Last week many of the brightest minds in the blockchain development community gathered to share ideas on the technology’s future across a broad range of industries.
As was the case in 2017, the widespread opinion continued to be that financial services is a key target industry for blockchain to disrupt, much of the conversation focused around how and when this would happen. Here are our key takeaways from the show.
ICOs are a controversial subject
The number of ICOs being launched skyrocketed in the second half of 2017, partly due to greater public awareness of the purported benefits of blockchain, and in part due to the fact that cryptocurrency (Bitcoin) investors suddenly found themselves cash rich and ready to jump on the next investment opportunity. However, there is certainly no consensus as to whether the quality of investment opportunities matches the quantity currently available.
The most heated conversations in the room all occurred around the legitimacy and morality of ICOs. Despite being ostensibly an event for forward thinkers in the blockchain space to share ideas, there was clearly a percentage of the audience that felt uncomfortable with the sums of money currently being invested into companies with no proven history of financial success, and little more than an idea and some blockchain theory to their names.
Inevitable comparisons continue to be redrawn between the current crypto investment surge and the dotcom bubble of the early 2000s, whether those accusations are lazy or have validity is not clear. What is clear is that a very high percentage of ICOs will not be successful (a fact that almost every blockchain proponent will attest to); the argument revolves around whether ICOs offer an adequate risk/reward investment model, or whether it is recklessly irresponsible for fledgling businesses with no history of success to piggyback on the crypto-hype in search of financial backing for projects with limited chance of success.
The debate continues.
Regulation is coming, but is that actually a good thing?
The cryptocurrency community is at odds with itself over the potential for regulators turn their attention to blockchain. Despite rumblings from countries such as China, South Korea and India that probative legislation on trading cryptocurrencies will be hammer blow to investments, this is yet to come to pass, and the general consensus from attendees at Blockchain Week was that regulation would ultimately prove to be beneficial to the industry in the long run as it will drive out bad actors. The overwhelming consensus was the legislation is on the horizon whether community welcomes it or not, so acceptance and cooperation with the regulator would garner the most beneficial results.
Cycling back to the issue of ICOs, it is critical to the future of blockchain that retail investors remain protected. Consequentially, the industry should expect regulation to ensure investors are not stung by failing unscrupulous ICOs. If the regulator observes large numbers of investors losing money through ICOs, as some sceptics believe, then regulation will come sooner rather later.
Anthony Woolley, MD, UK Head of Innovation at Societe Generale addressed this issue during a panel session titled Blockchain & Financial Services Disruption.
“Regulators have encouraged and supported the industry but traditionally regulated when there is risk of retail investors getting hurt. My advice is that there is a good balance at the moment. That said there is a risk of regulatory arbitrage if the level of regulation becomes different around the world, so the industry needs to collaborate and move forward together.”
Richard Crook, Head of Emerging Technology at RBS, echoed Anthony’s words that to-date regulators had taken the correct approach to cryptocurrencies, stating: “We’ve always pushed for better regulation later rather than poor regulation earlier, the regulator has taken this approach so far.”
Blockchain developers need to take AML concerns more seriously
As the talk of penetration of the traditional economy and financial services continues to get louder, so does perhaps the principle concern of blockchain antagonists. What was once cryptocurrencies’ biggest asset, namely the anonymity it providers buyers and sellers in the marketplace, is now looking like its Achilles’ heel.
Anti-money laundering has become a fintech pillar in recent years, with banks responsibilities’ in this area increasingly becoming pressing as mobile banking, open banking, and the expansion of the payments industry puts even more pressure on AML compliance. Any blockchain based financial services system will have to address AML with the same dedication, and it is not yet clear whether developers have realised this fact yet.
The wave of increased blockchain funding generated by ICOs is another anti-money laundering headache for developers. Millions of dollars that have been raised in the digital economy cannot be used for investment in skills/resources from the traditional economy thanks to the reluctance of banks to offer accounts to blockchain companies due to anti-money laundering concerns. For this reason we can already observe a secondary industry offering ICO AML solutions hitting the market.
Physical assets have a place on the blockchain
One of the more unexpected and interesting speakers on the Blockchain Week programme was Tom Coghill, Commercial Director of Royal Mint Gold, who spoke to the audience about how a physical asset, namely gold, could be registered on a blockchain, its benefit.
“We (the Royal Mint) have been making tokens of value for nearly a thousand years. So we know something about it”, Coghill told the audience.
“So it is natural for us to get involved in digital assets. Why? Mostly because we recognise modern society is using electronic payments more and more, digital payments. Looking at innovation, specifically we’ve put gold onto the blockchain because it makes sense to build blockchain to sit alongside our physical gold vault. We’ve been working on it for three years and last summer put the blockchain into production, it is a publically visible network but it is privately permissioned. You own a token and you own a physical asset, it’s your asset. You can trade it peer-to-peer without a need for a central authority to verify that transaction. It is a safe haven asset that the world will adopt as a digital asset.”
We expect to see more of these projects in the near future.
Banks shouldn’t fear change
With the blockchain community having its eyes firmly fixed on revolutionising financial services, there is a belief that traditional banks that take the threat of blockchain seriously have a negative outlook on how blockchain adoption will affect the industry. This perception was directly challenged by the traditional banking representatives at the show, including Anthony Woolley and Richard Crook, who emphasised the benefits for banks of improving inter-entity workflows in much the same way as email did to enterprise in the 1990s.
“There is no reason the banks should stay in the same structure,” said Ajit Tripathi, EMEA Partner at Consensys Enterprise, was keen to stress.
“Banks are different now than they were before the internet, and before the iPhone. The sheer force of innovation in the community, and the fact that there are customer problems that rely on decentralisation, means that the industry will evolve. Regulators are moving that direction with GDPR. Banks should begin with what are the customer needs, not what the enterprise needs.”