Blockchain is back on the agenda. It is a ledger of digital transactions that is distributed between different participants. The technology has a myriad of uses, from cost effective FX transfers to programmable money. Franchesca Hashemi analyses a report delivered by Innovalue and Locke Lord about the blockchain

The blockchain landscape is a muddy morass of crypto-jargon that changes every day. And for good reason. It cannot be defined because, quite simply, nobody is aware of its full potential. What is certain, however, is the blockchain’s diversity and popularity.

Hailing from the Bitcoin world, this public record of digital events could change the global economy in the same way email has revolutionised communication.

Research by Innovalue and Locke Lord, a strategic management and financial technology advisory firm, describe the blockchain as a distributed ledger system that allows transactions to be securely gathered and verified without the involvement of a centralised body. To generalise, transferring any kind of information over the blockchain is safe because network "nodes" validate the work going on.

Innovalue’s report, entitled Blockchain and Financial Services: Industry Snapshot and Possible Future Developments, suggests that blockchain can replace the middle figure, such as a card provider, in a payment transaction. In order to mitigate risk, however, there are two more independent concepts underpinning blockchain technology: "cryptography and open source software."

The cryptographic element safeguards and organises the Blockchain. It is the use of code to send messages to a specific person, while open software instils the public and shareable aspect.

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Developers have big dreams for the future of blockchain. It really could be manipulated to serve any need, from sending or receiving remittances, digitalising assets (passport, medical history or a house) to smart contracts and collateral management.

History and How It Works
In 2008 Satoshi Nakamoto, a pseudonym for a mystery person or indeed group of people, introduced the world to Bitcoin, and its decentralised infrastructure system.

It received media attention, Innovalue explains, due to "its price volatility (reaching ~£1,000 per coin in 2013)" and affiliation with Silk Road, the online black market. People using this Dark Web service needed a payment system that allowed the transfer of different currencies across vast geographic distances and between strangers, so they used Bitcoin.

Even though the FBI closed Silk Road down, Innovalue’s report continues, its existence increased financial leaders’ curiosity for the Bitcoin ‘backbone’: blockchain.

Innovalue breaks down the technology: The "blockchain" is the ledger (book of records) of all transactions, grouped in blocks, made with a (decentralised) virtual currency scheme.

The book keeping element has a ‘synchronous’ and even manner, as Innovalue explains: "it constantly updates and with the aid of a mathematical function, allows participants to reach an agreement on the approval of transactions. "

Within this context, information regarding the transaction is transferred in ‘blocks’ to the ‘chain’ and between members of the community. Entries in the ledger can be seen by all participants and are added in chronological order. This system, according to Innovalue, is like a public register:
"The list of all transactions is, de-facto, owned by each participant. Thus, all movements of information that has been exchanged in the network can be traced, enabling the transparency of the system, assuming the IP address of the computer being party to a transaction is not masked."

The report cites the European Central Bank’s ‘two key features’ of a value exchange system: reliability and safety. Normally, a known financial brand bank would fill this role. However, as Innovalue explains, blockchain’s risk alleviating mechanisms not only bridge the third party void but "prevent double spending" through the hash function, which is cryptographic in nature, and distributed ledger design. The latter element works by "redistributing the control and risk of the system to each member of the network", Innovalue states.

This creates a proof of work process. ‘Nodes’ are instrumental to the blockchain technology. Effectively, this is an IP address on the network that verifies transaction.

The Network and Virtual Currencies
Since blockchain’s inception and its subsequent mainstream popularity, its basic premise – a decentralised network – has been reworked by fintech developers. This has resulted in a blockchain amalgamation, whereby centralised networks can exist within a decentralised blockchain (which is the distributed ledger aspect).

Innovalue explains that distributed ledgers, maintained by all participants in the network, enable transparency and integrity:
"On this concept, IT firms (such as Microsoft and Oracle) have developed a method to distribute data among multiple devices in a way that each device can modify and/or update information, making them available to the entire system."

Distributed ledgers differ from centralised and decentralised systems, the report continues, as the information is "owned by the network’s participants, and not only by a central entity or restricted group of hubs".

