[LINK] itN: 'Why are Australia's banks so interested in blockchain?'

Roger Clarke Roger.Clarke at xamax.com.au
Mon May 23 10:40:17 AEST 2016


[At last some sense is being spoken by someone, as an antidote to the ridiculous things that have been written about the potential of blockchain technologies.  

[Blockchain is an interesting further development in the area of distributed data, with advantages and disadvantages, and a few potential applications.  And, as with all newish ideas, it may lead to some further ideas that may have some more advantages, disadvantages and applications.

[It's not magic, despite the pretences of the armada of con-men who've (re-)invaded the IT industry.

[Onyer, Steve!]


Why are Australia's banks so interested in blockchain?
By Andrew Colley on May 23, 2016 6:37AM
Experts disagree on the technology's potential.
http://www.itnews.com.au/feature/why-are-australias-banks-so-interested-in-blockchain-419397/page0

If you use the term "cloud computing" at your next barbeque, owing to the invention of smartphones, you might find yourself in a conversation about privacy. If you mention the term "big data", you might also get a flicker of recognition and end up in roughly the same place.

However, if you drop the word "blockchain" into the discussion you're almost guaranteed a blank stare.

That is unless you happen to be talking to an executive of a major bank or other financial institution.

This word has fast become a regular part of the lexicon of decision-makers in banking and a rapidly growing number of sectors involved in the trade of almost anything of value.

Broadly speaking, the word refers to a methodology of settling transactions by using a so-called "distributed ledger" that can be cryptographically protected to ensure, theoretically, that everyone involved in its use has frictionless, automated means of conducting transactions and an immutable source of truth that hackers or other miscreants can't tamper with.

Some, like Zhenya Tsvetnenko, founder of fintech start-up Digital X, believe blockchain use has the potential to eliminate vexatious and expensive commercial legal disputes.

The Commonwealth Bank hinted to iTnews that it could help address problems like corruption when conducting trade in developing countries.

More pessimistically, lawyer and blockchain expert, Mark Toohey, believes it has the disruptive power to decimate jobs in the financial sector.

However, Steve Wilson, privacy specialist with Silicon Valley firm Constellation Research, while not critical of projects inspired by blockchain, says many of its champions have become overly mesmerised by it. He argues it simply can't deliver the cryptographic miracle for which many hold hope.

What is it?

No discussion of the blockchain is possible without referring to Bitcoin - the controversial crypto currency developed by an anonymous security expert known only as Satoshi Nakamoto.

Nakamoto wanted to demonstrate that it was possible for consumers to exchange value entirely digitally and securely without the need for centralised fiduciary infrastructure provided by banks. It was an experiment and a nose-thumbing exercise born out of dissatisfaction with the banking status quo. And it succeeded.

Bitcoin creates new digital (or cryptographic) currency as part of an ongoing group exercise that simultaneously preserves the integrity of a publicly shared distributed ledger of Bitcoin transactions.

The currency itself and the record of its transaction is little more than numbers (long ones) shared securely between mostly anonymous parties. The shared ledger merely reflects the change of ownership of bitcoins.

The true magic of Bitcoin is the way it incentivises everyone involved in the generation and use of the currency to preserve the integrity of the shared ledger - particularly so-called Bitcoin miners.

A Bitcoin miner's ultimate goal is to earn more of the currency by converting Bitcoin transactions into digital records that comprise each new page or "block" in the shared electronic ledger. Thousands of these miners compete at nodes on the network at any one time.

Once they've converted a block of transactions, the Bitcoin protocol requires them, essentially, to use brute force computing power to make millions of guesses at a number that satisfies certain conditions of an algorithm built into the system. This number crunching and computing process is referred to as "proof of work".

It's often likened to a game of digital bingo or a lottery, and the first miner to guess the number correctly gets to add their block of transaction to the ledger, collect 25 new digitally-minted Bitcoins and take a small transaction fee for every new trade in the new block. The new block contains information mathematically linking it to the previous block, hence it's a chain of blocks or "blockchain".

If the Bitcoin system detects that an unusually large amount of computing power is being thrown at it, increasing the rate of correct guesses, it simply increases the difficulty of guessing the number with the aim of keeping the rate at which new blocks are created to around one every ten minutes.

