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Disruption by Blockchain
By: Shreya Canakapalli, CFA, Senior Consultant
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| As we enter 2020, let’s reflect on an asset that’s seen exponential growth: Bitcoin. Since July 2010, the digital currency has posted gains of over 9,000,000 percent. However, Bitcoin is not alone.
Over the past few years, we’ve witnessed enormous growth in other digital currencies including Ethereum and XRP and more generally in the blooming ecosystem of businesses built around the currencies’ underlying technology - Blockchain.
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| What is a blockchain?
Like a notebook, spreadsheet or database, a blockchain is a mechanism for storing and manipulating data. Blockchains come in many different forms and organizations around the world are rapidly building new designs. All blockchains share key characteristics that make them interesting and powerful.
First, blockchains are decentralized - unlike databases that serve as a single central source of truth, blockchains are designed so each user holds their own copy of the data in the system. Since all the data is distributed widely, there is no need for one authority to be responsible for the integrity and availability of the data.
Second, blockchains are tamper resistant - blockchains are built on top of cryptographic algorithms that make it easy to add valid data, but virtually impossible to change previously validated data.
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| How is a blockchain used?
One way to use a blockchain is to store a list of valid transactions between users exchanging a resource. The resource can be purely digital, like a currency or it can map to something tangible like real estate. What constitutes a “valid” transaction depends on the use of the blockchain.
For example, cryptocurrencies like Bitcoin and Ethereum allow a transaction to be added to the global ledger only when the sender has sufficient funds for that transaction. This ability to validate transactions without relying on a central authority enables owners of the cryptocurrencies to confidently trade goods, take loans and more.
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| Why does blockchain matter?
The rise in popularity for blockchain applications including cryptocurrencies have inspired and pressured traditional institutions to reevaluate how they provide services. A new generation of voting systems, escrow management and contract execution are all in the works.
Recently, China’s central bank announced plans to digitize part of China’s existing currency. While the plan’s details are still emerging, this digital currency is expected to rely on some aspects of the blockchain and potentially do away with others. Instead of being decentralized, the central bank will likely control the ledger with access to view and edit transactions.
China’s central bank argues, by transitioning from a cash based to a digital payment system, it can reduce illegal money movements and transactions as well as streamline international cross-border transactions. It is too early to speculate on the impact of this digital currency, however, this announcement is expected to drive other central banks to explore similar options of incorporating blockchain into their monetary policy.
An area where blockchain also improves processes is with cross-border payments. Currently, if a company needs to wire money across national borders, it requires using multiple intermediary banks which increases both time and costs. For 2018, The World Bank estimated, the global average cost for cross-border payments was 7.01 percent1.
If this process transitions to a blockchain, payments could be completed in or near real-time. The distributed ledger provides full transparency where the receiver and sender can verify transactions by looking at the same ledger and cut costs by removing the intermediaries. Deloitte estimates costs could be reduced as much as 80 percent 2 . In fact, IBM is working with central banks around the world to expand adoption of its real time clearing and settlement network IBM Blockchain World Wire.
Where is blockchain going?
Although cryptocurrencies have brought blockchain technology to the forefront, its full potential is only now being realized.
The next decade could see dramatic disruption in industries which had assumed a central point of trust was necessary. As central banks are evaluating how cryptocurrencies fit into their monetary policy, many organizations are bracing for a paradigm shift that has been enabled by blockchains.
For more information, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
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| This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
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