In addition, Innovalue suggests that distributed ledger can be created with three variables in mind:
– Access to the network
– Homogeneity of the devices (computers, hardware or software) in the network
– The complexity of information included in each block

This means that the blockchain technology can serve any number of currencies. Presently, however, financial institutions utilising the blockchain, or which have invented a system based on its design, underpin it with a cryptocurrency. This can be for security, as cryptocurrencies can act like a buffer, or simplicity.

According to the European Central Bank, a virtual currency scheme: "can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community".

Innovalue deconstructs virtual currencies by classifying them into three main categories: closed virtual currencies (unrelated to the economy and connoted mainly with the gaming world), non-convertible virtual currencies, and convertible virtual (digital) currencies.

The latter is significant to a financial institution’s potential blockchain strategy. However, as the report explains, there is a difference between "virtual" and "digital" convertibles currencies. Virtual currencies deal with products that exist only on the internet, while digital convertible currencies can be broken down into two more categories (centralised and decentralised) and tend to have a more complex use.

Innovalues continues: "Centralised: currencies that have a centralised depository (like a central bank in the real economy- and a principle administrator) fiat currency."

For example, Tibado is a San Francisco-based payment company that uses digital fiat money and a centralised ledger. It, according to Innovalue, uses ‘cloud-based architecture’ to enable payments and mobile or web transfers.

In contrast, the decentralised convertible digital currencies do not rely on a central authority but a distributed system of trust. This has made it difficult, if not impossible, for legacy financiers to embrace Bitcoin and its contemporaries, as there is no safeguard in place for deflation, inflation interest or exchange rates, as Innovalue points out.

The most used and advanced digital currencies are decentralised convertible ones, according to the report:
"These exist because of the blockchain, the underlying technology that allows the exchange. The relation to between decentralised digital currencies and the blockchain is indissoluble and is analogous to the relationship between the internet and email."

Bitcoin is the best known decentralised currency and presently has the highest market capitalisation for its kind ($3.4bn/£2.2bn), according to There are around 500 known decentralised digital currencies, Innovalue explains, and the total market capitalisation for this industry is $4bn.

Where We Are At
It is important to remember that blockchain is not fixed to Bitcoin. The technology can be shaped to accept any currency, and this is viewed as Blockchain 2.0. It is more of a movement than an explicit definition or explanation. Yet the term does well to encapsulate the blockchain evolution and mainstream adaptation, as it dulls the presence of Bitcoin. Regardless of the word choice, the core infrastructure of blockchain and distributive ledger systems (which can be spoken of as independent and complimentary concepts) remain unchanged from Blockchain 1.0.

Many people dislike the terms 1.0 and 2.0. This is understandable, as "1.0" in itself is still maturing so how can the fintech world claim an updated and secondary version? Mainly due to Blockchain 2.0’s digestible connotations: not necessarily connected to Bitcoin, with variations and known adaptation from the mainstream banking sector. In short, Blockchain 2.0 is socially acceptable.

Yet with each phase that blockchain and its spin-offs go through, according to Innovalue, a literal "plethora" of financial opportunities will arise. In effect, anything that needs to be recorded can live on the public ledger blockchain. This includes voting systems, welfare payments and pensions, car hire, remittances and insurance.

It is an apt tool for the digital economy, especially since the distributive nature aids the creation of new information hubs that are easily accessible to the blockchain network’s participants. This particular point, Innovalue explains, could be extremely useful for peer-to-peer transactions and/or the documentation of "intellectual capital for an idea to provide proof of ownership during patent disputes".

Currency Exchange A.K.A the "Remittance" Industry
Blockchain as a public ledger is able to free the flow of remittances. It could provide near real time money transfers, backed up by cryptocurrencies unless a financial brand decides to innovate around this, while fees could be lowered drastically.

Many remittance companies leverage Blockchain 2.0. The result is a market full of variations, compatible with both fiat currencies (from Sterling to the yen and everything in between) and virtual currencies (including Bitcoin and other cryptocurrencies such as Litecoin, which has a total market capitalisation of $97m, according to Innovalue, and Peercoin, with a total market cap of $7m.

These alternative network models, as Innovalue explains, could disrupt the FX and create new clearing spaces for all sorts of transactions.

