Future of Fintech Special Report

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FUTURE OF FINTECH RACONTEUR.NET 14 27 / 09 / 2017 Governments in race for blockchain BLOCKCHAIN A distributed ledger, which promises global transparency in financial and other dealings, could become a tool of government in a new age of finance T en years after the global banking crisis and alter- natives to the systems that caused it are still sought. For techno-libertarians and anar- cho-capitalists, who would gladly see feckless banks and inefficient governments done away with entire- ly, one fintech solution is posed by the digital cryptocurrency bitcoin. Underpinned by a distributed ledger known as blockchain, bitcoin would allow finance to flow freely without third-party governance or oversight simply by following the laws of code. It is an ironic twist of fate, then, SHARON THIRUCHELVAM that far from seeing central author- ities toppled by blockchain, govern- ments are expected to be the main drivers of its adoption. By 2018, nine out of ten government organisations plan to invest in blockchain tech - nologies to help manage financial transactions, assets, contracts and regulatory compliance, according to a recent IBM survey. Which begs the question, what is blockchain and why do governments consider it important? As a type of dis - tributed ledger, a blockchain is a data- base that is maintained by a number of its users collectively rather than by a single entity centrally. Changes made to the ledger are encrypted so they cannot be changed or erased with - out leaving a record at every stage. In theory, any kind of data, from health records to business transactions, can be added to a blockchain, creating permanent and secure records. For that reason, it is considered a powerful potential tool for improving transpar - ency, efficiency and trust. Proponents believe blockchain has potential in almost any con- text where information needs to be agreed and shared, for instance in- surance, trade deals, public health systems, foreign policy, internation- al aid, taxation, loans – the list is seemingly endless. It follows as little surprise that governments are ex- ploring the area as part of their wider digitisation efforts for fear of losing a competitive and strategic edge. "There are going to be clear winners and losers," says Dr Catherine Mulli - gan, research fellow at the Centre for Cryptocurrency Research and Engi- neering at Imperial College London. "It is not necessarily about which governments are investing, but those that are enabling support for these kinds of technologies will see a signif - icant advantage." A fundamental difference between private and public blockchains should be made clear. Public blockchains fol - low the original anarcho-capitalists' ideal which requires no oversight and allows anyone to join the network and to contribute to it, and for anyone in the world to see its records. Private systems, by contrast, which are the kind sold as blockchain-as-a-service (BaaS) products by companies such as IBM and Microsoft, are closed and include an administrative structure. "The technology is political and can serve both philosophies very well," says Tomaso Aste, professor of complexity science and head of the financial computing and analytics group at UCL. Blockchain has the potential to be many things to many people, and how it is fostered by different gov - ernments will largely depend on their political bent and organisa- tional needs. Are they a progressive liberal democracy or a one-party state? Do they suffer from high lev- els of corruption? Are their bureau- cracies co-operative or divided? UK government departments, for example, are beleaguered by data-sharing problems and silos caused by departmental differences in organisational culture and the de - mands of their respective data sets. IT procurement in UK government de- partments is wrought with difficulty, pegging the country far behind front runners like the leading e-nation Es- tonia, where almost all government services are accessible digitally. The UK fares slightly better in cen- tral banking tech research. The Bank of England, which has been research- ing blockchain for several years, re- cently announced the successful test of an interledger programme devel- oped by Ripple, the California-based blockchain specialist, to synchro- nise a payment between two central banks' systems. However, no government is doing more research into blockchain ap - plications at scale than China, which has developed its own cryptocurren- cy, trialled a blockchain taxation sys- tem, and hopes to establish itself as a global leader in the sector, according to Cai Weide at the blockchain re- search institute in Qingdao. China's latest move, however, has surprised many in what appears to be the shut- down of the country's cryptocurren- cy exchanges. Imperial's Dr Mulligan notes that the Chinese government is very likely to be interested in the ability to track and trace every transaction made in its economy and records added to government databases. This poses the question could block - chain be used as a tool to aid surveil- lance of citizens and by extension as a means of suppression? China has a partly managed economy and an ambivalent attitude to human rights as a one-party authoritarian state. Just imagine pairing the power to have immutable records on your citizens with future technologies enabled by artificial intelligence, such as biometric surveillance. The vision is Orwellian. This future may never material - ise, according to Vili Lehdonvirta, economic sociologist and associate professor and senior research fel- low at the Oxford Internet Institute, because most blockchain talk sets unrealistic expectations for the technology and is founded on un - substantiated hype. "Let me put it this way, have they [BaaS providers] come up with a single client that is actually using it for something oth - er than a prototype? Most of these problems people are seeking solu- tions to are organisational science problems," he says. Technology is a tool and rarely a sil- ver bullet, however much we may will it otherwise. Even if blockchain were to become a kind of digital philoso- pher's stone, at least the race it will have triggered to make government services and activities more efficient, transparent, consensus-based and trustworthy will have caused deci - sion-makers to begin thinking imag- inatively and talking seriously about pursuing these goals. The Bank of England recently announced the successful test of an interledger programme to synchronise a payment between two central banks' systems INVESTMENTS OF GOVERNMENT LEADERS IN BLOCKCHAIN WHERE THE TRAILBLAZERS INVESTMENTS WENT IN 2016 COMPARED WITH OTHER AGENCIES IBM 2017 GOVERNMENT STANCES ON BLOCKCHAIN WORLDWIDE WHEN GOVERNMENT AGENCIES EXPECT TO HAVE BLOCKCHAIN IN PRODUCTION AND AT SCALE IBM 2017 2017 2020 2018 Trailblazers 14% Followers 38% Mass adopters 48% Asset management Identity management Regulatory compliance Voting systems Citizen services Contract management Financial transactions Borderless services Trailblazers All other governments 17% 45% 23% 45% 20% 45% 20% 21% 21% 18% 28% 24% 38% 38% 41% 16% 5% 10% 15% 20% 25% 30% 35% 40% 45%

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