BLOCKCHAIN: A chain to break socioeconomic shackle.

For years, people welcome lots of innovation for a secured way to facilitate their transaction, payment, title transfer, etc. With the advancement of technology, we have seen many groundbreaking changes within financial industry to ensure and deliver trust. However, we are still incurring a huge cost to avoid information asymmetry and safeguard ourselves from ‘Lemon problem’ (see ‘the market for lemon’ by George Akerlof, 1970). Now think about a world where every bit of relevant information is accessible by the related parties to complete a transaction. What if this mutual trust could be ensured by a unique system or technology. Back in 2008, in the wake of the global financial meltdown, Satoshi Nakamoto first proposed a concept of cryptocurrency or open-source money, ‘Bitcoin’. The main spirit behind this innovation of cryptocurrency was to enable people to act independently in financial market without compromising security. The operation of bitcoin is mainly based on a technology called ‘Blockchain’ and it is regarded as single most prolific innovation in recent times that possibly could change the way of doing business forever.

What do we mean by ‘Cryptocurrency’ and its underlying technology ‘Blockchain’?

Just over 100 years ago people from the island of YAP (Currently Micronesia) used the similar approach to exchange values which started before 500 AD. They had a unique economy. Though they had sustainable production of foods, they didn’t have any precious metal or minerals which was often used for the medium of exchange in other parts of the world. However, the people of Yap had their own money called ‘RAI Stone’, a block of limestone weighted more than 400 lb. Reasonably it was quite impossible to move the stones whenever a transaction took place. The islanders solved this problem by not physically moving the stones rather placing these in visible location but sharing the ownership information of those stones. Every adult of that island knew who are the owner of those stones how many stones each of them owns. Now, whenever people wanted to transact, they announce the change of ownership to others and all of them updated their knowledge accordingly. Blockchain is just an updated version of this economic system. Practically, yes, it’s not possible to remember millions of transactions that take place within a second around the world and here comes the role of computer and internet. Blockchain is a distributed and automatically updated ledger system where the users jointly update all the transactions. We call this as Blockchain because the system contains millions of blocks where each block records thousands of transactions executed through Cryptocurrency.

Internet of Value

As we have understood, the Blockchain technology operates through internet, we need to know how this technology delivers value by using simple internet services. No one doubts the power of internet anymore and Blockchain could be used to create new values for global finance by using internet. In past, through internet we used to send information then it became transfer of digitized things such as music or videos. Whenever we send something over internet such as music, videos or any documents, basically we send copies. But what if we want to transfer value such as money or any other precious things? We must make sure that the sender doesn’t have that anymore and receiver gets the complete ownership after the transfer. Under Blockchain technology, every time a person wants to make a monetary transaction, she would just announce to computer network her intention to send money to someone else. All those computers, upon hearing the announcement would update their internal ledger by deducting the amount from her and adding the money to the other person and all these are happening in real time.

Why people will use this technology?

Yes, it’s true that behind this technology, there are hundreds and thousands of codes and complex computer architectures. But after years of using DOS, did we ask for codes before welcoming the user-friendly windows operating system. People embraced windows for its easy GUI (Graphical User Interface). They didn’t want the technical details behind the cursor movement or desktop screen. So, complex computer algorithms of Blockchain will not be an issue for global acceptance and widespread adoption of this technology.

