Blockchain and Stable Coins: opening the crypto markets?

| 20-05-2019 | Carlo de Meijer | treasuryXL

In my recent blog about IBM’s Blockchain World Wire I mentioned the use of Stable Coins as settlement instrument for global payment transactions. Not many are familiar with the term Stable Coins, because it is a relatively new type of cryptocurrency.

The Stable Coin market is however hotter than ever. In recent months, Stable Coins have seen remarkable growth in both size and variety. Today, with over 120 projects on the market, there is growing thinking that Stable Coins may trigger the mass adoption of cryptocurrency payments, thereby opening the crypto currency market. Facebook recently came with its WhatsApp Stable Coin. Even a traditional bank like JP Morgan has entered this market, with their own Stable Coin-like product named JPM Coin.

Why is there such a hype in talking about this phenomenon? And what are Stable Coins? How do they work and what should you know about it in terms of use cases, benefits and risks.

Why Stable Coins? 

But first of all: why Stable Coins? The cryptocurrency market such as for Bitcoin, Ether and others suffers from high volatility and unpredictable price fluctuations. They are struggling to maintain a decent valuation against the fiat. Last two years we have seen the market capitalization of the crypto reaching a high of almost 1 trillion USD before bouncing back to less than 200 billion USD. Most of the coins are down 80% from their all-time highs.

This volatile nature is one of greatest criticisms directed towards the crypto market. Because of this high volatility, Bitcoin and most cryptocurrencies are inconvenient for daily transactions. The demand for cryptocurrency is mainly fuelled by speculation and trading. Retail merchants on the other hand are sceptical of accepting the crypto as a medium for financial transactions. 

There is however a growing desire to bring stability to the cryptocurrency market. The  current market sentiment is turning more towards less price-volatile options. It is thus not surprising  that interest in Stable Coins is on the rise.

“Unlike cryptocurrencies such as Bitcoin, which are highly volatile, stable coins provide people with the pragmatic, helpful benefits of a cryptocurrency, without having to worry about distressing price changes since they are grounded in the real world.” Brigitte Luginbühl, CEO of SwissRealCoin

What are Stable Coins? 

A Stable Coin is a cryptocurrency with all its intrinsic functionality, but does not suffer from the vulnerabilities of market fluctuations and price volatilities. They fall into the category of payment tokens, whose main purposes are store of value, medium of exchange, or unit of account. Like other cryptocurrencies, Stable Coins aim to become global, fiat-free money that is programmatically issued and tracked with the use of blockchain technology.

A Stable Coin refers to a class of  cryptocurrencies that is pegged to a tangible, or stable, asset such as fiat money (which is specifically USD) or precious metal (which is generally gold). The idea of backing a cryptocurrency with a tangible asset is to reduce the price volatility associated with standard cryptocurrency. Since the Stable Coin is correlated to the gold or fiat, its valuation is fixed in relation to that underlying asset.

In theory, this makes Stable Coins ideal and usable as a store of value and a basic medium of exchange. They provide cryptocurrency traders and investors with an easy and simple way to keep value without losing to price swings. In doing so, digital coins may become far more practical for everyday use, and it may encourage global adoption.

Models of Stable Coins

To “get rid” of the volatility of the cryptocurrency market, different variations of Stable Coins have been introduced. Thereby a number of alternative types have emerged, backed by a multiplicity of assets, ranging from baskets of cryptocurrencies to physical assets. Most Stable Coins fall into one of the following models: fiat-collateralized, asset-based, crypto-collateralized, or algorithmic.

A. Fiat-collaterised

Fiat-collaterised Stable Coins are the most popular form of Stable Coins. They are fully backed i.e. on a 1:1 ratio by existing fiat currencies in real bank accounts such as the USD that is held in reserve by the Stable Coins’ issuers. The coins represent a claim on the underlying fiat currency.

How do they work?
Stable Coin working is quite simple. They are backed by a company or a central entity. This company or central entity manage the acceptance of new fiat and issues a corresponding amount of the fiat backed tokens. The issuing company holds assets in a bank account or vault (or works with a third party provider that does so on their behalf.  The company or the central entity is the custodian of the fiat reserves, and it backs all the tokens.

A degree of trust in the central entity is created by third-party audits – validating that fiat reserves are kept equal to the token supply. If the holder wishes to redeem cash with his tokens, the company or central entity will wire transfer the fiat money to the holder’s bank account and the equivalent coins will be destroyed or taken out of circulation.

Pros and cons
Stable Coins have a fiat backed structure and their operations and working are simple to understand. Since these are backed by a stable fiat currency, there is not much fluctuation in the prices.

