Date posted: 1/12/2016 5 min read

CA ANZ CEO on the future of cryptocurrencies

Businesses and most governments need to appreciate the impact blockchain might have on many transaction-based organisations

In brief

  • Blockchain is a decentralised spreadsheet that relies on the crowd computing and cryptography
  • Digital currencies concerns include taxation issues, money laundering and terrorism financing
  • Businesses need to evaluate this technology for both challenges and opportunities

By Lee White FCA

Just as the spread of the digital world forced organisations to re-invent themselves and create new types of businesses, there were also “casualties” among the unprepared.

Remember Eastman Kodak? Founded in 1880, at one stage Kodak accounted for 90 per cent of film and 85 per cent of camera sales in the US and until the 1990s was rated one of the world’s five most valuable brands. Then digital photography replaced film and smartphones replaced cameras until the former giant filed for Chapter 11 bankruptcy protection.

The latest technical breakthrough is the blockchain. This technology is a simple digital platform for recording and verifying transactions online that anyone can see and other people cannot erase.

No certified bookkeeper oversees the transactions because the blockchain is a decentralised spreadsheet that relies on the power of crowd computing and cryptography rather than a central authority. Thousands of computers around the world verify transactions and manage a global decentralised ledger.

The best known use of blockchain so far is to facilitate digital currency transactions, the most notable being bitcoin. When you make a bitcoin transaction on the blockchain, each transaction is distributed to many nodes in the bitcoin network.

Simply put, everyone participating in the bitcoin process also has a copy of that distributed ledger and can check it for inconsistencies.

A cryptographic process relying on the combined computer power of the cloud, verifies the order of transactions. Try to pass off a fake exchange and other bitcoin users should be able to trace every alteration and exchange which occurs, a role traditionally undertaken by established third parties like banks.

Presently, the tech-savvy community dominates the evolution of blockchain — as it did when email was being made more user-friendly for mere mortals.

Remember when the only way you could check your email was through a command line prompt? Then web browsers were developed producing a more seamless experience for non-technical users.

Also slowing down the community’s appreciation of blockchain’s potential is its legacy reputation. The majority of media coverage has been about the criminal activity surrounding Silk Road, the collapse of the Mt.Gox bitcoin exchange, and the price volatility of the digital currency itself. Because of the prominence of digital currencies in any discussion of blockchain technology, people have focused on the currency, rather than the technology behind it.

Laboratory testing

While digital currencies are not regulated by the Reserve Bank of Australia or subject to regulatory oversight, the RBA maintains that the current limited use of digital currencies does not raise significant concerns with respect to competition, efficiency or risk to the financial system.

The RBA argues that digital currencies are more likely to raise concerns over issues relating to taxation, Anti-Money Laundering and Counter-Terrorism Financing Rules and consumer protection, the realm of other regulators.

Not surprisingly, the high profile of digital currencies has prompted those most likely to be potentially affected by these changes to have a closer look. Westpac, ANZ and Commonwealth are testing blockchain technology while UBS has set up a blockchain research lab, Goldman Sachs has invested in bitcoin start-up Circle and NASDAQ is also experimenting with the technology.

While governments will be given many reasons not to embrace blockchain technology, they need to look for the reasons to do so. Citizens will generally be hesitant and cautious but with the encouragement of government they will grow and adapt.

Shift your focus

The value of bitcoin is the technology, not the currency. I cannot stress that enough. Forget the currency — focus on the technology.

Bitcoin enthusiasts predict it can impact anything involving a transaction. The question for business and governments is whether or not they will invest the resources to understand how blockchain could change the experience of their customers or citizens. At the very least, they need to keep current with the latest applications of this technology and be aware of its flaws. No technology is perfect.

Because a transaction does not have to be financial or locally based — it’s on the internet so theoretically can cross borders — governments will have to recognise that while national priorities are important, that cannot be the reason to avoid embracing these changes.

As technology rapidly decentralises across all parts of the globe, governments need to think in more decentralised ways when providing services like passports, health records, and contracts.

I can see this technology fundamentally changing regulators.

Regulators are obliged to take their direction from government. If government directs regulators to move rapidly then that will be important. But they are generally large and, in many instances, slow. They are focused on compliance and enforcing the law, itself a focus on the past.

While governments will be given many reasons not to embrace blockchain technology, they need to look for the reasons to do so. Citizens will generally be hesitant and cautious but with the encouragement of government they will grow and adapt.

Similarly, businesses, not just financial institutions, need to evaluate this technology for its ability to disrupt their existing operations or provide new opportunities. And that could mean investing in specialists with the right expertise who are highly in demand. Failure to do so could consign them to the dustbin of history.

Time for a “Kodak moment”?

Lee White FCA is the CEO of Chartered Accountants ANZ. This article originally appeared on NBR and in The Singapore Times.

This article was first published in the March 2016 issue of Acuity magazine.