Over the years, from the first studies on the chains of block in the early 1990s to the explosion of cryptocurrencies and the advent of smart contracts, the distributed ledger technology (DLT), more commonly known as blockchain, has seen several major developments through successful testing phases and implementation programs. The technology still promises to revolutionize many sectors, from banking and insurance to logistics and healthcare. According to experts, it has the potential to universally reshape the way business transacts across nearly every industry in the global economy.
Even if blockchain and DLT have become one of the hottest topics in the business and digital worlds, most people do not completely master the subject, as underlined in the global survey published by British bank HSBC: 80% of those who have heard of "blockchain" do not fully understand it. The term "distributed ledger technology" actually refers to all initiatives and projects that are building systems to enable the shared control over the evolution of data without a central party, with individual systems referred to as "distributed ledgers". If one wants to describe a system that has global data diffusion and/or uses a data structure of chained blocks, one should call it a "blockchain". However, "blockchain technology" and "distributed ledger technology" are still commonly used interchangeably. "Differences between blockchains and other distributed ledgers can include the use of a special data structure that bundles transactions into blocks, and/or the broadcast of data to all participants," highlights Gaël Denis, Telecommunication, Media and Technology and FinTech Leader, EY Luxembourg.
As described by Gideon Greenspan, CEO and Founder of Coin Sciences, "a blockchain is a new type of database that enables multiple parties to share the database and to be able to modify it in a safe and secure way even if they don’t trust each other". It is generally composed of the five following elements: Cryptography (the use of a variety of cryptographic techniques including cryptographic one-way hash functions, Merkle trees and PKIs), P2P Network (a network for peer discovery and data sharing in a peer-to-peer fashion), Consensus Mechanism (an algorithm that determines the ordering of transactions in an adversarial environment, for instance, assuming not every participant is honest), Ledger (a list of transactions bundled together in cryptographically linked ‘blocks) and Validity Rules (a common set of rules of the network, for instance, what transactions are considered valid, how the ledger gets updated, etc.). As a result, using a blockchain may help when it comes to reducing the need for trust between stakeholders, building a secure value transfer system, streamlining business process across multiple entities or even when wishing to increase record transparency and ease of auditability.
The key benefits of the blockchain technology is the distributed infrastructure’s ability to share information that is secure and provide for the unalterable transfer of data – ensuring its integrity. The technology has become an important tool in building trust among business and consumers as both can provide and access accurate data about transactions across nearly every financial service industry from retail banking to insurance to investment banking.
Endless possibilities and main limitations
EY in collaboration with the Cambridge Centre for Alternative Finance and Visa, released the first ever "Global Blockchain Benchmarking Study" highlighting how the financial services industry, as well as the public and private sectors in general, are currently using DLT, how they plan to use it in the future, but also what the challenges to mainstream adoption are.
First and foremost, it is no surprise that the financial services sector has been a pioneer in the use and development of blockchain-based applications, the most common ones being cryptocurrencies, with Bitcoin and Ethereum on top of the list. Lately, central banks – which actually provide the infrastructure for their country’s financial services firms – have been working on several DLT uses aiming notably at reducing transaction, settlement and reconciliation costs. A few months ago, BNP Paribas and EY successfully completed a pilot demonstrating the feasibility of using the blockchain technology to optimize the global internal treasury operations of the bank. The trial proved its potential to drive operational efficiency by providing a more integrated cash management approach, also allowing greater flexibility and a 24/7 capability.
Intellectual property is currently also benefiting from the latest blockchain developments. As an example, Microsoft has recently partnered with EY and launched a solution for content rights and royalties management for the media and entertainment industry. "The scale, complexity and volume of digital rights and royalties transactions makes this a perfect application for blockchains. It can handle the unique nature of each contract between digital rights owners and licensors can be handled in a scalable, efficient manner with an audit trail for the participants. By deploying this on Microsoft Azure, we believe this will be highly scalable across thousands of royalties and content partners," adds Paul Brody, EY Global Innovation and blockchain Leader.
Yet, key challenges are still ahead and are currently slowing down the wider adoption of DLT. "Unclear regulatory environment and resulting legal issues are most often mentioned when professionals are asked about the democratization of blockchain. They actually consider privacy and confidentiality to be more of an issue than scalability and performance concerns," explains Gaël Denis, who has acquired more than 20 years of experience in assisting startups, regulated e-money and payment institutions, major e-commerce players and telecom operators in several parts of the world. Privacy and confidentiality issues also are slowing down DLT deployment in production: encryption of on-chain data and the use of pseudonymous addresses are the most common used methods to improve confidentiality and privacy. Moreover, reluctance to change established business processes is also seen as a major challenge, proving once again that more education – and therefore training – is needed when it comes to change management and the introduction of new technologies in general. With interoperability, which is still in its infancy, also being mentioned as an important concern, experts are currently putting increasing focus on developing common standards via the joint development of enterprise DLT frameworks through a variety of consortia. As a matter of fact, there is a strong desire among industry actors and prospective users to make these systems interoperable. It falls into two major categories: "cross-chain interoperability", which deals with connecting separate ledgers and facilitating cross-chain communication, interaction, and value transfer, but also "enterprise system integration", relating to the integration of DLT networks and applications to existing or legacy enterprise systems and how they can interact with each other. According to Gaël Denis, "lack of standards makes interoperability between networks built on different protocol specifications difficult to achieve. Interoperability will therefore be essential for the massive adoption of blockchain and distributed ledgers. Integration with legacy enterprise systems is often considered an application-level task, but can also constitute a competitive advantage for infrastructure providers".
"Our strategy, risk, compliance and tax proficiency across financial services helps us identify the critical business challenges that blockchain-enabled platforms can best address. From design to delivery, our strategists and engineers work hand-in-hand with clients to guide where, when and how to develop the best blockchain strategy for their businesses," adds the FinTech expert. Proof of the expertise and knowledge of the employees of EY Luxembourg, the team representing the company won the European Investment Bank (EIB) Blockchain Challenge earlier this year, for its innovative solution of improving transactions using blockchain and robotics. The EIB’s Finance team invited its 25 major counterparties in the banking sector to an annual forum to reflect on common issues, such as financial instruments processing, regulation, infrastructure or organizational set-up. In this context, the EIB Blockchain Challenge highlighted the emergence of innovative solutions and the necessity for traditional players to reinvent themselves. "Understanding when and how to build from blockchain technology’s inherent strengths – including asset creation, asset transfer and data reconciliation – will separate the winners and losers as many industries are now moving from exploration to application," concludes Gaël Denis.