What is the Blockchain and the philosophy behind it, many people know it as the technology behind Bitcoin, but Blockchain's potential uses extend far beyond digital currencies. What exactly is Blockchain, and why are Wall Street and Silicon Valley so excited?
Currently, most people use a trusted intermediary such as a bank to make a transaction. But Blockchain allows consumers and suppliers to connect directly, removing the need for a third party. Using cryptography to keep exchanges secure, Blockchain provides a decentralized database, or "digital ledger," of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before being verified and recorded.
In the case of Bitcoin, blockchain stores details of every digital currency transaction, and the technology stops the identical Bitcoin spent more than once.
The technology behind the Blockchain is revolutionary and can work for almost every transaction involving value, including money, goods, and property. Its potential uses are almost limitless: from collecting taxes to enabling migrants to send money back to family in countries where banking is steep.
Blockchain could also reduce fraud because every transaction would be recorded and distributed on a public ledger for anyone to see. In theory, if Blockchain goes mainstream, anyone with access to the internet can use it to make transactions.
According to the World Economic Forum's Global Agenda Council, only a tiny proportion of global GDP (around 0.025%, or $20 billion) is in the Blockchain.
The forum's research suggests this will increase significantly in the next decade as banks, insurers, and tech firms see the technology to speed up settlements and cut costs.
Companies racing to adopt Blockchain include UBS, Microsoft, IBM, and PwC. The Bank of Canada is also experimenting with the technology. A report from financial technology consultant Aite Group estimated that banks spent $75 million last year on Blockchain. And Silicon Valley venture capitalists are also queuing up to back it.
Banks are making big bets on Blockchain and will invest an estimated $400 million into the technology—the digital public ledger enabling cryptocurrency usage such as bitcoin by 2019. Financial institutions spent an estimated $75 million on Blockchain technology this year.
Most financial institutions argue that they are not interested in cryptocurrencies. But many are increasingly focused on the potential usage of blockchain technology for functions such as settlement, the crucial but unglamorous moment when cash and securities will exchange between buyers and sellers.
While trading activity has become increasingly high-speed, computerized functions in recent years. Settlement can still take days, exposing banks to the risk that their trading partners could become insolvent during the period after a trade is executed is settled and known as settlement risk.
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