More than just crypto: blockchain usage grows amidst greater regulation

By Emma Olsson | 19 November 2019

With countries such as China and Germany laying the groundwork for their blockchain legislation in the past few months, and financial services still undecided on the uses of blockchain, it is apt to re-evaluate the uses of the distributed ledger technology (DLT).

Blockchain often connotes cryptocurrencies, but the technology has many uses: increasing speed and security in cross-border transactions, smart contracts, digital identity – to name a few. As blockchain regulation becomes more commonplace, the application of the technology has the potential to grow in prevalence.

Blockchain as a decentralised peer-to-peer system has been around since 2008, when it was coined by the anonymous Bitcoin founder Satoshi Nakamoto in a whitepaper.  Since then it has gained hype, yet governments and regulators have been hesitant to regulate a fledgling technology that seemed unstable, and in many cases, illegitimate given its tie to dark web transactions. Silk Road, a black market platform facilitating Bitcoin transaction, was shut down by the FBI in 2013 for this reason. Some market players believe blockchain has passed its heyday; since 2018 there has been talk of the crypto bubble bursting, with major players Bitcoin, XRP, and Litecoin shrinking in market value, then proceeding to intense fluctuation in late 2019, according to Coindesk’s index. Several bankers have questioned blockchain’s commercial usage. Other market players claim that blockchain’s usage is more beneficial in processes of industrialisation. As we move further into the aftermath of the bitcoin bubble being “burst,” blockchain technologies emerge in more diverse sectors.  

Payments take the lead

The payments sector has long been considered one of the ripest for blockchain adoption, as high speed of payments has become more expected. The recent proliferation of real-time payments is turning speed into a priority.

SWIFT, for decades the global payments system of choice, has recently been under pressure regarding the emergence of blockchain as a potential competitor amid its own declaration to avoid the technology. The payments system has chosen to focus on common standards and API rather than the trendier DLT. However, the decision to avoid blockchain could also be a result of SWIFT’s great reach – with 11,000 financial institution (FI) links in 300 countries, experimenting carries a lot of risk, something firms with smaller may be more willing to test.  In 2017, the company launched SWIFT Global Payments Initiative (GPI) with the intention of creating “the new standard in global payments.” There has been some indication toward a lightening up on blockchain, though: a report from June 2019 announced that they would soon enabling GPI on DLT platforms as well.

The players pushing SWIFT towards increased speed of cross-border payments and openness to DLT firms include both established banks and challenger payment providers. In 2018, JPMorgan launched its Interbank Information Network (IIN), which now includes 365 banks who use the network to share information on global payments via blockchain. Ripple, a de-centralised real-time payments network founded in 2012, was created with blockchain as its backbone, and has long been considered a rival to SWIFT. In June of this year, Visa launched B2B Connect, its DLT-based end-to-end payments network with 30 countries on board; by September it had doubled its reach.

Whether DLT will emerge as the industry norm in payments is yet to be seen, but blockchain is still far from large-scale adoption.

Digital identity takes ethical turn

Blockchain has long inspired hesitation from its involvement in cryptocurrencies, but there hasn’t been the same amount of contention surrounding digital identity, the feature that underpins all DLT payments.  

IBM launched its blockchain-based Verify Credentials program in 2017 as a way to verify identity without the need of an intermediary provider. In March, Mastercard announced plans to embrace digital identity. The move towards digital identity has been triggered by the desire to ease up on know-your-customer (KYC) procedures. In September, global financial markets data provider Refinitiv announced a digital identity solution to assist in KYC compliance.

While recent embraces point to a focus on digital identity, concerns remain around the way ID is stored and managed by different authorities. After the initial buzz of blockchain that overtook most of the 2010s, focus has recently shifted towards responsible or ethical use of digital identity. Organisations such as the ID2020 Alliance attempt to establish frameworks for the responsible implementation of digital identities, while also ensuring that they are accessible.

Recently, conversations surrounding digital identity have turned to its role in financial inclusion. No doubt spurred by Facebook’s Libra announcement in June, blockchain’s ability to provide an economic identity for those who previously have been left out of financial institutions has gained traction. According to the World Bank, 1.7 billion adults did not have a bank account in 2017. Often this is because they lack identification methods, which digital identity is increasingly aimed at remedying.

Smart contracts legally recognised

Smart contracts are another blockchain innovation to have cropped up in a post-crypto boom landscape. They are digital protocols that facilitate the negotiation of a contract, generally operating on a blockchain. Launched in 2015, Ethereum was created explicitly for facilitating smart contracts. Since then, similar platforms have emerged such as RSK – pegged to the Bitcoin blockchain – and EOS – an open-source blockchain protocol.

On November 18, the UK Jurisdiction Taskforce of the Lawtech Delivery Panel recognised smart contracts as enforceable agreements under English law in an official statement:

“Time and again over the years the common law has accommodated technological and business innovations, including many which, although now commonplace, were at the time no less novel and disruptive than those with which we are now concerned. In no circumstances therefore are there simply no legal rules which apply.”

The announcement follows the Dutch Ministry of Justice and Security recognising smart contracts under Dutch law in October. Such recognition could set a precedent for how blockchain-based smart contracts are considered in other countries.

Smart contracts remove a third party from negotiation, instead using a cryptographic code to enforce the desired action. The insurance industry is ready for this type of disruption. A study by Accenture in 2018 demonstrated that 84 percent of insurers think blockchain and smart contracts will redefine their interactions with partners, with 50 percent already planning on using blockchain within the next two years. Insurance firm AXA has experimented with Ethereum contracts in the past with a flight delay compensation protocol called fizzy, though the project was terminated in September 2019.

The travel and hospitality industry could also benefit from smart contracts in the form of traveller loyalty and the ability to connect with serval providers – flights, car rentals, hotels – all at once.

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