the cost and time of clearing interbank transactions, as well as creating a more secure system. At the moment, the situation seems to mirror many previous new technology arrivals, with stakeholders scrambling to form new alliances to commercialise blockchain technology (think ‘VHS vs Beta’ of the mid- 1980s). e most signi cant of these alliances so far from an Australian perspective is the R3 consortium ( r3cev.com), which includes three of Australia’s ‘big four’ local banks — Westpac, Commonwealth and NAB — as well as more than 40 other banks and nancial institutions around the world.
Testing of the technology is well underway, with the Commonwealth Bank and 10 other global banks setting up a blockchain trading simulation in January 2016 with Microso ’s Azure enterprise cloud-storage playing host ( tinyurl.com/tla55-commbank). at was followed in March by a much larger trial involving R3 members testing a range of blockchain technology providers including IBM, Intel and Ethereum ( tinyurl.com/
tla55-trial). And to give you an idea of just how fast things are moving, the R3 group decided the following month that it was ready to jump aboard the Microso bandwagon and ink a deal that will likely cement the so ware giant as a leading player in blockchain services.
EVERYTHING AS A SERVICE
Blockchain competition amongst the tech giants is growing rapidly. e days of making squillions from selling computer hardware to corporations are fading fast — these days, the big money comes from selling products as services, thanks mostly to distributed or ‘cloud’ computing. You may have already heard of ‘so ware as a service’ (SaaS), such as your O ce 365 online subscription. But there’s also ‘infrastructure as a service’ (IaaS), where tech companies supply virtual hardware over the internet and care for enterprise-scale servers running many corporations.
But showing that you can seemingly make almost anything a service, Microso is now selling ‘blockchain as a service’ (BaaS), o ering to play host to blockchain ledgers not just for banking but for “businesses, industries and public organisations”. IBM and Amazon are also revving up their cloud computing reserves to deliver blockchain services. Meanwhile, chip giant Intel has announced its own distributed ledger technology codenamed ‘Sawtooth Lake’ in support of the Linux Foundation’s HyperLedger Project ( tinyurl.com/tla55-intel), of which, Australia’s ANZ Bank is a member.
POTENTIAL JOB LOSSES
But even before blockchain technology has clocked on for its rst shi , there is talk that the rise in new nancial technology or ‘ ntech’ could lead to signi cant job losses within the nancial services sector. A report from Citigroup released at the end of March this year forecasts as many as 1.7 million jobs could be lost to disruptive technology changes within the industry in the US and Europe over the next 10 years — equating to 30% of the current industry workforce. Report author Ronit Ghose is quoted as saying that “the biggest take out [of jobs] will
happen in countries that have been through a crisis or are tech savvy”. ose job losses are expected to come from the continued move from face-to-face to online banking, as well as implementing cost-cutting technology such as blockchain ( tinyurl.com/zkwjwrv). At time of writing, no-one had put a number on the potential job losses in Australia, although it would be unrealistic to think the local industry will be immune.
OVER-HYPED?
According to market analyst Gartner, cryptocurrencies in general remain high on its 2015 Hype Cycle for Emerging Technologies. CEO of nancial services rm JP Morgan, Jamie Dimon, reportedly believes cryptocurrencies like Bitcoin will struggle in the face of government controls ( tinyurl.com/
tla55-jpmorg). What’s more, not everyone shares the view that blockchain will set the world alight. While many, Dimon included, acknowledge the potential of blockchain tech, others question the role it will play in the nancial industry. e European Central Bank published a paper in April this year on ‘distributed ledger technology’ ( tinyurl.com/
zog95du, PDF), concluding that, while blockchain has potential, questions over whether it can make the leap to mainstream nancial markets mean “it is more likely to cause a gradual change in processes, rather than a revolution in the market”.
ELECTRONIC VOTING
But it’s not just nancial sector feeling the blockchain blowtorch — it’s even being touted as a solution for e-voting. e recent closelyfought federal election in Australia saw many call for the introduction of electronic voting. e expectation is that e-voting will speed up vote-counting and the declaration of seat winners, but also reduce waiting times for voters at the polls. Not only has Prime Minister Malcolm Turnbull thrown his support behind it, so too have academics, including director of the University of Western Australia Centre for So ware Practice, Dr. David Glance.
However, within government circles, e-voting has generally been considered fraught with complications, not least of these being privacy and security. Various Australian Government inquiries have looked at electronic voting since 2000, when a small delegation from the Australian Electoral Commission (AEC) headed to the US to witness e-voting during the then US presidential election. e following year, the AEC itself produced a report into e-voting, noting the major advantages, including instantaneous calculating of results and the ability for any voter to vote anywhere in the country. But it also outlined the disadvantages, from cost of computer hardware needed at each polling station to the lack of a paper trail of ballots, potentially raising “unacceptable risks” ( www.aec.gov.au/voting/ report.htm).
More recently, the second interim report of the parliamentary inquiry into the conduct of the 2013 federal election investigated options for e-voting. It noted the main concerns were the security, integrity and transparency of the system, along with cost and the system’s ability to maintain vote secrecy and engender voter con dence ( tinyurl.com/tla55-report). e nal report of the 2013 election concluded in its introduction that “to introduce large-scale electronic voting in the near future would dangerously compromise federal electoral integrity” ( tinyurl.com/tla55-2013).
Read online forums and you’ll nd responses to the idea of e-voting range from enthusiasm to acceptance, caution to suspicion. As some argue, the fact that we still scrawl markings on sheets of paper makes our voting system robust and much more di cult to hack, as multiple scrutineers check the counting of each vote. In the end, it might be slow and labourious, but it’s considered accurate and trustworthy.
AUSSIE START-UPS
However, blockchain transactions are considered extremely di cult to hack, they remain forever and can be viewed by anyone, which means blockchain could solve the problem of waiting for weeks for an election outcome.
Perth-based veri.vote ( veri.vote) is one Australian start-up in the race against teams from the US to deliver e-voting technology based on blockchain storage. According to its website, veri.vote is aiming for a system that is e cient in resources, secured through blockchain technology, completely anonymous and uses open-source so ware and protocols to allow anyone to view an election result.
Still, there are many questions that remain unanswered about how e-voting would work in practice, from vote-taking to vote-counting to vote veri cation processes that ensure computers don’t muck things up. en there’s protecting voter anonymity, something enshrined in Australian electoral laws. We suspect it’ll take a bit more than just someone from the AEC or government of the day coming out and saying that e-voting is perfectly anonymous to convince voters. Acceptance may even come down along generational lines, with younger ‘digital-native’ voters possibly more likely to accept e-voting than older voters.
SECURING THE FUTURE?
Blockchain is viewed as having real potential for solving some of the internet’s greatest security and privacy concerns — from nancial transactions to electronic voting. But it’s very early days, and while testing is progressing, blockchain still has a long way to go before its running global banking and democratic elections. at’s reason enough for us to keep a lid on expectations for a little while yet.