But, these fiat-based Stable Coins are issued by centralized entities with their own governance protocols and, in the case of full custody integration, can be vulnerable  to fraud activities. This is very much against the concept of decentralized crypto. Additionally, not all fiat currencies are stable, as the fiat that underlies them, may not be stable itself.

Examples
Most known examples of fiat money-backed Stable Coins are dollar-based including Tether (USDT), TrueUSD (TUSD), USDCoin (USDC) and Gemini Dollar (GUSD).

 B. Asset-based

Asset-based Stable Coins are backed by some type of commodities. The most common commodity which is collateralized is gold. Gold backed Stable Coin represents a specific value of gold. The physical gold in itself is stored in a trusted third party’s vault.

How do they work?
Asset-based Stable Coins work similarly in cases where the coin is backed by fiat money (see above).

Pros and cons
As these Stable Coins are backed by real assets they provide stability. In a way, the commodity has been tokenized. This brings greater liquidity and price discovery. The coin holder has the advantage of recoursing to the underlying asset. They can redeem these assets at the conversion rate to take possession of the real assets.

Just as in fiat money backed Stable Coins, they are governed by centralised entities. So some of the very concepts of crypto and digital currencies are defeated in this type of stable coin. The holder is dependent on the vendors and custodians. This can result in a single point of failure at some time. This system is also dependent on the audit and assessment by the third party, underscoring the purpose of cryptocurrency.

Examples
Examples of commodity-backed Stable Coins are Digix gold (DGX) and Petro Coin. DGX is dependent on the market value of gold and is fully redeemable at any point in time.  The ownership/custodianship status is tracked on the Ethereum     Blockchain. Petro Coin is a Stable Coin backed by the oil reserves of Venezuela.

C. Crypto-collateralised

Crypto-collateralized Stable Coins are backed by a mix or basket of other digital currencies like Bitcoin or Ether.

How it works
Crypto backed Stable Coins require holders to stake a certain amount of cryptocurrencies into a smart contract which will then result in the creation of a fixed ration of Stable Coins.

In this type of coins, the volatility risk of a single cryptocurrency is reduced and distributed in a group of cryptocurrencies. The Stable Coins are over-collateralized to withstand the extreme price fluctuations.

Pros and cons
The benefit of this method is that it is decentralized and as a result adhere to the trustless, transparency and secure structure of the crypto world. Therefore they are not vulnerable to a central point of failure.

Crypto backed coins are considered transparent because transactions are recorded on the public blockchain with full transparency and accountability. They are efficient in the sense that conversion from one crypto to another is quick as it occurs on the blockchain.

On the other hand they are volatile and complex. Since the underlying asset is a cryptocurrency itself, it is inherently much more volatile as compared to other types of Stable Coins. Also, there are multiple complex elements which can trouble the minting process of these stable coins.

Examples
The most prominent example of crypto backed Stable Coins is Dai. DAI does not rely on any central entity and lives on the blockchain. Its  face value is pegged to the USD. It achieves stability by using an autonomous system of smart contracts.

 D. Algorithmic (or Seignorage) Stable Coins

The most complex and less popular model are algorithmic Stable Coins. These Coins are not backed by collateral at all. Instead, they use various mechanisms to expand or contract their circulating supply as necessary to maintain a stable value.

Algorithmic Stable Coins are based on smart contracts (and other mathematical -based algorithms) where people put up collateral in a cryptocurrency (like Ethereum). This to back the value of a Stable Coin pegged to a fiat currency. With this method, there is no need for know your customer (KYC) measures to be put in place because there is no need for a counterparty to maintain reserves or redeem money from.

How it works
These types of Stable Coins maintain stability using an algorithm. This means that the Stable Coins are not actually backed by real-world assets. Instead, trust in the system is reliant on the expectation that the coins will gain a certain amount of future value (similar to Bitcoin).

These models are generally created with two tokens: the first is a Stable Coin, and the second is related to a bond, thus promising income if the Stable Coin rises in price. By purchasing the bond with the Stable Coin, supply is decreased. As the total demand for the coin increases, a new supply of stable coins are created to reduce price back to stable levels. The main objective is to keep the coin’s price as close as possible to USD 1.

Pros and cons
The advantages of these type of Stable Coin are that they are decentralized, they have an absence of collaterals and lastly, they are kept at stable prices.

On the other hand, these are the most innovative of Stable Coins but also the most complex and thus difficult to create these successfully.

Examples
Basis (formerly known as Basecoin) is an example of this type of Stable Coins. Basis is pegged to the value of USD through algorithmic adjustments of the coin supply. Prices are monitored using the Oracle system.

Use cases for Stable Coins

Stable Coins promise many of the same benefits as other cryptocurrencies – like cheap transactions and rapid settlement – without the price volatility typically found in the crypto markets. Through that combination, Stable Coins could satisfy the demand for high-quality fiat currencies in parts of the world with limited access to the global financial system.