Current practice and usage

Though Blockchain is a universal technology that could serve multiple industries, it primarily evolved to solve problem in financial industry. It is anticipated that within 20-30 years the financial service industry will be just software. We would see the disappearance of lot of business models because of ongoing automation driven by AI (Artificial Intelligence). Most of today’s financial activities such as syndication, trade finance, stock exchange, insurance claim would be converted into smart contracts under Blockchain technology. Now to survive through this transition financial institutions should move ahead of time and embrace this technology as early as possible. Alex Tapscott, the author of ‘Blockchain Revolution’, rightly said “Here are as many opportunities to create value as there are for disruptions, but it will be the financial services firms that choose to disrupt from within, that choose not to fall victim to the innovator’s dilemma, that survive”. Blockchain could significantly cut down the cost involving global payment and settlement system. According to a recent analytical report ‘The FinTech 2.0 Paper’ published by Santander InnoVentures, using of Blockchain technology in cross-border payment settlement, securities trading and regulatory compliance could reduce bank’s infrastructural costs up to $20 billion per annum by 2022. Consider a stock market where trust is secured and guaranteed by a central exchange and clearing house. Implementing Blockchain technology in stock market operation would bring efficiency by distributing the centrally poised trust-system. It would create a marketplace where market participants wouldn’t need any clearing houses, brokers, exchanges and can rely on the peer-to-peer exchange system. This way the transaction cost will be near to zero as there will be no existence of traditional market. Santiago Stock Exchange (Latin America's third-largest stock exchange) in Chile plans to implement Blockchain-based securities lending solution. Top executives from globally leading financial firms already acknowledged what could this technology do and they are hiring Blockchain engineers and investing resources to explore the idea behind this. According to ‘Blockchain Technology market report’ published by Venture Scanner, as of May 2017, the Blockchain technology attracted more than $2.4 billion seed funding and is also experiencing high growth riding on the wave of enthusiasm.

Possible financial revolution

Not only large economies or big corporate can benefit from Blockchain, it could do wonder to ensure sustainable economic development for developing and least developed countries also. Its undeniable that people from underdeveloped nations have enough supply of labor, motivation and even capital but they don’t have proper access. Access to those resources when they need it and how they need it. Farmers can’t take loan by mortgaging his property because the title has been tampered. Small producers are deprived of good price for their product only because they don’t have access to well-functioning markets. The existence of complex finding and matching process within market system makes resources scarce for people even if they have enough purchasing power. Blockchain title registry system could make property rights more secure and convenient. Many countries such as Sweden, Honduras and Georgia are experimenting with this distributed record keeping technology to digitized their existing land title registry system. This multi-edge technology provides an opportunity to establish a ‘trustless’ market which could simultaneously offer ultimate transparency, reliability and productivity. Blockchain could be also used to achieve the Financial inclusion goals. The Blockchain enabled financial services would be accessible through a regular smartphone capable to connect over internet. As the smartphone is getting cheaper and cheaper this could be game changer for poor people to gain the access to all kinds of financial services without spending extra time, effort and even money.

A better future?

Blockchain would make our world a better place to live by solving some crucial problem that we often face, let’s say forming a disaster relief fund or aid collection in case of an emergency caused by natural disaster. Currently this activity is burdened with a lot of red tape and bureaucracy and inefficient distribution system. For example, prospective contributors couldn’t verify the authenticity of the cause or organizers and the contribution ‘lost along the way’ before reaching its intended recipient. However, allowing Blockchain to perform in the same situation people can even verify recipient’s identity and need. Blockchain could easily remove the information gap and bring transparency to process these aid payments. Very recently, a UK based emergency fund, ‘The Start Fund’ was able to disburse the humanitarian aid payment (B002 Bangladesh (landslide) ActionAid) to affected areas within 72 hours of being alerted whereas currently it takes an average of 90 days for UN’s central emergency response funds to reach on-the-ground NGO.
With the advancement of civilization, we have minimized power gap by industrialization, time gap by automation and distance gap by internet. What we still need to overcome is trust gap and give people independence from traditional trust system. Because of information asymmetry, existing trust system requires a great deal of effort and resources to finalize any transaction. Through the publicly available distributed record keeping system, Blockchain technology can reduce this asymmetry and guarantee transparency in supply chain. Buyers will be empowered with more information and can establish trust relationship without even meeting seller physically or virtually. For example, cautious buyers of expensive jewelry can distinguish good diamonds from ‘Blood Diamonds’ as Blockchain can necessarily attach a digital passport to any product which confirms the authenticity and origin of it. By all means, Blockchain could be a brand new season of ‘Breaking bad’ of distrust with hopefully never ending episodes.