With presidential elections at risk of hacking and influence, and online fraud a growing threat, imagine a world where online transactions are secure and fraud-free, where all elections are fair and open. Where individuals hold unchallengeable land titles, and refugees get all the succour they need. A new technology called blockchain is able to enable this.
The decentralised digital ledger that underpins the cryptocurrency Bitcoin, blockchain creates an immutable record of every data point in any given field.
The importance of blockchain according to American entrepreneur, Marc Andreessen is that it
“… gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”
Something echoed by Google CEO, Eric Schmidt
“…the ability to create something that is not duplicable in the digital world has enormous value”
So, the importance of blockchain comes in recording each unique transaction or piece of digital property.
So, how does blockchain work? Let’s say that Mr A wants to transfer something to Mrs B. This transaction is recorded in an online ledger that tells us what is transferred, the sender, the receiver and the time/date stamped. The transaction is then grouped with other transactions that have occurred within a 10-minute window to make a block. This block is then broadcast to every node/computer on the network (at the time of writing, Bitcoin had 8,048 nodes globally).
Once the node receives the block, the transactions are verified, timestamped and added to the chain of transactional blocks in a chronological order that makes up the entire history of all transactions through that particular currency or field. All the transactions are kept in an open ledger, so that anyone at any time can see what transactions have occurred, meaning that there’s a concrete record of what you’ve transferred or received. There is total transparency and there’s pretty much total security. If a hacker wanted to change a transaction, in let’s say Bitcoin, they would have to hack a particular block or ledger on all 8,048 Bitcoin computers simultaneously.
Still with us? So, why is it going to change the world? Blockchain gives the individual total control of their own data, which they can pass to anyone without the need for a middleman. There’s no need to have transactions verified by a bank, an agent or a government, and the record is dispersed to all computers involved in the chain, making it unhackable.
Blockchain has been most associated with financial services thanks to its cryptocurrency inception, and one immediate application of blockchain would be in bringing down the cost of remittances. In 2016, an estimated $575 billion was remitted, of which $429 billion was to developing countries. The average fee for sending $200 was 7.45%, a total of just under $43 billion a year in transaction fees. Now visualise a blockchain service where immigrants can send money home, where these fees are fractions of a percent.
If we look at any given purchase, say a pint of beer from your local pub, which you pay for with your Visa card. The transaction goes through Visa, a merchant processing company, then your bank, then the pub’s bank – and unsurprisingly, at each step the middlemen take a fee. Now, if you are dealing directly with the pub, you transfer money from your digital wallet to theirs; this transaction is uploaded to the global digital ledger on everyone’s computers and the cost is infinitesimal.
Outside of purely financial transactions, what are the other applications of blockchain? In Ghana a Danish start-up, Bitland is looking to provide a land registration service. Up to 90% of land in Ghana is unregistered, which means that it’s difficult to prove ownership, it can’t be used as collateral against borrowing, corrupt officials can steal it, and sales are near on impossible. But a land title that is held within a blockchain becomes absolute and its history transparent for all to see. This would have huge implications for the Ghanaian economy as landowners would not only have security but would also be able to invest in and trade their assets.
If we turn to democracy and elections, if every voter received a digital token to vote with, when that vote is cast the token would be transferred to the chosen candidate and recorded in the blockchain, meaning voter fraud becomes virtually impossible. US start-up, Votem is trying to disrupt voting by making it both secure and accessible on mobile phones, meaning a boost to voter turnout, lower costs, greater security and accuracy and global accessibility for emigres. All underpinned by blockchain technology.
All anyone needs to be connected to a blockchain is a phone, and over five billion people on the planet currently have one.
But even phones are not crucial to blockchain. The World Food Programme has already rolled out blockchain technology in Jordan to help Syrian and Palestinian refugees, issuing cryptographic coupons, which are validated using another nascent technology, iris-scanners. The UN want to track everything from contributions to identity management through blockchain to increase transparency and combat fraud. It is estimated that up to 5% of aid is lost to fraud, and with an annual global aid budget topping $140 billion, that $7 billion could make a huge difference.
Blockchain is still embryonic, but over the next decade it could become as important as double-entry bookkeeping became for the rise of capitalism, or the emergence of the internet for information. Blockchain could herald a new era where the World Wide Web becomes an internet of value, disrupting multiple sectors, bringing costs down and speeding up transactions. Blockchain is a key part of our digital disruption and cybersecurity theme and will open up multiple opportunities for long-term strategic investments.
This article is designed to throw an everyday lens on some of the issues being discussed and debated by investors across the world; it is not research, so please do not interpret it as a recommendation for your personal investments. If something has piqued your interest and you would like to find out more or discuss what investments might be suitable for you, please contact one of our Investment Managers on 020 7337 0777.
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