Enterprise #blockchain firm #Ripple just today announced the rise of a new CEO, as Brad Garlinghouse takes over from the company’s current CEO Chris Larsen. Larsen will serve as chairman of the executive board come January of next year, when Garlinghouse will move from COO to CEO. Larsen wrote about theRead More
Bank Innovation
In this blog post, I will outline these three terms and explain the amazing transformational opportunity that arises from their coalescence.
#Open Innovation is a term originally coined by Dr Henry Chesbrough in the early 2000’s best summarised by Figure 1 below.
Figure 1 – Open Innovation
Open Innovation gives organisations the ability to create value by combining their ideas and innovation with those from their business network members.
To understand #blockchain, it’s useful to step back to realize that Business – and Governments – never operate in isolation. They are participants in a business network. Ownership of assets pass across the network in return for payments, governed by contracts. Network participants currently keep their own ledger – recording all assets they own and updated on when asset ownership changes. Whilst well tried & tested, this process is very inefficient, often piling cost on cost.
Figure 2 – Components of Blockchain for Business
Blockchain provides the business network with the ability to agree that a transaction is valid; an audit trail of asset ownership over time; a shared ledger ( “record book”) that is tamper proof, and guaranteed finality of transactions. Government oversight, compliance & audit can be part of the same network.
Hyperledger is a Linux Foundation project to render a blockchain fabric (or plumbing) for business. It’s stated goals are a “collaborative effort created to advance blockchain #technology by identifying and addressing important features for a cross-industry open standard for distributed ledgers that can transform the way business transactions are conducted globally”.
For me, the important attributes of #hyperledger are:
So what happens when we bring Open Innovation, blockchain and hyperledgertogether?
First we need to realise that the business network as the first “acid test” for a blockchain use case – no business network means “think again about blockchain usage”.
Our customers have different approaches to building out the networks to drive full value from blockchain, and we often get to advise and guide them in the pragmatic, practical steps of network formation. This comes down to how much our customer wants to embrace Open Innovation – that is how much they want to create value by combining their ideas with those from other business network members. This can be visualised by setting the slider in Figure 3.
Figure 3 – Open / Closed Innovation Slider
Full Open Innovation is not right for all use cases, not organisationally easy, and won’t be possible when strong competitive forces exist in the network. But I would argue that the most transformational value can be realised when Open Innovation, blockchain and hyperledger can be brought together.
More blockchain Information?
Originally published in Insights on Business, October 2016
[linkedinbadge URL=”https://www.linkedin.com/pulse/open-innovation-hyperledger-blockchain-john-palfreyman?trk=hp-feed-article-title-like” connections=”off” mode=”icon” liname=”John Palfreyman”] is Director – Blockchain at IBM Cloud Division
A check on #stock #exchanges before Halloween makes sense. We covered stock exchanges in a two part series in May, with a focus more on #Fintech innovation and naturally, we found #Blockchain parties and concerts all over the planet. These activities continue to spread but today I want to highlightRead More
Bank Innovation
It seems as though #fintech-ers are more interested in chatbots than #blockchain these days, but that doesn’t mean distributed ledger #technology has slid out of the spotlight. Blockchain startup #Chain made waves at the recent Money20/20 event when it announced what it’s calling the Chain Core Developer Edition: basically theRead More
Bank Innovation
In-house counsel are going to be hearing a lot about smart contracts. They need to prepare themselves for the discussions that their business and commercial leads are going to want to have with them. That means quickly coming to grips with the key commercial, legal and regulatory issues that #smart contracts can give rise to.
Smart contracts exist as code within blocks in a #blockchain. They have the potential to automate performance of a transaction and are typically described as “self-executing” for this reason.
In identifying the issues a business may face in a smart contract deployment, it is important to take on board that there is a spectrum of possibilities as to what a smart contract actually is. At one end of the spectrum, there is the “code is contract” model (which aspires to fully encode complex commercial contracts). At the other end of the spectrum, there is the automation of business logic and/or the automation of the performance of aspects of a conventional contract.
The “code is contract” model is very challenging from a legal perspective. It puts into question an issue potentially relevant for all smart contracts: has a legally binding contract formed? The answer to that question may vary according to the applicable law determining the issue.
In between the two extremes on the smart contract spectrum, it is likely that more modest but achievable use cases will emerge. A good example is the smart contract model developed by Barclays and R3, under which contracting terms (in the form of an ISDA master agreement in natural language) are connected to computer code via parameters (a smart contract template). These parameters feed into computer systems for execution.
