Blockchain rules

Deirdre Macken dis­cov­ers the new kid on the block

The Australian - The Deal - - Front Page - Story by: DEIRDRE MACKEN

Blockchain sounds like a so­lu­tion to a 19th-cen­tury rail­way prob­lem, but lately it’s on the lips of ev­ery ex­ec­u­tive who wants to solve the prob­lem of 21stcen­tury dig­i­tal trans­ac­tions. As in­no­va­tor Tim Lea, of Vere­dic­tum, says: “It’s a great space we’re in – but get­ting hot­ter by the day.”

Lea is build­ing a blockchain for iden­ti­fy­ing videos and he’s run­ning hard to keep up with the ex­press train.

The evo­lu­tion of blockchain is ex­po­nen­tial. It may have be­gun as a sys­tem for deal­ing with (of­ten dodgy) dig­i­tal trans­ac­tions six years ago and it may have cap­tured the imag­i­na­tion and bud­gets of banks last year, but in the months since it be­gan en­ter­ing dic­tionary searches, it has be­come a pos­si­bil­ity for al­most ev­ery sort of busi­ness.

Blockchain is still new enough to be greeted with “block what?” at busi­ness func­tions. It needs an ex­pla­na­tion and so far no one has found one as catchy as “in­for­ma­tion su­per­high­way” was in the early days of the in­ter­net. But let’s give it a go.

Blockchain tech­nol­ogy is a way of record­ing and stor­ing dig­i­tal trans­ac­tions. It’s a dis­trib­uted ledger that al­lows trans­ac­tions from one ver­i­fi­able party to another on a net­work that every­one can “see” but no one can change, de­fraud or clip the ticket along the way. Some peo­ple have called it “the in­ter­net of value”, oth­ers re­fer to it as a “trust net­work” but every­one agrees it’s the best way of wheel­ing and deal­ing on the net.

It has been best known as the sys­tem for ex­chang­ing Bit­coin and it has been a pub­lic net­work. Fo­cus is shift­ing to pri­vate net­works that give var­i­ous par­ties per­mis­sion to par­tic­i­pate, and this is be­com­ing the pre­ferred model for fi­nance busi­nesses. But a new model is emerg­ing that will be a hy­brid of pub­lic and pri­vate net­works that would best suit ar­eas such as copy­right.

The idea is that blockchain will be­come the in­fra­struc­ture for the dig­i­tal age as peo­ple re­alise that its char­ac­ter­is­tics – iden­ti­fi­ca­tion, fric­tion­less trans­fer, tam­per-proof stor­age and trust be­tween par­ties – can be used for any asset.

The list of uses is al­ready large – banking trans­ac­tions, share trad­ing, un­se­cured loans, record­ing prop­erty ti­tles, trad­ing in di­a­monds, art­works and cur­ren­cies, man­ag­ing in­sur­ance and track­ing min­ing equip­ment.

“Any­one who’s not work­ing on it is off the pace,” says lawyer Mark Toohey, who has been us­ing the tech­nol­ogy since Bit­coin days and now lec­tures on it. “Peo­ple mocked us for be­ing in­ter­ested in Bit­coin. Now they’re say­ing, ‘Hang on, you know about blockchain?’”

Toohey says the tech­nol­ogy is in that in­ter­est­ing moment when most peo­ple haven’t heard about it; those who have re­alise they need to know more; and the few who do know about it are se­cretly work­ing to claim its ben­e­fits.

Gaug­ing how much work is be­ing done on the new tech­nol­ogy is al­most im­pos­si­ble, but look­ing at just one ap­pli­ca­tion gives an idea. Blockchain is made for copy­right. All the music, books, videos, news sto­ries and pho­to­graphs that be­came dig­i­tal and lost their rights can be man­aged more eq­ui­tably on blockchain.

Lea is work­ing on a smart own­er­ship and dis­tri­bu­tion plat­form that will iden­tify own­er­ship of videos and pre­vent piracy, and says: “There’s a ma­jor prob­lem in so­cial me­dia called free­boot­ing where some­one dis­cov­ers a video on YouTube, down­loads it and strips it of any ref­er­ence to the con­tent pro­ducer and then puts it on Face­book to draw peo­ple to their page so they can sell more T-shirts or what­ever.

