In the world of fintech and the wider financial services space, there is one word that either unifies or divides… And that is the B-word.
Yes, I am of course talking about “blockchain”, or more accurately, distributed ledger technology (DLT) delivering a blockchain ledger.
It seems some people are really excited if your technology or solution is dependent on the blockchain, while others are totally turned off. I don’t think I have ever really known a technology to divide opinion so much. Just the other day I got caught up in a conversation that went along the lines of:
“Well, blockchain is pointless in financial services, it’s just some tech looking for a problem.”
“Come on, let’s not be silly. Blockchain solves many challenges right across financial services and wider.”
“No, no, no. Digital money doesn’t have to be blockchain based, what can’t we do with money today that a blockchain solves?”
And there we have it… The real area of division. Not the technology, but what the technology is being used for. All too many see blockchain as a technology looking for a problem to solve, and that problem is all too often linked back to currency, money movements and now, in vogue, central bank digital currencies (CBDCs). The reality is that this is total rubbish and shows a real lack of understanding of what blockchain technology can solve.
First off, blockchains aren’t new, and no, they were not invented with Bitcoin. I personally remember working on “hash chains”, essentially a pre-cursor to blockchains, back in the 90s. I mean, the late 90s (I’m not that old – just a hard paper round, as my dad would say). These were first used back in the early 1970s. Not that new a concept, right? Even blockchains themselves, these were worked on in the early 90s by Stuart Haber and W. Scott Stornetta. Back in 1992 they incorporated Merkle trees into their blockchain to add efficiency and thereby enabling the collection of more documents into a single block. So, the B-word, well, it’s not new.
The second point is, I cannot think of a technology that has ever been created that doesn’t have a problem to solve. The issue is not the technology, it’s us humans. Our understanding of technology and its application. Financial services, on the fringes I guess, suffers with this more than any other industry in my opinion. Whenever a new tech comes along and gains traction, people within the industry (more so since 2008) look to that technology to solve the world’s financial problems, and no doubt to create something of value for them to sell. Blockchain, since Bitcoin, has been put forward as the de facto technology for digital money. And this is where you get division.
For me, there are lots of unknowns around using blockchain and DLT to deliver digital money and/or payment systems. These range from performance considerations to data residency, access to underlying data in the ledger, insider trading concerns and good old data privacy issues. None of which are due to security, no. All of which are to do with the distributed nature of the tech and who has access to the nodes.
Now I may sound like someone who doesn’t believe in blockchain, and you would be significantly wrong. I am someone who looks at technology and applies it to areas where I think that technology best solves a problem right now, and even better in the future. I don’t want to look some 10+ years out. Not initially anyhow, as when you do that, you don’t drive innovation, you drive academic debate – and that’s not building/creating/innovating. That’s just chat.
With this in mind, I see a number of fantastic applications of DLT and blockchain, and I am glad to say the technology is really making a difference and moving the needle. Let’s pick my top two. Nope, not cash. Nope, not communications. Not ledgers, or smart contracts, or trading platforms either… But identity and security.
“B” is for security
Well, maybe not “B”, but for sure the “D” in decentralised. You see, the security issues in financial services all start with a singular point of weakness. A single point of failure and a centralised approach. And that is good old PKI (public key infrastructure). PKI is used to secure everything, from connectivity to proving payment integrity through digital signatures. It’s also the cornerstone of security online. Here we are in the 20th century dependent on a handful of central authorities (CAs) who provide root of trust. All the processes associated with security keys are cumbersome and expensive, and as a result contain a fair amount of associated risk. Now when you think about transactions, that risk factor just goes up and up.
And this is where DLT and the blockchain step in and help.
A DLT blockchain removes the need for CAs. That means the “middleman” is gone. That’s a massive improvement in efficiency, security and cost considerations right there. You no longer have an organisation as a root of trust and some rather legacy-based processes. You now have trust placed in science and maths. Nice. The blockchain can help significantly therefore in securing financial services and financial service transactions.
Recently, dedicated infrastructure was put in place to bring a decentralised approach to PKI for financial services. Look up “DPKIps” if you’re interested. But the technology can be applied to much more than just securing financial services transactions or messages. DPKIps also enables web3 to move away from CAs and the current implementation of HTTPS. Here, the blockchain holds the public key used to decipher certificates used to secure websites.
“B” is for identity
Identity is something the industry is talking about more and more. However, we have to remember that at the heart of any identity solution/infrastructure is the need for privacy and security, specifically correlation of identity data. All too many believe identity is just one thing – a universal identity solution on one infrastructure. Big tech firms and many banks subscribe to this type of thinking, not because of concerns over privacy and security, but because they can monetise identity information.
If we want true security and privacy capabilities, then centralised solutions and singular providers cannot be entertained. So how then do you add trust that an identity you verify is accurate? Well, you replace CAs and utilise a blockchain.
If I as an individual hold my own identity data in the form of a credential, then that credential doesn’t mean much. Why should anyone believe the data it holds? However, if it was issued to me by someone that could be trusted, for example my university issuing me with a credential holding my qualification, then the credential is trusted. But how do you prove that?
In comes the blockchain. If the university has its own private key, the corresponding public key could live on the blockchain, forming part of its identity. As in, the identity of the university. Well, that’s no different to our security implementation above. When that identity credential needs verification, a digital signature is simply verified using the public key that is found on the blockchain, found via my university digital identity (address).
The blockchain here removes any CA and places trust in the maths and the issuer of the identity. The beauty here is the blockchain is now holding the identities of the public entities – my university in this example – and since it is built on DLT, no one company needs to own that infrastructure. It’s also totally immutable, and therefore we can trust the implementation beyond any form of doubt.
The blockchain enables digital identity models such as self-sovereign identity (SSI), an identity model that continues to gather a head of steam. And rightfully so, because with identity, privacy and security are key. Here, the blockchain delivers.
So, next time you talk “B”…
So the next time you get caught up in a discussion around technology that is looking for a solution, new tech that could change the world, or even if someone raises the B-word, don’t be afraid to share these thoughts.
The blockchain is technology that will change our world. It will change how we secure messages, data and our own identity, and maybe, one day, even the way we use money.