Various use cases have been proposed for Stable Coins, including mobile app payments, alternative currencies in emerging markets and global payment systems. Currently, the most common use of Stable Coins is for crypto traders to move between investment positions seamlessly and create leveraged positions, without added volatility.

Stable Coins also could be useful for crypto exchanges that want to offer fiat-based trading pairs while reducing their engagement with legacy financial institutions. Another interesting use case, is one of coupon and dividend payments in the up and coming digital securities space. This may enable to receive coupon payments in real time via a Stable Coin directly into a smartphone’s digital wallet.

Benefits of Stable Coins

Just like any other cryptocurrency, Stable Coins may offer both benefits and risks  connected to each alternative governance and price-stability models. The main goal that Stable Coins strive to create is an optimal currency in terms of  price stability, scalability, privacy, decentralization and redeem ability.

Unlike Bitcoin or other cryptocurrencies, Stable Coins are more immune to price fluctuations because they are pegged to tangible and more stable assets, like the US dollar (USD).

“An optimal cryptocurrency should have the following four traits: price stability, scalability, privacy, and decentralization.” “Short-term stability is important for transactions and long-term stability is important for holding.” Forbes

“Stable coins are one of the keys to bringing the benefits of cryptocurrencies to everyday people, both in terms of price stability and decentralization of capital.” Rafael Cosman, founder and CEO of TrustToken,

These benefits give it a better chance of mass adoption, compared to existing crypto currencies. This will be especially relevant for people living in countries with unstable monetary systems, where residents are often exposed to hyper inflation and uncertainty.

Stable Coins development could also be of help for the general population in economic and/or political uncertain countries. If the fiat money is converted into Stable Coins it will ensure that the value of money is preserved.

The adoption of Stable Coins may also  support capital market formation and can be used in new applications for decentralised finance on the blockchain. These include lending and derivatives markets because without borders and volatility, it becomes easier to lend money.

Traders and investors can change between cryptocurrencies, without being exposed to  asset volatility. Stable Coins enable traders to keep value stable against a fiat currency, usually the dollar, while they’re in-between trades.

Finally Stable Coins may help in reducing the risk of high price movements. They can be used in the cryptocurrency market as a hedge against bitcoin and other top cryptocurrencies.

 Main risks of using Stable Coins

There are however a number of bottlenecks that could limit the adoption of Stable Coins. First of all, there is the counter-party risk. By trusting a third-party keeping a cryptocurrency stable, the dollars or other fiat currencies could be fractionally reserved instead of fully backed. In this case, a bank run could cause the price of the coin to drop dramatically.

There is also the centralisation risk. Centralisation risks mean the same monetary issues that fiat-currencies face when a central authority has the power to print money without oversight. Accounts can be subject of misappropriation, being blocked, or accessed by unauthorised third parties.

In the case of algorithmic based Stable Coins there is the risk of algorithm manipulations. As most decentralised Stable Coins are embedded  within smart contracts, there is a risk the algorithm which keeps the currency stable fails. Algorithms could even be manipulated by a third-party.

Stable Coins and Regulation

Thus far, Stable Coins have largely been got attention from regulatory agencies. There hasn’t been much discussion in the crypto industry about how U.S. securities and commodities laws might apply to Stable Coins. But also in Europe Stable Coins has got less scrutiny from a regulatory point-of-view up till no. But that may change.

As Stable Coins are seeing greater industry adoption, the US SEC and CFTC will likely take a harder look at their compliance status. But the main question is: how will those Stable Coins be characterised?

Given how dollar-backed Stable Coins are redeemed, the SEC might characterize them as “demand notes,” which are traditionally defined as two-party negotiable instruments obligating a debtor to pay the noteholder at any time upon request. Demand notes are presumed to be securities.

For its part, the CFTC might take the position that Stable Coins are “swaps” under Commodity Exchange Act Section. Under that definition, the CFTC might characterize Stable Coins as options for the purchase of, or based on the value of, fiat currencies.

If Stable Coins are classified as regulated securities or swaps, there could be serious consequences for a large segment of the crypto industry. For example, Stable Coin issuers might have to register their offerings and comply with all the ensuing regulatory requirements. Similarly, a company or fund that conducts or facilitates Stable Coin transactions might have to register as a broker-dealer.

The SEC and CFTC aren’t the only regulators that may take an interest in Stable Coins. Only time will tell how other regulators worldwide will approach the regulation of Stable Coins, particularly if they’re used to avoid trade sanctions or other transaction reporting obligations.

 Asia ripe for Stable Coins

Stable Coins are looking to become a more attractive crypto solution, particularly in the Asia  Region. And that for various reasons.