A key example of a start-up transfer company using blockchain to its merit is Nairobi-based digital currency exchanger and transfer service BitPesa.

Innovalue explains: "BitPesa’s business model is based on the ability to use Bitcoin as a foreign currency clearing and international transfer instrument between two currencies.

"This is done by converting the sender’s value denominated in a fiat currency into Bitcoin at point of receipt and, almost at the same time, to reconvert Bitcoin into the receiver’s fiat currency."

It is a "de facto" process that can remove the complicated, time consuming and expensive obstacles present in the clearing and settlement structures that banks typically involve.

Programmable Money
Digital currencies, according to Innovalue’s report, are characterised by industry professionals as programmable money, or money with in-built functionality:
"[It enables) users to encode requirements into a payment instruction in order to achieve autonomous, self-executing contracts ("smart contracts").

"Software is used to set up a contract to specify the payment details and the conditions required to be met before the transactions take place. The conditions can be based on publicly available information."

The software will check the requirements have been reached then follow through with the agreed payment. In effect, the smart contract is programmed to do the job of a written or typed contract. This is useful for individuals who want to sell, buy or conduct some form of business with an unknown body over the internet.

Yet programmable money can pose security concerns, Innovalue warns: "The automatic and enforcing nature would make it difficult to apply conventional contract law.

"Reversing any disputes over the irreversible and ‘automatically completed’ nature of these contracts may be very hard to deal with."
The report lists consumer protection and privacy as primary concerns, because there is zero discretion in terms of a get-out clause. Alongside this, legal information is publicly viewable (although it exists in computer code).

Smart Property
Blockchain can be utilised for the transacting of information that amounts to a physical or conceptual asset. This could be anything from a house or intellectual property item such as an artists’ song to stocks, bonds, cars and commodities.

Transactions for smart property on blockchain, according to Innovalue, can be viewed as: "contracts enforced by algorithms that can automatically execute the stipulations of an agreement once pre-determined condition are activated".

In this instance, smart property and blockchain is essentially proof of ownership regrading an entity that can be digitalised.
There are many ways to facilitate smart property transactions. Innovalue provides an example of one: "By harnessing the blockchain technology as both a ledger and trading instrument, the Coloured Coins protocol functions as a distributed asset management platform, facilitating issuance across different asset categories by individuals as well as businesses."

Financial brands are innovating around the smart property concept. One potential application that will be difficult but not impossible to execute in future is the distribution of a will. To do this, the smart contract on blockchain should be programmed to scan for publicly available proof of the testator’s death (such as a digitalised death certificate or online obituary). The network will be notified once this condition has been met and within near real time of the death being verified by the nodes, money or assets from the will can be transferred digitally to the beneficiaries.

How Incumbents Leverage the Blockchain
Several legacy banks are investing in blockchain research. Santander published its ‘Fintech 2.0 Paper: rebooting financial services’, while Barclay’s proof-of-concept venture with Bitcoin spending platform Safello has been big news. Royal Bank of Scotland has also jumped on the blockchain bandwagon, with an announcement in June 2015 that it will investigate the technology with Ripple as part of its £3.5bn digital revamp.

Innovalue lists four key areas that corporate and institutional incumbents are looking at: in-house platforms, direct investment in blockchain companies, partnerships with existing blockchain developers and the study of potentially applications through an accelerator.

The report also proves investment in blockchain and Bitcoin companies increasing, with $95m invested globally in 2013, $350m invested in 2014 and $344m invested from January to March 2015, according to CoinDesk’s figures.

What Next?
Banks and developers alike are not even close to uncovering blockchain’s full potential. Yet the sheer range of financial companies now investing, researching and simply talking about blockchain proves that it is a technology under serious consideration.

On this ground, financial brands are assessing areas that need revitalising and adopting the blockchain technology to suit their needs, while keeping abreast of their peers’ developments.

As Innovalue explains, the blockchain ascent continues: "It is an innovative solution to the process of completing information exchanges and transactions. As with all technical advances, blockchain is undergoing progression from initial launch for niche applications (e.g. a digital currency) to potential large scale adoption by businesses and governments."