This is in effect a split (or so-called “Ricardian”) contractual model, which avoids some of the pitfalls currently associated with the “code is contract” model (for example, how do you encode concepts that involve judgement or degree, such as “reasonable endeavours” or “as soon as practicable”?)
Any proposed smart contract deployment would need to consider regulation. However, to date, the responses of regulators globally to blockchain #technology have been fragmented, and are (generally speaking) at quite an early stage.
There is likely to be a lack of certainty and consistency in terms of the regulatory treatment of smart contracts and other applications of blockchain technologies for some time. In developing their regulatory responses, policy-makers will need to consider a number of key questions, such as: what should be regulated; which activities should be regulated; who should be subject to and responsible for compliance with the relevant obligations; and how should regulatory responses be pitched so as to avoid stifling innovation? In addition, policy-makers are likely to focus on how AML and KYC regulatory obligations can be credibly performed. Regulators will also be interested in how the use of blockchain and smart contracts affects firms’ risk profiles.
As a matter of risk analysis, in-house counsel will need to consider the legal and operational consequences of transacting in an electronic context. Apart from the fundamental question about whether a legally binding contract is formed, it is important to bear in mind that smart contracts sit within blockchains operating over the World Wide Web. They are code. Code can contain bugs. Code may not always perform as the parties had intended. Messages transmitted over the Internet can be delayed or interrupted, and data can be corrupted in transmission. Private encryption keys can be obtained by hacking. The liability implications of these kinds of events need to carefully considered.
It is likely that, once a model is demonstrated to work in a live environment, not only will it be adopted elsewhere, but smart contracts will, with developments in the underlying technology, incrementally become more sophisticated over time. It is quite possible that, in five years or ten years’ time, smart contracts will be doing significantly more than just automating aspects of the performance of contracts.
However, some observers put the time horizon for a large-scale implementation of smart contracts within, say, the financial services sector at just 18 months. My own view is that it will probably take longer. Having said that, there is a great deal of technology and entrepreneurial “digital fuel” being thrown at this area at the moment, so in-house counsel would be wise to track developments and to ask to be involved in the consideration of a business’s use cases and proof-of-concept deployments for smart contracts at an early stage .
Norton Rose Fulbright has a dedicated global team focused on blockchains, distributed ledgers and smart contracts. Follow the latest developments here.
Sean Murphy is a Norton Rose Fulbright Partner in London. He co-chairs the firm’s global blockchain and distributed ledger practice group.
I can remember sitting in conferences back in Australia during the “naughties” (2000 to 2010) and the talk was around which of the four major local #Banks was going to be the last to complete their #core banking replacement programs. It is the middle of the next decade and I think the count is two completed, one still in progress and one not started.
Having experienced the bruised ribs and black eyes from more than a few core banking system implementations, I can say with some authority that it is one of the hardest things to do in a bank. Apart from the #technology spaghetti that a core system replacement has to deal with, it is also a major transformation program, because it invariably ushers in numerous analogous process re-engineering and automation programs.
So if you are a bank and thinking about embarking on a core banking system replacement, you have to ask yourself whether this is the best focus of the majority of your investment capital and energy over the next three to five years or more.
I would argue that it is not, because of the race for scale, the imperative to digitalizeand the potential of #blockchain.
Scale is King
Back in the 1880s in the US, the Oklahoma Land Runs (https://en.wikipedia.org/wiki/Land_run ) saw settlers dashing out on horses, in wagon trains, or any transport they could find to put stakes in the ground and lay claim to newly opened territory. Within 24 hours of each run, thousands of settlers had laid claim to packets of land, but the slow and the indecisive missed out.
The modern-day equivalent of the land run is happening today, but the real-estate of the #digital age is customers. Alibaba is leading the “customer land run” across Asia. They have rapidly accumulated hundreds of millions of customers across China, and are already pushing out for new claims across Southeast Asia.
Alibaba’s investments in Paytm and Lazarda are prime examples of its drive for scale. Both take-over targets had been running loss-making business models focused on customer acquisition. In 2015 Lazarda for example had over a billion dollars in sales, yet by the time Alibaba bought them out they were close to burning through their entire 2014 $250m cash injection.
Alibaba paid $500m to buy out most of the existing Lazarda investors and tipped in another $500m to turn that stake into a majority controlling interest. They weren’t buying a great technology platform (Alibaba already has that) and certainly not a profitable business model. They were buying customers.