According to a recent report by Remitscope, more than 50 percent of remittance flows worldwide could be attributed to countries from the Asia Region. Current traditional money transfers however are far from instantaneous or frictionless and often result in the end customer paying unnecessary transaction costs.

With interest growing, a Stable Coin with a well-developed user experience built into the remittance solution would greatly appeal to these markets. In Asia’s emerging markets, the technology’s application in the remittance sector is especially promising. Stable Coins via blockchain technology can improve the speed and stability of these transfers—particularly in countries where financial infrastructure is still in development.

Asian countries are well placed to adopt Stable Coins. It is encouraging that cryptocurrency ATM usage has grown and more cryptocurrency ATMs means improved access to Stable Coins, which will only help the ecosystem mature and evolve for the better.

It is also very likely that we will see more non-USD Stable Coins being tailor-made for Asia. The emergence of more non-USD Stable Coins will signal that the market is maturing further and ready for the benefits of Stable Coins globally.

The regulatory environment, without overt regulatory guidance in jurisdictions,  in the Asia Region is particularly favourable to encourage such innovation.

 What is needed to drive adoption?

To drive Stable Coin adoption, further development is needed in both cryptocurrency exchanges and various cryptocurrency services.

First, making it easy to digitally deposit and withdraw fiat currencies into and out of exchanges remains a huge hurdle to widespread adoption of cryptocurrency as the process is slow and transactions can take a long time or, if they are fast, involve expensive fees.

There is also still a need to solve issues surrounding settlement and velocity in fiat deposits and withdrawals into exchanges. Top exchanges generally take weeks to process transactions and this often leads to increased customer service tickets.

Another issue is the margins on cash to cryptocurrency exchanges. These are very high, sitting at 7-10 percent globally. Not only is it expensive to transact and exchange cryptocurrencies on exchanges, but it is also less convenient when needing to withdraw cash. That is why there is a premium on cryptocurrency ATMs.

Cross-border payments and converting cryptocurrency to cash should be made more convenient for users across the world. Stable Coins could reduce friction when sending money between counterparties as its often quicker, cheaper, and far more convenient.

To improve the user experience, money transfer companies should be encouraged to start integrating cash to crypto features in their respective locations. Overall, consumers will benefit the most from this increase in competition with more options in providers and more locations to conduct their exchanges locally.

In the long term, with more Stable Coins from various other currencies being made available, exchanges could become more liquid, enabling greater efficiency in the crypto ecosystem. Risks for companies dealing with cryptocurrency to fiat gateways will also be reduced as they no longer need to worry about banking relationships and can instead just focus on maintaining a cryptocurrency wallet.

Forward Looking

Stable Coins may have a great potential. The total addressable market for Stable Coins is essentially all of the money in the world, or approximately $90 trillion. Stable Coins are a crucial element in the world of cryptocurrencies, as they can bring stability. They may pave the way for wider acceptance and real potential for global adoption..

The technology is however still relatively young and will continually evolve, but it is clear that demand is there. Before full adoption is reached, Stable Coin developers will need to address the various concerns still in the market. The key is to create the optimal cryptocurrency including features such as price stability, decentralization, scalability, and privacy.

“Stable coins will ultimately give people enough confidence to start using cryptocurrencies for daily transactions.” “Stable coins are trying to strike the balance of not being dependent on a central bank, while also securing price stability”. Brigitte Luginbühl, CEO of SwissRealCoin

Ultimately, decentralised Stable Coins may pave the way for a new and modern  financial infrastructure  that will remove inefficiencies, reduce risk stemming from centralised parties and change the way we transact.

For Stable Coins to be accepted as a viable alternative to fiat currencies, however, they must first intersect and integrate into our current financial infrastructure.

 

 

Carlo de Meijer

Economist and researcher

 

Corda Settler, Ripple and SWIFT: mariage à trois?

| 07-05-2019 | Carlo de Meijer | treasuryXL

My last blog was about the IBM World Wire, a blockchain based platform for global payments. Another competitor in the blockchain payments world I have written about regularly is Ripple. Both are thereby targeting centralised payments messages network SWIFT.

IBM and Ripple however are not the only players in the blockchain payments world. Late last year R3 launched its new Corda Settler platform using Ripple’s XRP. But here it comes. In January SWIFT announced a partnership with R3 were they are collaborating to test Corda Settler, specifically to “integrate gpi with Corda Settler.” However, as Corda Settler depends on the XRP token, the partnership puts SWIFT and Ripple, the two rivals in an indirect connection. Will that result in a love triangle or even a “marriage a trois”? And could that work?

But first: What is Corda Settler?

