All developing economies, and plenty of mature ones, are looking for ways to boost economic activity. One key aspect of this is the speed and reliability at which businesses, big and small, can carry out transactions with other businesses and respective governments. Transactions could range from the procurement of machinery or services, to financial exchanges for rights or immovable assets.
Typical problems encountered in developing economies include:
- Relative lack of governance regulation to cover every transaction case as regulation take time and market development to evolve
- Relative lack of capacity in regulatory institutions that can support transaction integrity and create a disincentive to transgress from an agreed transaction
- Fast pace of change, allied to a relatively low level of of regulatory advancement, means that new situations are encountered and have to be dealt with using outmoded practices, examples of this could include digital currencies and e-commerce
- Migratory or non resident companies may be difficult to hold to account for errant transactions
- Even where government has established central registries for key data, not all assets in a country can ever be registered, with a full trace of ownership, so while a car may have a full history listed with the transport department, would a 3D printer or a diesel generator have the same visible trace?
- Relative lack of transparency in transactions, due mainly to the immaturity of regulation
All these factors are leading to lengthy and costly processes to ensure trustful transactions. While these issues are more acute in developing economies, it can be said that advanced ones have some elements of them too and would benefit from more trustful and efficient transactions.
From the Smart City context, we would look at technical solutions, backed by governance and processes, to enhance the speed and trust elements of transactions…enter the Blockchain.
What is the blockchain?
Everyone who has ever been to an auction will be familiar with the concept. Each transaction is witnessed by everyone in the room and recorded for posterity by the auctioneer. The Blockchain is the auctioneer, at least as far as the recording of transactions is concerned, a digital ledger. Except that this auctioneer is not one individual but many parties recording the transaction. Its as if everyone at the auction had a copy of the auctioneers book, entered the sale and allowed all attendees (and only attendees) at the auction to look at their ledgers.
Basically, the Blockchain is a vehicle for driving visibility and traceability in transactions. It does this while hiding sensitive information in plain view through the use of strong and evolving encryption.
The principle behind the blockchain is that Moore’s Law will allow more powerful computers to break any encryption over time. To get over this, blockchain systems constantly calculate new and more secure encryption blocks in which transactions are encoded. In this way, security is maintained over the long term and that security allows the transaction itself to be visible but the valuable asset being transacted to remain private to the transacting parties.
Encryption alone would not make a robust system for enhancing trade as it would still rely on a central processing entity or intermediary, so the blockchain has two other key ingredients. All transactions are linked together and they are all distributed by storing them all on each participant’s computer or server. In this way no one person or organisation can seize all records and alter them unless they control a majority of computers involved, a remote possibility once enough participants are engaged. All individuals with access to the blockchain application can however see all transactions, ensuring a trustful environment, while the valuable asset being transacted remains private to the parties involved. This also allows relevant authorities or regulators to oversee transactions and ensure they follow rules while not seeing the actual asset.
What actually happens in a blockchain enabled transaction is surprisingly basic and straightforward, irrespective of the complexity of the technology. Applications are being created today with familiar easy to use interfaces that allow a user to register an asset of value to transact as easily as today’s e-commerce web sites. This could be as simple as entering a set of text that defines the asset or “attaching” a digital document. The asset, a vehicle registration certificate for example, is then encrypted for another blockchain registered party. All the encryption, distribution and other heavy lifting happens in the background, following the blockchain protocol. Included in this flow is the encryption process, which serves to keep the asset private but also signs the transaction from the initiator. All the latter has to do is send the asset through the blockchain application, which is in effect (and sometimes actually is) like emailing a decryption key to the recipient.
An example Blockchain use case is in finance, where visionaries such as Blythe Masters, CEO of financial asset blockchain startup Digital Asset, are heralding it as “email for money” and the Bank of England is stating it is the “first attempt at an Internet of finance”. Even the World Economic Forum has stated that “The blockchain protocol threatens to dis-intermediate almost every process in financial services”.
The Blockchain and economic development
Could the block chain then be used as a method for creating transparent and trustful transactions?
The answer must lie in the blockchain’s key features and adaptation of them for this purpose.
Principle among these features is the public, but encrypted, storage of an item of value and the traceability of the transactions on that item. That item or asset of value could take many forms, crypto currency (the blockchain’s was born to power the crypto currency Bitcoin after all), a digital item of intrinsic value such as a movie, airline miles or the encrypted access keys to a physical value such as an escrow bank account, gold or land deeds.