“Free­boot­ing is so com­mon one study found that of the top 1000 videos on Face­book, 725 had been stolen from YouTube. Those stolen videos had 17 bil­lion views from which the video pro­ducer got noth­ing.”

The abil­ity to track own­er­ship will change the busi­ness mod­els of ev­ery in­for­ma­tion and en­ter­tain­ment in­dus­try but copy­right in­sti­tu­tions ap­pear flat-footed. Copy­right Coun­cil chief ex­ec­u­tive Adam Suck­ling says: “I went to an in­ter­na­tional copy­right con­fer­ence just last year and there was noth­ing said about it.” His coun­cil is “look­ing at it, but it’s quite em­bry­onic”.

Lea, who is about to join the BlueChilli in­cu­ba­tor, laughs when asked if there’s a race to ex­ploit the tech­nol­ogy: “Blockchain is where the in­ter­net was in 1995, which was the year the Mo­saic web browser al­lowed techie peo­ple to join. I re­mem­ber go­ing on to the in­ter­net then and I thought, this is go­ing to be as­tro­nomic.”

Other ob­vi­ous users in­clude con­tent cre­ators, crowd­fund­ing sites, shar­ing econ­omy op­er­a­tors such as Uber and Airbnb, car reg­is­tra­tions, dis­crete energy net­works, and live­stock farms.

Those who ser­vice the busi­ness com­mu­nity are of­ten best at gaug­ing ac­tiv­ity and one le­gal ad­vi­sor, Ber­nadette Jew, of Gil­bert and Tobin, sus­pects there is more talk than ac­tion.

“Over the past six months the dis­cus­sion of blockchain has just taken off, you can’t re­ally avoid it, es­pe­cially when they’re in­vest­ing in new tech­nolo­gies,” she says. “(But) when you go be­hind the scenes, it’s mostly dip­ping the toes in.”

For le­gal firms, blockchain means smart con­tracts, which are con­tracts con­verted into com­puter code – ei­ther wholly or par­tially – in the same data­base as a blockchain. Smart con­tracts are more dy­namic than ex­ist­ing con­tracts be­cause they can be au­to­mat­i­cally trig­gered by var­i­ous con­di­tions in the con­tracts. To date, firms such as Gil­bert and Tobin are de­vel­op­ing them mainly for sim­ple com­mod­ity con­tracts, such as loan agree­ments.

Al­ready the reach of this tech­nol­ogy is vis­i­ble in the ways peo­ple work. Says Jew: “It will change the way we work be­cause when we’re writ­ing a con­tract we will have to think, ‘Should we be writ­ing in code or tra­di­tional mode’ and, if it’s code we will have to think in rigid, log­i­cal ways and we will need to be clear which part of the con­tract should be in code.”

This will change some jobs, and elim­i­nate many. When banks and the ASX talk about cost sav­ings, they’re re­fer­ring to the elim­i­na­tion of many roles in the tra­di­tional ex­change of as­sets – jobs such as trus­tees, back of­fice roles, search, au­then­ti­ca­tion and agency jobs.

“It scares me,” says Toohey. “When we re­move a sig­nif­i­cant num­ber of white-col­lar work­ers, what hap­pens when those of­fice tow­ers empty out, what will hap­pen to so­ci­ety?” Com­ing on to the list are ge­netic pro­files, med­i­cal records, trans­port ser­vices, postal ser­vices, tax­a­tion and gov­ern­ment pay­ments, in­clud­ing so­cial se­cu­rity.

An­drew Dyer at the Bos­ton Con­sult­ing Group agrees that it only be­came a must-have con­ver­sa­tion six months ago and, in his view, most in­volved in de­vel­op­ing the tech­nol­ogy are at the “post-con­cept, post-de­sign but pre-prod­uct stage”.