In December last year, R3 announced the launch of Corda Settler. Corda Settler is designed in such a way to give companies a new fast, secure and reliable way to move crypto and traditional assets on a distributed ledger. The Corda Settler app is an open-source decentralized application (DApp), that runs on the Corda blockchain. It is aimed to facilitate global (crypto) payments across enterprise blockchain networks with Ripple’s XRP as its base currency. Corda Settler thereby focuses on the settlement of payments transactions between crypto and traditional assets within enterprise blockchains.

Corda Settler uses XRP

Both Corda and Ripple are open-source blockchain platforms with a focus on serving enterprise businesses. Therefore, it makes sense that Corda selected XRP, the globally recognized cryptocurrency, as the first and only supported cryptocurrency for settlement on the platform.

“The deployment of the Corda Settler and its support for XRP as the first settlement mechanism is an important step in showing how the powerful ecosystems cultivated by two of the world’s most influential crypto and blockchain communities can work together.” “While the Settler will be open to all forms of crypto and traditional assets, this demonstration with XRP is the next logical step in showing how widespread acceptance and use of digital assets to transfer value and make payments can be achieved.” Richard Gendal Brown, CTO at R3

While Ripple’s XRP is the first cryptocurrency supported by the Corda Settler, in the future it is very likely that R3 will make settlement in other cryptocurrencies possible.

“The Corda Settler is agnostic to which payment method is used. Whether it’s JP Morgan coin, or Wells Fargo coin, or BAML coin, or HSBC coin, it doesn’t matter to us. We have no horse in that race.” “We don’t have any financial incentives one way or another. We’re just trying to get as many people onto our platform as possible.”David Rutter, CEO of R3

How does Corda Settler work?

The platform is still in its first stages of development. Corda Settler supports payments of all sorts to be settled through “any parallel rail supporting cryptocurrencies or other crypto assets”. Also any traditional rail capable of providing cryptographic proof of settlement can settle payments obligations. In the next phase of development, the Settler will also support domestic deferred net settlement and real-time gross settlement payments.

In its current phase, when a payment obligation arises on the Corda blockchain during the course of business, any of the parties involved now have the option to request settlement using XRP. The other party can be notified that settlement in XRP has been requested and that they must instruct a payment to the required address before the specified deadline presented to them.

After they make the payment, an oracle service will ensure the validity of the payment and settle the obligation. Uniquely, the Corda Settler will verify that the beneficiary’s account was credited with the expected payment, automatically updating the Corda ledger.

What does Corda Settler mean for the parties involved?

It is clear that in the transaction initiated by Corda Settler, the receiving party doesn’t need to use Corda to receive the payment. At the same time, it is not mandatory for the sending party to use XRP or any other cryptocurrency.

This means that using the Corda Settler; one can send XRP or dollar and the receiver can accept the payment in an entirely different currency. “Settlement Oracle” will broadcast the actual settlement notification. It can be operated through different entities like exchanges, banks, and others.

It will thus allow banks and other financial institutions to build their blockchain networks with minimum overheads. They don’t need to integrate the R3 technology fully. All they need is to let their clients receive deposits via Corda-enabled services.

SWIFT partnership with Corda

End January SWIFT has announced its partnership with R3’s Corda Settler to launch a proof-of-concept (PoC). The trial would see the interaction of SWIFT’s payments standard framework GPI (Global Payments Innovation) with R3’s trade finance platform.

“Following the recent launch of our Corda Settler, allowing for the payment of obligations raised on the Corda platform, it was a logical extension to plug into SWIFT gpi. SWIFT gpi has rapidly become the new standard to settle payments right across the world. All the blockchain applications running on Corda will thus benefit from the fast, secure and transparent settlement provided through the SWIFT gpi banks.” David E. Rutter, CEO of R3

Global Payments Innovation (GPI)

This trial will integrate SWIFT’s GPI Link cross border payments gateway with R3’s Corda Settler platform to enable the continuous monitoring and control of payment flows, settle GPI payments through their bank, and receive credit information.

SWIFT’s GPI is a messaging system based on existing messaging standards and bank payment processing systems. It has rapidly become the new standard to settle payments right across the world. The integration will also support application programming interfaces (APIs), as well as SWIFT and ISO standards to ensure global integration and interoperability.

It aims to provide quick and cost-effective transfers between SWIFT members. Through GPI “SWIFT hopes to assist banks enhance their relevance within the fast-evolving international payments ecosystem – by delivering immediate value to SWIFT’s members’ customers”.

Goal of the SWIFT-Corda Settler PoC

The objective of the PoC-trial is to try out interlinking of trade and e-commerce platforms with GPI – SWIFT’s new standard for cross-border payments and is an extension of other SWIFT trials with blockchaintechnology. These platforms need global, fast, secure and transparent settlement, preferably using fiat currencies.

