By Vikram Kumar, Jonathan Perkinson CA and Richard Miller

In 2015, blockchain had all the frothy bubbles of a new wave crashing. Headlines called it the next big thing. Venture capital fuelled start-ups at a record rate. Patent applications flooded in. Big name companies jumped on the bandwagon with their own version of the potential.

All of this for what’s essentially a database?

There is a strong sense of déjà vu. All those hopes and expectations, the promise of a new age dawning.

It’s a mistake to dismiss blockchain as something technical. In the same way that the internet affects everyone and the big benefits came from commercial and community innovation, blockchain can’t be left to technologists alone.

A blockchain is a sequential record of transactions. Quite simple really.

Only verified transactions are stored in the blockchain. Each transaction is immutable, timestamped, independently verifiable, and its inputs and outputs linked to other transactions.

Unlike a shared ledger or the familiar database, what makes blockchain different is that it is an internet native. There is no single source of truth or control with everyone having their own authentic copy of the record set.

Origins of the blockchain

Seven years ago a person using the pseudonym Satoshi Nakamoto created the Bitcoin cryptocurrency.

Since it is trivially easy to duplicate electronic files and data, a cryptocurrency system (a medium of exchange that controls creation and usage of currency with cryptography) needs to ensure that, like physical money, it is only possible to spend digital money once. Blockchain solved this “double spend” problem.

(Note there is a rough consensus that “Bitcoin”, with a capital “B”, refers to the system and technical protocol while “bitcoin” is used for currency units. That consensus does not extend to using “blockchain” as a single word or “block chain”.)

What makes Bitcoin as a network so interesting is that, so far at least, it has shown that trust does not have to flow from centralised institutions and law. The design assumes that some participants are dishonest and malicious. No one owns the Bitcoin network, no permission required. A tiny fee, independent of the transaction amount, is all that it takes.

At the heart of Bitcoin is blockchain. So much so that for a long time most people didn’t distinguish between the two, just as the web is used interchangeably with the internet. Looking at the blockchain as an independent component in its own right, with Bitcoin only its first application, has unlocked its potential — useful in providing a transaction layer for distributed and decentralised systems at global scale, analogous to the internet providing the communication layer.

Permissionless vs permissioned blockchains

Usage beyond Bitcoin has created a new form of blockchain, one that requires participants to get permission to record their transactions. This implies that some authority or process gives that permission to identified participants and is therefore distinctively different from the “permissionless” Bitcoin.

There is also increasing differentiation between public and private blockchains, depending on whether anyone can access and write to the transaction set.

These differences are not merely semantic. There are significant differences in security versus features which has led to much debate about relative strengths and applicability.

Permission and private blockchains, designed poorly, could end up negating the very fundamentals that make blockchains attractive in the first place.

Blockchain and financial services

Given its cryptocurrency origin, the wider financial services industry is one area that’s started paying attention to the blockchain.

Financial services are about asset ownership, transferring value and working across boundaries. At another level, they are about record keeping, trust relationships and regulatory restrictions. An overriding interest is to push down costs while increasing efficiency and timeliness.

Blockchain can change each of these, which is the source of its significance as a tool for innovation.

Some early examples illustrate the potential. Companies like Abra, Bit2Me, BitPesa, CoinJar, Streami, TransferWise, and many others allow person-to-person international remittances, cutting down costs and time to a fraction of traditional providers. Ripple aims to do the same for bank-to-bank transfers.

Bitcoin and other cryptocurrencies are programmable money so “smart contracts” (software code that defines and enforces agreed terms) on platforms like Codius, Ethereum and Rootstock can transfer money based on the results of software code and logic without intermediaries. Services like BTCJam provide peer-to-peer lending.

Blockchains are powering other financial services. Koinify and Lighthouse are crowdfunding platforms while Nasdaq’s Linq uses the blockchain for issue, cataloguing and recording of transfers of shares of privately-held companies. Earlier, Overstock launched tØ (pronounced tee-zero), a blockchain-based private and public equities trading platform.

There is a clear division between those using the blockchain to innovate within the traditional regulatory structure and those challenging it. The former are a powerful force given their resources, scale, and domain expertise. A prominent example is R3 CEV, a consortium of 42 major banks developing blockchain-based commercial products, standards and protocols for the wider financial services industry. Such efforts are welcomed by governments and regulators keen to support innovation within their comfort zone of established frameworks.

Yet, it is likely to be start-ups and others working outside established frameworks that will try to make fundamental changes. They understand that the blockchain challenges the underlying assumptions of centralised hierarchies. They also understand it is easier to start from niches — such as international remittances and private capital.

The greatest disruptive potential will be on middle- and back-office roles that maintain the integrity of financial records. As more financial records become self-validating, those roles will need to be cut or reshaped.

The future

It’s still very early days and so far, there have only been small glimpses of a future where the blockchain will change, or at least impact, every aspect of the financial services industry.

Take the experience of Bitto NZ. It set up a Bitcoin ATM in New Zealand about three years ago. Its bank promptly shut down their account for “associating with the bitcoin”.

The company has recently seen a big change in attitude and now provides expert advice to a bank and two government departments.

Director Jonathan Ewing says: “Sending five cents to 500 people every five minutes is now a possibility, requiring no intervention by a third party. Research shows that teenagers in particular, are increasingly unlikely to require a personal banking relationship. Instead they will access services via a multitude of smart applications and crypto-based exchange solutions.”

There are three historical lessons that can be applied to new generic technologies such as the blockchain:

• First, its impact will be overestimated in the short term but underestimated in the five-to-ten-year period
• Second, it will be used to solve known problems before its true, differentiating power is unleashed (think programmable money and triple entry accounting)
• Finally, technology libertarians looking at the blockchain as the next crack at getting governments and corporate interests out of Cyber Utopia are going to be disappointed again

If you could go back to the early days of the web in the 1990s, what would you do? Seek the leading edge, be a fast follower or wait till the dust settles?

That’s what you should be thinking about with regards to the blockchain in 2016.

Vikram Kumar is the founder of start-up KotahiNet and an advisory board member of start-up BraveNewCoin.

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