But why pay such a premium? Surely Alibaba could have competed head to head with the likes of Lazarda and won over customers?
The answer is that this is a land run. Alibaba want scale and they want to lay claim to it before their competitors do.
If you look at Ant Financial’s own publications and beyond, (http://www.alibabagroup.com/en/ir/pdf/160614/12.pdf ) the competitive advantage that scale gives them in terms of customer analytics and marketing is clear. If you read between the lines you will also see that there is an even bigger prize to be had with scale.
Alibaba’s customer numbers and payment transaction volumes are rivaling those of Mastercard and Visa. This is significant because the major credit card schemas used to rely on a combination of pipes (the need for physical cards, POS terminals at merchants and secure connections via banks) and volume as barriers to entry to protect their businesses. Smartphones and apps have removed the need for bespoke pipes, so the only barrier to entry now is volume, and Alibaba is breathing down the schemas’ necks.
It is not only the credit card businesses whose revenue is under threat; it is also the banks. Combating the threats of the customer land run is probably a more pressing problem to tackle right now than any core system replacement.
Customers want digitalization
As I noted in a recent article, there are multiple imperatives for banks to undertake digital transformations, but the most pressing of them is customer expectations. While there is no doubt that end-to-end digital solutions are required to take full advantage of the efficiencies and scalability that digitalization implies, for banks sitting on legacy core banking systems I think there is a strong argument now to “fake it until you make it” in terms of digitalization. A lot of customer-facing digital transformation can be undertaken while sitting on legacy platforms, and you are more likely to lose customers because of a lack of digital engagement than you are because of poor-performing back-end systems.
Blockchain is real
I have to admit that I have been a blockchain skeptic for some time, but I am changing my tune. The real prize of blockchain in my opinion is not so much the crypto-currency facilitation. For me it is the distributed ledger capabilities.
Wells Fargo and CBA just recently announced their joint experiment to use the blockchain’s distributed ledger to facilitate a trade finance deal. (http://fortune.com/2016/10/24/commonwealth-bank-well-fargo-blockchain/ )
The blockchain is the perfect adjunct to trade finance transactions, and once trade finance gets settled there, other ledger-based financial transactions will soon follow. So if you are a bank thinking about buying the latest core banking suite from one of the leading vendors, now would be a good time to hold off and hopefully leapfrog to a blockchain-based solution in three to five years (my guess on the gestation period for the new breed of blockchain-based core systems).
BNY #Mellon has made a lot of noise about #blockchain #technology in recent months and that continued in a discussion of the bank’s #innovation agenda yesterday. Reporting the bank&8217;s third-quarter earnings, CEO Gerald Hassell #outlines a shift in resources from real estate to digital. This practice normally refers to branches — all theRead More
Bank Innovation
From Aegon.com
Aegon, Allianz, Munich Re, Swiss Re and Zurich have launched the #Blockchain Insurance Industry #Initiative B3i aiming to explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services.
If Blockchain #technology proves viable, it could well streamline paper work and reconciliations for (re-) insurance contracts and accelerate information and money flows, while greatly improving auditability.
Blockchain offers huge potential for enabling digital contracts and transactions amongst multiple parties to be executed in a secure, transparent and auditable way.
By establishing trusted relationships among all participants, Blockchain has the potential to provide a consistent, automatic contract execution environment where transactions and contracts are stored on a shared ledger, thus reducing the administrative workload of multiple stakeholders to ensure contract consistency and execution.
From allianz.com
The Blockchain technology can only reach its full potential for stakeholders if implemented in a consistent and compatible way, based on minimum standards to exchange data and transactions via Blockchain. Therefore Aegon, Allianz, Munich Re, Swiss Re and Zurich have agreed to cooperate for a pilot project, using anonymized transaction information and anonymized quantitative data, in order to achieve a proof-of-concept for inter-group retrocessions by the use of the Blockchain technology.
With this feasibility study, the founding members aim to explore whether Blockchain technology can be used to develop standards and processes for industry-wide usage and to catalyze efficiency gains in the insurance industry.
Harald Rosenberger, Head of Innovation at Munich Re says: “Blockchain technology shows most of its potential only if it’s applied in a network of peers. Therefore we see a huge benefit for the insurance industry in doing this together in the Blockchain Insurance Industry Initiative B3i. With B3i we are in the position to explore and shape the future use of Blockchain and to set the necessary standards for a true digitalization of insurance.”
