LONDON -- Blockchain technology may be the next logical step for financial transactions, explained financial expert Chris Skinner during the opening session of the Payments International conference Wednesday morning. However, there are several fundamental problems we need to solve before it can truly become mainstream, he stressed.
Skinner noted that the world is currently in the middle of its fourth revolution, and it is a digital one. As we move away from the industrial age, the ways in which we trade and transact are changing exponentially—so much so that it becomes increasingly glaring when old methods show their inefficiencies.
Case in point—Skinner explained that he recently received a paper check from one of his clients that was more than $10,000. Due to the high amount, his bank called him up and informed him that it would appear in his account after 28 days. Adding insult to injury, he was charged $200 for the transaction.
In contrast, blockchain technology could bypass such headaches. “When you can transact on a blockchain $100 billion on a Sunday morning in 10 minutes for $6, what is going on with our old system?” Skinner asked.
The immediate issue
However, currently, Skinner sees blockchain as overhyped and under-delivering. “The reason it’s overhyped is because it actually is a transformation technology for this planet,” he said. “The reason why it’s under-delivering is because trying to figure out how we share a database is quite difficult. You have to ask yourself, ‘Do I need a database? Do I trust the people who use the database? If I don’t trust them because I don’t know them, then I probably can use this as a very low-cost authentication system. This can authenticate all the transactions on the database in real time, using the network rather than using humans.”
This is why blockchain is transformational; transactions can be authenticated without involving lawyers or bankers. But what is holding it back right now is a lack of cohesion around how it can be used. There are questions around the role of a centralized organization is in a decentralized structure. “How does a central bank, a central securities depository, a central counterparty clearing system work in a distributed structure? That’s a big question being asked of the central banks right now,” he said. “The reason the central banks have an issue is that this is a shared database.”
Because this database is shared, it’s an industry issue to create a shared structure—not a technology solution. There has been so much focus on the technology that no one has been focusing on this. “Solve the industry issue first, then apply the technology,” Skinner said.
The sky is the limit
Once the kinks have been worked out, there are a vast array of areas where blockchain could come into play, providing multiple benefits to corporate treasury, such as clearing and settlement and trade finance; Microsoft is already making headway on the latter.
One of the most interesting prospects for blockchain could be its role in creating self-sovereign identities—digital identities created for individuals by the individuals themselves. Some blockchain companies are already testing the waters in this area. “Right now, the governments and financial institutions issue an identity to me, and they control it,” Skinner said. “I’d like to have my own identity that I control and I allow you to access it when I feel like you can have access. That’s a transformational change. And it’s decentralized, so it’s far more difficult to hack.”This has implications for one key issue that gives corporate treasurers a lot of trouble: know-your-customer (KYC) regulations. “If we can create a digital identity scheme that’s on a distributed ledger, that’s cheap, then KYC becomes irrelevant,” Skinner said. “That’s one of the things that’s been a big driver in using distributed ledgers for digital identity. And if you can authenticate in real time, then you can do real-time transactions in trillions, for almost no cost.”