Blockchain, the technology behind Bitcoin and other digital currencies, isn’t quite as novel or omnipotent as many have advertised it to be. That doesn’t mean, however, that it can’t do wonders in the world of finance. The World Economic Forum recently published a report on how blockchain will reshape financial services — that is, how to apply 1970s technology (more on this later) to problems that have existed since the 1980s. It covers everything from global payments to insurance claims to proxy voting to contingent convertible bonds — is there anything in the financial industry that isn’t broken? Were you guys seriously not planning to do anything about it until a blockchain came along? The 130-page report reminds me of those old Coca-Cola ads that promised to cure everything from headaches to exhaustion. The ads worked because nobody really knew what was in a Coke bottle. Similarly, the term “blockchain” has been so misappropriated that no one knows what it means anymore. The technological innovation of a blockchain is that it combines cryptographic signatures with a fault-tolerant distributed database. This combination allows multiple parties to enter information — say, about money transfers or securities trades — securely and with certainty that every other participant has that same information. Distributed databases and cryptographic signatures have both been around since the 1970s. For decades, the two fields of computer science had little cause for interaction, as they existed to solve very different problems. The technologies finally became conjoined when people wanted to create a registry of asset ownership without relying on a governing body to approve that ownership. Why are financial institutions so excited about a shared registry of asset ownership? While the WEF report contains a lot of ridiculous applications, this is a legitimate one: Clearing and settlement of trades […]