“With the gpi Link, banks will be able to provide rapid, transparent settlement services to e-commerce and trading platforms, opening up whole new ecosystems to the speed, security, ubiquity and transparency of gpi and enabling them to grow and prosper in the new digital economy. Given the adoption of the Corda platform by trade ecosystems, it was a natural choice to run this proof of concept with R3.” Luc Meurant, SWIFT’s Chief Marketing Officer

“SWIFT GPI will integrate directly to Corda Settler, the application that allows participants on the Corda blockchain to initiate and settle payment obligations via both traditional and blockchain-based rails. This will enable obligations created or represented on Corda to be settled via the large and growing SWIFT GPI network”.R3 co-founder Todd McDonald

While SWIFT is keen to experiment with the possibilities opened up by blockchain-based trades, they are much less enthusiastic about using cryptocurrencies such as XRP.

Objective

The SWIFT and R3 Corda Settler trial will enable corporates to authorise payments from their banks via a GPI link to their bank through the Corda Settler platform. GPI payments will be settled by the corporates’ banks, and the resulting credit confirmations will be reported back to the respective trade platforms via GPI Link on completion.

By enabling trade platform ecosystems using Corda to integrate ‘GPI Link’ into their trade environments, SWIFT hopes to extend its reach beyond member banks to include to a wider range of corporates and markets.

The first stage of the PoC will work with R3’s Corda blockchain platform, Corda. SWIFT says it will not limit ‘GPI Link’ to R3’s DLT-based trade environment. SWIFT has plans, if the Corda PoC is successful, to extend the trial to other DLT, non-DLT and e-commerce trade platforms. The results of the PoC will be demonstrated – as a prototype – at Sibos in London in September 2019.

Corda Settler: Fiat currencies versus XRP

Swift said it is not (yet) using XRP on Corda Settler!. And that for a number of reasons.

“All trade platforms require tight linkages with trusted, fast and secure cross-border payments mechanisms such as GPI. While DLT-enabled trade is taking off, there is still little appetite for settlement in cryptocurrencies and a pressing need for fast and safe settlement in fiat currencies”. Luc Meurant, SWIFT’s chief marketing officer

According to SWIFT CEO Leibbrandt banks simply are not prepared to use a cryptocurrency as a clearing unit due to its price volatility. It appears that most banks prefer to use Corda’s technology for rapid and transparent settlement services in fiat currency rather than cryptocurrencies. Most enterprises prefer to settle via traditional payment mechanisms, albeit wishing for greater visibility into what is happening to payments and receipts. This leads to the need for trade platforms to have fast and safe settlement in fiat currencies.

“I think that the big part of Ripple’s value proposition is the cryptocurrency XRP. There we do find the banks are hesitant to convert things into a cryptocurrency right now because of the volatility in the currencies.” Leibbrandt, SWIFT CEO

Another reason why SWIFT is hesitant (not willing) to use crypto currencies is because the legal status of XRP and other cryptocurrencies remains unclear due to the current uncertain regulatory environment. Risk averse financial institutions are unlikely to adopt cryptocurrencies until regulations become clearer.

Ripple’s CEO Garlinghouse however argues back that “with SWIFT payments taking days and XRP payments clearing within seconds, SWIFT transfers are actually subject to much greater volatility due to fluctuating foreign currency rates”. At present, the banks take on that volatility risk by guaranteeing the amount sent will match the amount received. Because of XRP’s speed, which executes transactions in a matter of seconds, Ripple says it ‘eclipses’ volatility risk. With near-instant XRP-backed transfers, that volatility risk is actually completed eliminated.

“I hear people talk about volatility and I feel like they’re propagating this misinformation. Mathematically, there’s less volatility risk in an XRP transaction than there is in a fiat transaction.” Garlinghouse, Ripple CEO

Garlinghouse countered SWIFT’s legal arguments saying that every XRP transaction is vetted for Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. Finally, Garlinghouse added that XRP payments greatly reduce systemic risks to banks in smaller economies, which have to use large amounts of money to prefund international transfers.

Mariage à trois?

With the launch of a universal settler app for payments on the Corda blockchain platform, using XRP as its first crypto payment trail, this may bring the Corda and XRP ecosystems into closer alignment.

Now SWIFT has partnered with blockchain consortium R3, we are in the strange position wherein SWIFT will be possibly be trailing Ripple XRP-powered payments. Through its experimental integration with R3, SWIFT may be indirectly integrating with XRP, though Leibbrandt has no desire to work with XRP directly.

It is still to be seen whether SWIFT will move beyond the proof of concept stage. But that might change. The future of SWIFT and Ripple’s relationship will not lay in the hands of present CEO Leibbrandt, as he will be stepping down as SWIFT CEO in June. His successor may be more receptive for the new world.