It is possible for an adversary to attempt to corrupt the blockchain with a new block containing fraudulent transactions (say, one that reverses transactions in a previous block). However, such an adversary would have to convince every other miner that its block was valid and continue to add new blocks on a "fork" in the chain in an attempt supersede the "honest" chain.

The Bitcoin protocol dictates that only 21 million Bitcoins will ever come into existence - and gradually the reward for adding new blocks will decrease. However, they are divisible into smaller denominations and valued against any other validly traded currency.

What's in it for banks?

Clearly, creating a new digital currency isn't the draw for the finance industry, and the level of effort and cooperation required to get banks globally to represent all their conventional currency in a form suitable for blockchain settlement would be colossal.

However, Bitcoin's blockchain method of using a distributed ledger to provide a faster, more secure and virtually incorruptible means of settling transactions has clearly caught their attention.

MasterCard was one of the first major financial service brands to go public with its interest in blockchain in 2015. However, since then it has been more cautious with its public statements on the technology.

Earlier this month, Microsoft announced a strategic partnership with a consortium of 40 banks known as R3 to accelerate development of distributed ledger technologies.

The Commonwealth Bank of Australia - another institution that has been vocal about its experimentation with blockchain - is part of the group that started with just nine banks in September 2015, as are NAB and Westpac, among others.

In late April, ASX-listed ownership broking specialist, Computershare, announced a joint venture with UK-based blockchain specialist SETL to establish a securities settlement system based on the technology.

In Australia, the ASX became something of a poster child for blockchain when it revealed late last year that it was considering the technology to replace the exchange's ageing CHESS securities clearing house.

Cliff Richards, ASX's general manager of equity post-trade services, believes the exchange has played a major role in boosting blockchain's credibility in Australia.

"The technology has the potential to deliver improvements in latency, certainty [of title to assets], auditability and provide a single source of truth available to all participants so that reconciliation activities [across different versions of what should be the same data] are reduced," Richards says.

"All this lowers risk, which can lead to significant cost savings in operations, margin and capital requirements."

The ASX is yet to provide a great deal of detail on how it will implement the technology, but sources told iTnews it's more likely to simply be a private distributed database infrastructure rather than anything as radical the Bitcoin blockchain implementation.

Dilan Rajasingham, CBA's executive manager of technology innovation, says the bank is experimenting with blockchain technology in trade finances and payments and at least three other areas, but was reluctant to discuss in detail. 

Rajasingham said the bank's experiments were designed to prepare it for any "over the horizon disruption".

However, he believes there has been too much focus on the blockchain's impact on financial services and not enough recognition of its potential positive contributions to society.

For instance, the bank is working with TYME, a South African start-up seeking to financially assist millions of un-banked individuals living in poverty in developing countries.

Here, he says, blockchain's immutable and transparent qualities have the potential to address endemic corruption when governments in those countries attempt to financially assist their populations.

"A lot of what's done now is done using manual processes, which are, like any manual process, open to interpretation and open to corruption," Rajasingham says.

"Why won't we talk about making a difference to a billion peoples' lives?"

Early days

When it comes to getting banks to join the public conversation around blockchain technology, the CBA is something of an outlier. Most banks iTnews spoke to were prepared to share very little, if anything at all on the topic.

National Australia Bank chief executive Andrew Thorburn has said publicly that blockchain could underpin a "virtual banking system".

However, the bank, which joined the R3 group in October last year, was not prepared to elaborate on its plans for the technology when contacted by iTnews.

In a short statement attributed to NAB Labs general manager, Jonathan Davey, the bank said it was involved in shaping the use of blockchain and that it believed "in the long-term this work has the potential to deliver improved security, reduce processing effort and deliver savings, which will benefit NAB and our customers".

And interest in blockchain appears limited to the large well-resourced banks. Smaller second tier banks that iTnews contacted were not prepared to enter the conversation at all.

Those banks that are involved in blockchain development could find that they are competing with Australia's premier technology commercialisation engine, Data61.

Established with equal commitment to generating financial returns for its parent CSIRO as to exploring pure research science, Data61 has vigorously flagged its interest in blockchain.

