Blockchain: The Next Big Disrupter

by Adam Goyer and Mara Schmid

Toward a Digital Consensus

In the physical world, there’s one physical reality, and we all interact with it. The digital world, on the other hand, doesn’t always have a single reality. Data is copied, shared, and altered. By the time it gets to you, it might not be what it purports to be. Think of the misattributed quotes floating around online, or Trojan horse malware. If you get questionable data, and you’re lucky enough to have a central source where you can fact-check it, you better hope it hasn’t been hacked, deleted, changed by a disgruntled employee, or otherwise compromised.

That’s where the blockchain comes in. A blockchain is a distributed ledger of digital happenings that link to each other in a way that cannot be altered without breaking the system. This has the potential to fundamentally change the landscape of the digital world. Blockchains will allow us to create a general “reality”, i.e. an agreed-upon, decentralized set of facts that can be checked by anyone who needs to.

What Will This Change?

You name it. The legal industry. Finance. Anything that uses money or relies on a trusted middleman such as government institutions or banks. It could replace middlemen who have proven themselves untrustworthy due to corruption or incompetence, or it could replace middlemen in the name of efficiency, cost effectiveness, or greater democratization.

Let’s take a look at a few ways this could shape up.

1. Smart contracts. A smart contract is a computable contract that runs beyond the control of the contract’s participants, ensuring that it will be executed as written when key conditions are met. An extremely simplified example: if X agrees to pay Y $40 when Z occurs, the $40 payment to Y will occur automatically when Z occurs, no matter what.

2. Smart property. Smart property is property whose ownership is controlled via contracts in a blockchain. This creates a simple way to enact complex ownership models — for example, using physical items you own as collateral for a business loan.

3. Financial applications. From payment to trade technology, a blockchain can be used both to execute and to verify financial transactions — at the same time.

4. Non-financial applications. There are of course financial implications, but blockchain technology can be used for use-cases that are not specifically related to handling money, like checking inventory and managing intellectual property rights.
 
Current Challenges

The areas where blockchain implementation could be the most disruptive — legal, financial — are also the most highly regulated. Because blockchain use-cases must integrate with standard financial architecture and meet compliance standards, the design requirements can be challenging.

There’s also a risk that in the rush to adopt the latest trend, businesses will implement blockchain technology in ways that make no sense. (Dr. Gideon Greenspan of Multichain has a great article about avoiding the pointless blockchain project.)

Current Status

Although many people remain unfamiliar with even simple aspects of a blockchain, key players in the financial industry are putting large amounts of money into researching and developing it. Nasdaq, for one, is investing heavily. One early application is Nasdaq Linq, a blockchain implementation that powers capitalization tables, which private firms use to manage their company’s shares. Another key player is Bank of America Merrill Lynch, who has teamed up with Microsoft to collaborate on using blockchain tech to transform trade finance transacting.

Blockchain development is happening on a smaller scale as well. Boustead & Co, the investment bank where Adam is Managing Director, is working with Fin Tech Clearing to investigate using a blockchain to transfer and clear securities into RIAs and other financial institutions. This would lower the transaction cost of moving securities around. In turn, micro-transactions would become more viable and open possibilities for how resources are owned and distributed. Fin Tech Clearing’s existing clearing and transfer agent licenses put them in an ideal position to build on the new technology without needing to integrate it with a legacy tech stack.

Legal updates to allow blockchain implementation are also in the works. Delaware, for example, is considering amendments to its corporate law that would allow companies to rely on the contents of a distributed ledger (i.e. blockchain) as their stock ledger.

Conclusion

Blockchain technology has the capacity to change the world in fundamental ways, much the way that the internet did. In the early days of listservs and dialup, no one was imagining Airbnb or the U.S. President’s Twitter account. Similarly, it’s impossible to say precisely how blockchain will revolutionize the way we live, spend money, and own things, but odds are very good that it will.