It is still speculative  that the proof of concept — or a future trial — could see SWIFT being more interested in cryptocurrency settlement. On the other hand Ripple will do its utmost by leveraging its relationship with R3 to convince (SWIFT-related) banks to take the dive into cryptocurrency via the Corda Settler platform.

For now, the complex links between SWIFT, Ripple, and R3 are sure to trigger continued debate about the future of global finance.

Read the full article here

 

 

Carlo de Meijer

Economist and researcher

 

IBM Blockchain: growing competition in payments

| 30-4-2019 | Carlo de Meijer | treasuryXL

Last year October I wrote a blog about IBM’s World Wire project. In that month they announced to come to the market with a global blockchain network for cross-border payments and foreign exchange for regulated financial firms using digital assets. But at that time it was not yet ready for production.

A month ago the firm has announced that World Wire has been sent into limited production. According to IBM “this is the first blockchain-based network that integrates payment messaging, clearing, and settlement on a single network”. The World Wire network will support instantaneous foreign exchange payment and settlement in locations in more than 70 countries, supporting close to 50 currencies and 45 banking endpoints.

This will definitely lead to growing competition in the payments industry. What could that mean for institutions like Ripple and SWIFT?

Why is World Wire needed?

But firstly, why is World Wire needed? And other blockchain solutions? International money transfers especially remittances make up an important part of the global economy. According to the World Bank, migrants across the world sent an estimated $574 billion to relatives in their home countries in 2016.

Current global payment systems however are not adequate enough for the high number of transactions that are happening across the world. Nowadays banks have to go through inefficient processes involving many intermediaries for both the clearing and settlement to conclude these transactions. Sending money across borders today is as a result a time-consuming and costly process.

What is World Wire?

On March 18, IBM announced the launch of IBM World Wire, a global network for regulated financial institutions to simultaneously clear and settle cross-border payments in real time. First unveiled last year October, World Wire now has entered the production stage.

“We’ve created a new type of payment network designed to accelerate remittances and transform cross-border payments to facilitate the movement of money in countries that need it most.” “By creating a network where financial institutions support multiple digital assets, we expect to spur innovation and improve financial inclusion worldwide.” Marie Wieck, General Manager, IBM Blockchain.

The platform is designed for fast and easy cross-border payments, foreign exchange, and remittances, thereby integrating payment messaging, clearing, and settlement on a single, unified network. The aim of the IBM Worldwide Wire payment system is to remove the function of banking intermediaries to international payment options, thereby lowering the cost and at the same time the transaction speed.

“World Wire’s novelty in the blockchain space regarding settlements is that payment messaging and instructions for settlements can happen in real-time. Hence driving all sorts of efficiencies into the process mainly because you’re doing things on one network, i.e. reconciling information and post fact isn’t necessary.” Jesse Lund, VP Blockchain and Digital Currencies IBM

The platform is developed on the open-source Stellar’s blockchain network. This operates as the backbone of their payment solution, allowing cross-border payment settlements in near real time using digital assets as a bridge currency. It is said that the settlements can be done in five to 10 seconds.

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Carlo de Meijer 

Economist and researcher

 

Gartner Blockchain Spectrum: a great tool for CIOs

| 08-4-2019 | Carlo de Meijer | treasuryXL

CIOs of companies are increasingly showing their interest in blockchain technology. In PwCs 2018 survey amongst a large number of business executives from 15 different industries in various countries, more than 80% of the respondents said their company was actively involved with blockchain technology. Some more than others. This is not surprising given the fact that blockchain may bring a number of great opportunities for enterprises, ranging from improvements in business processes to a complete overhaul of business models.

CIOs are under growing pressure to give guidance to decisions on ‘if’ and ‘how’ they should implement blockchain in their company. Within corporates there is a growing focus on the business challenges that blockchain could solve. CIOs however struggle with the issue of how and where to apply this technology as understanding is far from complete. While this technology is developing and changing fast, the features of blockchain are not (yet) fully mature, and current frameworks are far from adequate.

Looking at the various blockchain solutions that are coming to the market there is a lot of confusion which one would really meet the needs of companies when making up their decisions. This makes it for CIOs a very complex exercise.

Gartner recently launched its Blockchain Spectrum that should enable CIOs to take the right decisions and “make the right investments at the right time”.

PwC Survey: present attitude of CIOs

PwC (PricewaterhouseCoopers) recently launched a survey amongst a large number of CIOs from various industries on their attitude towards blockchain. It gives us some interesting insights about the CIOs present view on blockchain technology.

Survey results

This survey shows that many CIOs embrace blockchain. One of their findings was that 84% of the surveyed had at least some interest around blockchain. Not surprising given the enormous hype surrounding this technology. But the idea what blockchain really means for their company and how it should be implemented is still rather limited.