To process any transaction, an essential early step is to make sure the sender owns the asset they want to transfer, and make sure they will not trade it twice. Both of these necessary steps happen automatically when the owning party uploads the asset to the blockchain. In the case of an ownership document for an item of machinery or a service contract, the original is stored with strong encryption and cannot be copied without the original key, therefore the receiver gains access to the original item of value and is guaranteed it is only traded once
In the blockchain, information is stored in blocks that record transactions and each block is sticker to every transaction ever done through the network. Hence, it allows validating both the existence of assets to be traded and ownership. The encryption allows for “Smart Contracts” to be agreed and ownership of an asset transferred at the same time. “The blockchain, in essence, automates trust” according to Suni Hirami, a financial industry entrepreneur at Digital Asset, a company applying the blockchain to the financial services.
So a solution employing the blockchain can be applied to any asset that can be individually identified. A land title or a gold bar origination certificate for example. In fact any proof of ownership document, or even a contract that is acceptable to the parties in the chain, can be digitised and used as the digital “avatar” of the asset. This allows for a flexible system that can use existing proof of ownership as a base in any commercial context. Likewise the initiators and participants in a chain can agree on which body can carry out regulatory oversight or is the guarantor of authenticity.
A further crucial aspect to use of the blockchain in any commercial transaction is the savings gained from the rapidity of the transaction and the lack of recourse to expensive back office processes. A Santander Inno Ventures report has estimated that corporate banking lenders could save $20 billion annually in settlement costs. While costs may be less in other industrial sectors, the speed of execution and increased trust are hugely valuable. In effect an escrow for digital and physical goods can be created as trading parties can securely “inspect the goods” prior to making payments.
Even its genesis in the controversial Bitcoin crypto-currency is not a hindrance to the blockchain’s adoption for serious commerce, as both supporters and detractors of Bitcoin agree that this is one innovation which has worked flawlessly. In fact, an optional addition to the blockchain process would be to use crypto currencies for payment, while barter is an embedded ability in any “chain”.
Delivering Smart Trusted Transactions
Any blockchain based solution need not be a monolithic single solution. Vertical solutions are already evolving around land sales, international money remittance, valuable digital content and financial market transactions.
Quite simply, any group with a unified purpose can set about creating a blockchain solution that is appropriate for its context. These can be analogous to gated communities managing their own utilities, with supervision of the city government (this analogy can also be implemented in real life). Examples of the context that such “Smart Chains” can be created in could be:
- within a country or city jurisdiction
- a global industry vertical with strong regulation
- for transactions between individuals cross borders
A concrete example could be a nation state deciding to move commercial transactions internally to a blockchain powered system. The state’s government entity in charge of regulation and promotion of commerce could set up the system in collaboration with major private sector actors in the economy, as well as opening it up to small and medium enterprises. Both of the latter will benefit from increased speed of transactions, as well as reduced costs and reduced fraud. Transactions could range from major asset sales, such as industrial machinery or raw materials, to daily enterprise needs, such as technology or administrative services. The breadth of participants would ensure security through distribution of the chain among them and the regulator originating or supervising the system would ensure oversight. Participants would then use digital contracts, certificates of ownership or deeds authenticated with the entity as assets to create “Smart Contracts” and therefore exchange them with “Smart Trusted Transactions” on the blockchain.
The systems needed to create these transactional communities will not be hugely expensive or time consuming to set up either. In true disruptive fashion, the blockchain protocol code is Open Source, so solutions can be created as convenient to the initiators, the costs being in the code and processes created for the particular application of the protocol.
Many challenges remain for entities implementing a blockchain based trading system. These include the agreement of what constitutes a trade-able asset, ensuring sufficient scale within the gated community to gain security from the distribution of transactions, usage adoption and how to agree regulatory oversight. However this new technology does provide the potential to enhance economic development by lowering hurdles and increasing trust.
Andrew Rippon, Senior Smart City consultant, Nexgen Advisory
REFERENCES
“The Blockchain Might Be The Next Disruptive Technology ” | TechCrunch – Florian Graillot (@FGraillot ) – AXA Strategic Ventures. – October 2015
“Bitcoin Blockchain Technology In Financial Services: How The Disruption Will Play Out ” | Forbes – Laura Shin – Sept 2015
“Forget Bitcoin — What Is the Blockchain and Why Should You Care? ” | re/code – Mike Gault, Founder and CEO, Guardtime – July 2015
“Blythe Masters Tells Banks the Blockchain Changes Everything “, Bloomberg Business – Edward Robinson and Matthew Leising – September 2015