The Blockchain Insurance Industry Initiative B3i will allow #insurers and #reinsurers to get a better insight into the applicability of the Blockchain technology in the insurance market. In addition, B3i offers a platform to exchange insights regarding Blockchain and potentially other technologies, use case experiments and research information.
This initiative aims to facilitate the transition from individual company use cases to viable solutions across the entire insurance value chain. Such future development of a modern and efficient handling of insurance transactions will require common standards and procedures. Consequently, the Blockchain Insurance Industry Initiative B3i is open to other insurers and reinsurers. Its ultimate ambition is to assess how Blockchain technology can be established as a viable tool for the insurance industry in general and for insurance clients in particular.
The post Insurers and Reinsurers Launch Blockchain Initiative B3i appeared first on Fintech Schweiz Digital Finance News – FintechNewsCH.
The world of #Bitcoin and underlying technologies of distributed ledger, and the #blockchain are experiencing rapid change and growth.
As low-trust digital-based systems gain adherents and differing use cases, developers are creating new variant blockchains to deal with the inevitable fragmentation between public, consortium, and private blockchain technologies.
Public — Fully decentralized and uncontrolled networks with no access permission required — anyone can participate in the #consensus process to determine which transaction blocks are added. There is usually little or no pre-existing trust between participants in a Public blockchain.
Consortium — The consensus process for new transaction blocks is controlled by a fixed set of nodes, such as a group of financial institutions where pre-existing trust is high.
Private — Access permissions are tightly controlled, with rights to read or modify the blockchain restricted to certain users. Permissions to read the blockchain may be restricted or public. [1]
There is usually some degree of pre-existing trust between at least some of Private blockchain participants.
The degree of pre-existing trust that an organization requires, as well as necessary control over participant permissions, will determine what type of blockchain to use.
Different blockchain solutions have advantages and disadvantages. Take for example, the difference between how transactions are validated within each type of blockchain:
#Proof of Work (PoW): About “mining” transactions utilizing a resource-intensive hashing process, which (a) confirms transactions between network participants and (b) writes the confirmed transactions into the blockchain ledger as a new block.
The accepted new block is proof that the work was done, so the miner may receive a 25 BTC (Bitcoins) payment for successfully completing the work. The problem with PoW is that it is resource-intensive and creates a centralizing tendency among miners based on computer resource capability.
Proof of Stake (PoS): About “validating” blocks created by miners and requires users to prove ownership of their “stake”[2]. Validation introduces a randomness into the process, making the establishment of a validation monopoly more difficult, thereby enhancing network security.
One problem with PoS is the “nothing at stake” issue, where miners have nothing to lose in voting for different blockchain histories, preventing a consensus from being created. There are several attempts to solve this problem underway.
Additional developments in this area hope to combine PoW with PoS to create hybrid blockchains with the highest security and lowest resource requirements.
To that end, some developers are focused on enhancing network security through ‘consensus without mining.’ [3]
Tendermint co-founder Jae Kwon has published a paper describing his firm’s concept and approach in this regard.
Existing Proof of Work and Proof of Stake protocols have various problems, such as requiring huge outlays of energy usage and increasing centralization (PoW) or participants having nothing at stake (PoS) possibly contributing to consensus disruption on mined blocks.
Kwon’s solution is twofold and does not require Proof of Work mining:
(a) A ⅔ majority of validators is required to sign off on block submission, with no more than ⅓ able to sign duplicate blocks without penalty
(b) The protocol raises the penalty of double-spend attacks to unacceptably high levels by destroying the malicious actor’s Bitcoin account values.
The algorithm is “based on a modified version of the DLS protocol and is resilient up to ⅓ of Byzantine participants.”
Kwon and his team at Tendermint hope to bring speed, simplicity and security to blockchain app development.
So, how does one decide on what type of blockchain to use and their relevancy for your company use case? [4]
Below are a few examples of different types of blockchains, depending on the organization’s greatest prioritized need:
One consideration is confidentiality. For example, in the case of a public financial blockchain, all the transactions appear on the ledgers of each participant. So while the identities of the transacting parties are not known, the transactions themselves are public.
Some companies are developing ‘supporting’ blockchains to avoid this problem, by “storing or notarizing the contracts in encrypted form, and performing some basic duplicate detection.” Each company would store the transaction data in their own database, but use the blockchain for limited memorialization purposes.