Data 61's principal software systems researcher Mark Staples recently wrote in The Conversation that the organisation planned to "identify, develop and evaluate some 'proof of concept' systems using blockchains to investigate them".

Data61 is working with the federal Treasury to review how blockchain can be used in both the public and private sectors, through a nine-month process intended to result in practical use case scenarios for pilot.

Staples said blockchain ledgers could eliminate fraud in the transfer of anything of value, whether it's digital or physical.

He held up Everledger - the creation of Australian entrepreneur Leanne Kemp and which uses blockchain to track and record ownership of diamonds and other valuable assets - as an example.

"Here, rather than the blockchain recording transfers of digital currency, it records transfers of ownership of identified physical assets," Staples wrote.

"This globally accessible provenance trail could reduce fraud and theft, and enable new or improved kinds of insurance and finance services.

"The same general idea could be used for any supply chain, such as in retail, agriculture or pharmaceuticals."

Is blockchain overhyped? Read on to find out what the experts say....

Overhyped?

But privacy expert Wilson and blockchain expert Toohey believe the likes of Staples are misguided in their expectations of blockchain applications outside of its original role creating the Bitcoin crypto currency.

Wilson says the argument that blockchain could be used to account for exchanges of other valuable items comes unstuck once it's recognised that cryptographic certificates still need to be bound to those items by some form of trusted third party.

That, he argues, goes directly against the original intent of the pseudonymous Nakamoto's original white paper, which led to the creation of Bitcoin.

Citing Staples' example of Everledger, Wilson points out that the diamonds can't physically be on the blockchain in the way Bitcoins can be; a third party still has to map them to it in some form of database.

He argues what's being proposed is that massive amounts of compute power be thrown at problems better solved by simple spreadsheet software.

"I really laugh. It's humongous over-engineering when you bring it down to earth in the real world," Wilson says.

Wilson is not entirely derisive of all distributed ledger projects inspired by blockchain, but says the conversation around it needs to be grounded in reality.

"It's a bit like the Wright Brothers' flyer. It could fly 30 metres but couldn't hold its own weight in fuel. But you looked at it and you said 'okay, powered flight is possible' so why don't we work on progressive generations of the idea and see how it goes," he said.

"Bitcoin was a proof-of-concept for something once thought impossible but you can't put health records on the blockchain. It just can't be done."

Toohey also believes the technology doesn't currently warrant the attention it's getting, agreeing many of its suggested applications would be better handled with conventional databases.

Replacing human workers

However, once its true disruptive strengths are realised, Toohey argues there will virtually be no stopping the flow of white-collar blood as the technology threatens workers in equities and commodity trading.

"Blockchain is going to disrupt anyone that's an intermediary and that means anyone that's got the word 'broker' after their job title such as 'stock broker' or 'insurance broker', and anyone that sits at their desk and has an in-tray and an out-tray," he said.

"Their jobs are all imperilled. Anyone who can be relaced by a bot will be."

Digital X's Tsvetnenko says early implementations of blockchain technology are more likely to involve removing the day-to-day grind of paper-based invoicing and fulfilment systems, given the technology's potential to eliminate disputes and legal action.

"With the blockchain there's no arguing about the format of the invoice or whether it's there or not. It's impossible to argue with mathematics," he says.

He remains sceptical that groups like R3 will be able to reach a level of cooperation required for wholesale change across the thousand of banks in the global system system that currently rely on the SWIFT international payment network.

"The word on the street is that it's not going to be successful because it's hard enough working with one bank. Imagine 40 banks? How are you going to satisfy 40 banks that all have different ideas about what they want and how it should work," he said.

CBA's Rajasingham is more upbeat.

"SWIFT didn't start with a thousand banks but it grew to that. But you need a critical mass and that sort of critical mass can be provided by groups like R3," he says


-- 
Roger Clarke                                 http://www.rogerclarke.com/
			             
Xamax Consultancy Pty Ltd      78 Sidaway St, Chapman ACT 2611 AUSTRALIA
Tel: +61 2 6288 6916                        http://about.me/roger.clarke
mailto:Roger.Clarke at xamax.com.au                http://www.xamax.com.au/ 

Visiting Professor in the Faculty of Law            University of N.S.W.
Visiting Professor in Computer Science    Australian National University



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