There is a curve for new tech­nol­ogy called the Gart­ner Hype curve, and Dyer places blockchain at the point where “we’re through the point of dis­il­lu­sion­ment and we’re yet to see where all the op­por­tu­ni­ties lie”. While in­no­va­tors around the world are rac­ing to claim ter­ri­to­ries with the tech­nol­ogy, he says Aus­tralia might be fur­ther ahead in one area: “Our reg­u­la­tors are in much deeper dis­cus­sion than most ap­pre­ci­ate.”

Since the banks and the ASX have de­clared their in­ter­est, the Aus­tralian Tax­a­tion Of­fice, Aus­tralian Pru­den­tial Reg­u­la­tion Au­thor­ity, Re­serve Bank and Aus­tralian Se­cu­ri­ties and In­vest­ments Com­mis­sion, as well as se­cu­rity forces have taken an in­ter­est in a tech­nol­ogy that of­fers them easy, fast and solid in­for­ma­tion on trans­ac­tions.

“The Aus­tralian gov­ern­ment re­dis­tributes a lot of in­come in lots of pro­grams and there would be leak­ages there and I’m sure the leak­ages are quite large,” he says. “If you are able to un­der­stand who your cus­tomer is and link the cus­tomer to those other records – whether tax­a­tion or med­i­cal – it’s huge.”

“MyGov is the first step in iden­tity es­tab­lish­ment. There are al­ready three or four iden­ti­fiers for ev­ery per­son in Aus­tralia –

tax file num­ber, Medi­care num­ber, mo­bile phone num­ber and email ad­dress. If some­one could put those to­gether it wouldn’t be hard to es­tab­lish a good iden­tity. Ba­si­cally, the gov­ern­ment’s hu­man re­sources de­part­ment did it 18 months ago when it de­cided to sim­plify cus­tomer ser­vices.”

Dyer says link­ing cit­i­zens’ on­line iden­ti­ties to cre­ate a unique iden­ti­fier wouldn’t be dif­fi­cult but “the politics of it would be tough. There would be an out­cry.”

The pri­vacy as­pects of putting cit­i­zens on a gov­ern­ment blockchain might be fright­en­ing, but Dyer says “pri­vacy has gone. That went long ago. We leave foot­prints wher­ever we go but be­ing able to look at those foot­prints, see where they’ve come from and what’s hap­pen­ing to them, that is huge.”

De­vel­op­ing a unique iden­ti­fier for ev­ery per­son would ef­fec­tively open up a world­wide blockchain. One small Aus­tralian start-up, BitTrade Labs, is fo­cus­ing its ef­forts on us­ing blockchain to es­tab­lish trad­ing net­works in so­lar energy but also to build a dis­trib­uted iden­tity. This iden­tity, says co-founder Hugo O’Con­nor, can be built within a blockchain in a sim­i­lar way to how iden­tity is es­tab­lished with pa­per trails.

“It’s the same way that you use elec­tric­ity bills to show you live at a cer­tain ad­dress. The idea is to cre­ate a web of trust so you put your iden­tity on a blockchain and use oth­ers on the blockchain to vouch for that iden­tity.”

The big dif­fer­ence, he says, be­tween show­ing your elec­tric­ity bill or us­ing your dis­trib­uted iden­tity is “you would own your own data and you can al­low peo­ple ac­cess to that data or you can deny ac­cess”. The pitch that you can con­trol your own data and de­ter­mine who gets ac­cess to it will be cru­cial when au­thor­i­ties be­gin mov­ing med­i­cal records on to blockchains as they al­ready do in some de­vel­op­ing coun­tries.

Next on the list: rep­u­ta­tion man­age­ment, bi­o­log­i­cal trans­ac­tions, home se­cu­rity au­to­ma­tion, and au­then­ti­ca­tion of on­line re­views, ed­u­ca­tional at­tain­ment, vot­ing sys­tems.

The race to stake a claim in the in­ter­net of value might still be subter­ranean, but the win­ners that emerge will be the big play­ers in our on­line lives. It does feel like the in­ter­net of 20 years ago when open source be­gan evolv­ing into pri­vate profit. O’Con­nor, at least, is con­fi­dent: “We’re the only ones do­ing open source (in iden­ti­fi­ca­tion),” he says. “Plenty of peo­ple are build­ing their own walled gar­dens try­ing to own it but open source will win.”

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