Financial blockchain in 2016: From a buzzword to a slogan

Farzam Ehsani is the head of blockchain projects at FirstRand Group, Africa’s largest bank by market value.

In this article, Ehsani reviews the evolution of blockchain in the financial industry in 2016. In addition, he expects that the issuance of cryptocurrencies by central banks will truly usher in the blockchain era.

If 2015 was the year I first heard about blockchain, 2016 was the year many people pretended to understand what the technology was — it was embarrassing to admit ignorance of the term.

After all, everyone else seems to know what a blockchain is. “It’s a distributed ledger!” has become our excuse for not understanding the technology.

However, the fact is that we are learning. Whether it’s figuring out what a ‘node’ is or understanding the intricacies of homomorphic encryption and zk-SNARKs, we are witnessing the development of this technology and its impact on the world.

I like to compare blockchain to a very special car that can take you from Cape Town to Cairo in just a few seconds.

As the media continued to report on this amazing car, more and more people began to imagine new possibilities: the car would be used to transport coal, corn, sunflowers, etc. But when asked what the car would look like - whether it would have wings, wheels, belts or brakes - no one could give a satisfactory answer.

This is the state of blockchain in 2016: a magnificent technology has been discovered, use cases abound, but more work is needed to better understand and create the underlying platform for this technology.

Protocol Development

As much as we love Bitcoin and Satoshi’s ingenuity, we also realize that the Bitcoin car is not designed for all-terrain use.

The financial services industry requires a multi-asset platform, which is not what Bitcoin was designed for. Furthermore, in a regulated environment, participants know each other intimately and breaches of trust carry punitive consequences. Therefore, the usefulness of consensus algorithms such as POW that do not require trusted participants is greatly reduced, in addition to the increased costs and transaction times of permissioned networks.

Recognizing this, a number of open source platforms emerged in the financial services industry in 2016, including Hyperledger, Chain Core, and Corda. (Earlier, there were also open source platforms such as Ethereum and Monax.)

There are a few other platforms in the proprietary space that will also become well known in the open source space in 2017. I think the owners of these open source platforms will recognize that long-term success at any protocol level depends on network effects, and any attempt at monetization will hinder this effect.

After all, no one makes money from TCP/IP or HTTP.

Use Cases

As permissioned blockchain protocol designs emerged this year, the buzz for blockchain use cases has grown. There’s one use case in particular that has everyone trying to realize its full potential: currency.

Moving the most commonly used asset in economic activity - fiat currency - to a blockchain is currently a prominent use case. This is because almost all transactions in economic activity involve two parts, one of which is almost certainly currency.

Money is the lubricant of economic activity, and its value lies in its ability to serve as a frictionless asset. In this respect, unregulated cryptocurrencies outperform fiat currencies, and the financial community has clearly realized this.

Central banks from Canada to China, the United Kingdom, Switzerland, Singapore, the United States, South Africa, and more are researching, testing, or actively seeking to establish a central bank-issued virtual currency, or CBCC for short.

A sovereign blockchain central bank cryptocurrency would allow other financial instruments, such as bonds, stocks, derivatives and even land and car registries, to migrate to the same blockchain, allowing a wide range of use cases to flourish.

Without a central bank sovereign blockchain cryptocurrency, most use cases will be hampered. For example, reducing the settlement time of a stock to zero won’t help much if the currency used to buy it still takes a day or two to settle.

Catalyst for the future

The issuance of a sovereign central bank blockchain cryptocurrency would not only be a catalyst for other use cases, but would also transform the nature of banking itself.

In the paper “The Coming of Crypto Banking”, I described a future where banks may no longer be deposit-taking institutions, where banks no longer exist, and where the banking system may be more stable and inclusive. For central banks and regulators, blockchain fiat currencies become an indisputable fact.

As 2017 approaches, we will see blockchain move from a buzzword to a catchphrase. We will see the custodians of fiat currencies — central banks — more closely apply the power of blockchain technology to the benefit of the entire economy.

Once only in Satoshi Nakamoto’s imagination, this amazing blockchain car will soon be available to everyone. We’ll have to wait and see.

What do you think about the development of blockchain in 2016? What are your predictions for blockchain in 2017? Welcome to contribute your valuable opinions.