A second consideration is whether you need provenance tracking. Existing supply chains are rife with counterfeit and theft problems. A blockchain that collectively belongs to the supply chain participants can reduce or eliminate breaks in the chain as well as secure the integrity of the database tracking the supply chain.
A third example is the need for recordkeeping between organizations, such as legal or accounting communications. A blockchain that timestamps and provides proof of origin for information submitted to a case archive would provide a way for multiple organizations to jointly manage the archive while keeping it secure from individual attempts to corrupt it.
What are the benefits of each type of consensus mechanism and in which situation are they best utilized?
Proof of Work — Miners have a financial incentive to process as many transactions as quickly as possible. PoW is best utilized by high-throughput requirement systems.
Proof of Stake — Transaction Validators receive rewards in proportion to the amount of their “stake” in the network. This arguably improves network security by discouraging duplicitous attacks. PoS is best used by computing power constrained organizations.
Delegated Proof of Stake [5] — Network parameters are decided upon by elected delegates or representatives. If you value a “democratized” blockchain with reduced regulatory interference, this version is for you.
PAXOS — An academic and complicated protocol centered around multiple distributed machines reaching agreement on a single value. This protocol has been difficult to implement in real-world conditions.
RAFT — Similar to PAXOS in performance and fault tolerance except that it is “decomposed into relatively independent subproblems”, making it easier to understand and utilize.
Round Robin — Utilizing a randomized approach, the round robin protocol requires each block to be digitally signed by the block-adder, which may be a defined set of participants. This is more suited to a private blockchain network where participants are known to each other.
Federated Consensus — Federated consensus is where each participant knows all of the other participants, and where small sets of parties who trust each other agree on each transaction and over time the transaction is deemed valid. Suitable for systems where decentralized control is not an imperative.
Proprietary Distributed Ledger — A PDL is one where the ledger is controlled, or proprietary, to one central entity or consortium. The benefits of this protocol is that there is already a high degree of pre-existing trust between the network participants and agreed-upon security measures. Suitable for a consortium or group of trading partners, such as supply chains.
PBFT — In a PBFT system, each node publishes a public key and messages are signed by each node, and after enough identical responses the transaction is deemed valid. PBFT is better suited for digital assets which require low latency due to high transaction volume but do not need large throughput.
N2N — Node to node (N2N) systems are characterized by encrypted transactions where only the parties involved in a transaction have access to the data. Third parties such as regulators may have opt-in privileges. Suitable for use cases where a high degree of transaction confidentiality is required.
The above list represents the current major consensus mechanisms in operation or from research.
Due to the initial visibility of Bitcoin, the financial services industry has been early in researching the possible uses of consensus mechanisms to streamline operations, reduce costs and eliminate fraudulent activity.
The multi-trillion dollar global financial services industry is really composed of many different sectors, from lending to smart contracts, trading execution, letters of credit, insurance, payments, asset registration, regulatory reporting and more.
For example, the process of securing a letter of credit, which is an important import/export trading service, would likely utilize a ‘consortium’ approach to achieving transaction consensus.
In August, 2016 a banking consortium, R3CEV, successfully designed and executed trading smart contracts. These types of contracts could then be applicable to accounts receivable invoice factoring and letter of credit transactions.
For the use case example of cross-border remittances, which would involve many individuals on both sides of the transaction, a ‘public’ consensus mechanism would likely be a relevant #choice.
Since remittances would need to have a relatively short time latency for transaction completion, a solution involving a Proof of Stake approach with its low resource requirement to validate transactions along with potentially higher security, would be compelling.
In sum, the state of blockchain development is rapidly gaining speed worldwide, yet there is much work to be done.
Numerous Global 2000 companies led by their #technology executives and consultants are beginning to participate in development and testing of this revolutionary technology sector.
Organizations that begin first-hand learning about the power of blockchain technologies will have increased opportunity to lead their industry.
Originally published at intrepidreview.com on October 5, 2016.
I’m always interested in meeting blockchain startups, and Chief innovation officers who are creating transformational products, so please feel free to contact me by email at [email protected]
Collin Thompson is the Co-founder, and Managing Director of Intrepid Ventures, a blockchain startup and innovation studio that invests, builds, and accelerates Blockchain and #FinTech companies solving the world’s most difficult problems. Collin focuses on early stage investments, innovation and business design for corporations, governments and entrepreneurs working with blockchain technology.
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