Co-author: Ellie McLachlan
What is blockchain?
Blockchain is an electronic ledger of digital events. This ledger is shared (“distributed”) between an endless number of different parties, without an intermediate central authority confirming each transaction manually.
The computers that run and store the blockchain are decentralised, meaning they are not controlled or owned by any one company or country. Being decentralised makes this a very fast and low-cost process.
By contrast, our current system relies on the Central Bank of each country (e.g. the Reserve Bank of Australia and the Reserve Bank of New Zealand) “clearing” each transaction that passes from one bank to another. This process costs the banks money, which is why we face credit card surcharges for the interchange fees between banks and high conversion fees on international money transfers.
Source: WIRED (Facebook)
What can blockchain do?
It can be used for transferring value (money) and also for holding data records.
It’s secure, because it’s impossible to tamper with something that is shared by so many other parties, not just one central bank. Each computer must confirm a transaction before it can go through.
It’s efficient, because it cuts out the middle man between banks and between individuals.
Blockchain has previously been criticised because it makes transactions easier for illegal activities such as drug buying and selling and terrorism. But now that blockchain is going mainstream, this will become less and less possible because the blockchain is a public medium.
Why is it called blockchain?
In a blockchain, each transaction or record is represented by one unique data set or “block” of data attached to the ever-growing chain of other data blocks. Block… chain…
Every block in the chain is connected to the previous one, which means that whenever someone uses blockchain on a computer, the record of every single transaction is available on that computer and will be updated with each new entry.
Who invented blockchain?
Satoshi Nakamoto (not their real name) published the first paper about bitcoin in 2008. In the article, he suggested a process for transferring crypto-currency between owners without the need for an intermediate third party “checking” that each dollar is only spent once.
Blockchain has already proven to be a revolutionary idea. It overcomes one of the biggest stressors when you’re transferring digital assets – the potential for accidental or forged duplication of transactions and records.
Previously our banks acted as intermediaries, but since the invention of blockchain, many banks have been adopting blockchain technology. Banks have been using “permissioned” blockchains, which are closed circuit systems where they can do their legally-required reporting to regulatory authorities in a secure environment.
Benefits of blockchain technology for consumers
Cheaper account-keeping, withdrawal and transfer fees
Blockchain has the potential to drastically cut our transaction costs because it cuts out the cost of settlement, regulatory requirements for registration, and the middle man’s commission.
Spanish bank Santander Innoventures reports that blockchain could save lenders up to $20 billion/year. When the banks save money on transaction costs, we the consumer (hopefully) save money on account-keeping and transfer fees.
We’ll also see lower fees for international money transfers as a result of lowering the cost of cross-border payments.
Money transfers between banks will take seconds, not days. My scheduled direct debit payment for my monthly car insurance premium will never be called a “late payment” again.
The ASX will present much less of a risk because settling a stock trade will take minutes, not three business days from the order execution to the payment and transfer of legal ownership.
In the same way that we can now turn on and off our TV or our fridge using the Wi-Fi on our smartphones, blockchain will enable us to coordinate a vast number of appliances over the “internet of things”.
Working to end corruption
When every record and transaction is made over blockchain, a government can almost eradicate corruption and social injustices by removing the power of the bureaucratic middle-man.
When will Australia get blockchain technology?
ANZ and Westpac already started using blockchain technology back in July to digitise (rather than a paper-based system) bank guarantees on commercial property leasing.
Back in 2015, CommBank and Westpac were working on the R3 project with Ripple Labs to develop blockchain technology for our market.
The R3 project worked with international banks such as Barclays, Credit Suisse, JP Morgan, and the Royal Bank of Scotland to make sure the technology will transfer on a global scale.
One of the main challenges tackled by the R3 project was to create a standardised set of procedures and protocols for Australia’s blockchain technology.
The next step will be getting enough financial institutions to agree to use those protocols. But with the numerous benefits to banks of using blockchain technology, experts say it is likely that many will jump on board.