Looking more detailed into the survey results a very diverse picture of how companies are involved arises. For many CIOs blockchain is not yet a priority, at least compared to other new technologies including AI, Big Data analytics, and cloud. Only 15% has gone live while 10% is in the pilot stage. The large majority has just started in terms of research (20%) and development (32%).

The industries that are thereby leading are financial services (46%) and industrial products and manufacturing (46%). It should be mentioned that the financial services sector fell back from 82% in 2017. The survey respondents however still believe that financial services will remain the “current and near-term leader” of blockchain adoption. But there is increased potential in other areas such as energy & utilities, and healthcare.

Non-optimal blockchain solutions

Most blockchain initiatives today are Proof of Concepts (PoCs) that do not have real value. The existing models for blockchain that corporates operate are immature and therefore not suited to realise the various capabilities of blockchain technology. Most trials do not account for the evolutionary nature of blockchain “that leads to a spectrum of possibilities over time”.

“Inadequate understanding, lack of proven scalable models, inability to think beyond today’s business paradigms, lack of talent, and internal and external pressure to do something lead to tepid proofs of concept (POCs).” Gartner

Only 5% to 10% of current PoCs is expected to eventually “graduate to a preproduction” solution, with “major refactoring of requirements and architecture”. Even the ones that move beyond PoCs use just a “subset of blockchain capabilities” and that within current business models. They offer little or no decentralization and tokenization, being the most valuable features of blockchain.

This has much to do with “unwillingness or inability” to think beyond today’s business models and processes, according to Gartner.

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Carlo de Meijer

Economist and researcher

 

Blockchain Smart Treasury: game-changer for treasurers?

| 19-3-2019 | Carlo de Meijer | treasuryXL

Though blockchain is not yet well understood by many treasury people, and tangible real-world applications for the corporate treasurer’s day-to-day activities are still scarce, this technology is getting increased interest in the treasury world.

In August 2016 I wrote a blog in Finextra named “The Corporate Treasurer and Blockchain”. My conclusions at that time were that blockchain had the potential to fundamentally change the treasury function at corporates. For some it would even going to be a game-changer for treasury. The change might not be here yet, but it is coming, and treasurers need to take a long view on it.

But that is changing rapidly. The focus of blockchain developers is now turning from proof of concept projects to the creation of more practical, treasury-focused blockchain solutions. Recently we have seen a number of blockchain-based treasury trials that are worthwhile looking at. Last December R3 announced the completion of testing on a new blockchain-based KYC proof-of-concept, which was facilitated in collaboration with the French Association of Corporate Treasurers and a number of French banks.

One of the solutions that triggered me most is Smart Treasury by Boston-based fintech Adjoint, that is aimed to enable real-time gross settlement and continuous reconciliation and improve the liquidity management of the corporate treasurer. Main question is, could Adjoint’s solution be a break-through for blockchain in the corporate treasury world?

It is always interesting – and I am a very curious person – to see new initiatives in the blockchain scene and what they could bring for corporates esp. the treasury department.

So let’s have a deeper dive.

Complex treasury environment

Internationally operating corporates have undergone many transformations in their finance and treasury organisations triggered by technology innovations, regulatory initiatives and changed client behaviours. As a result today’s business environment for these corporates is highly complex from a treasury point of view.

In the digital era, real-time insight into a company’s global cash positions and managing credit facilities across all bank accounts of the group and the ability to move money intraday to where and when it is needed is increasingly needed to support this changing business environment.

Key challenge is to obtain consolidated information of group-wide multi-currency positions across a fragmented banking network in a timely manner. Today’s model of international correspondent banking however does not easily facilitate the ability to manage cash in a real-time environment.

Corporate treasurers are urgently looking for new ways to provide cash management with up to date – and if possible real time – information on cash positions and cash forecasts faster and with deeper insight, allowing corporate treasurers to better react to the company’s current cash and working capital needs.

In this context, they are significantly increasing their spending on treasury technology and innovations, to speed up and streamline their company’s cash, liquidity, risk and working capital management, in order to gain greatest visibility over their business critical function and reach greater strategic control.

Adjoint’s Smart Treasury: what does it bring for corporate treasurers?

Adjoint’s Smart Treasury solution, that was launched last year, contains a number of unique specifics that makes it very interesting for corporate treasures.

Smart Treasury should be seen as a multi-bank, multi-currency virtual account platform for real-time gross settlement and continuous reconciliation. This should allow corporate treasurers to untap liquidity in their various subsidiaries’ bank account.

Adjoint has combined blockchain technology with related smart contracts and APIs (or application programming interfaces) to create a solution that aims to dramatically speed up settling intercompany transactions in a secured way while significantly reducing the costs.

Most important features of this Smart Treasury solution are the following:

Distributed ledger: Auto reconciliation

Smart Treasury uses distributed ledger technology to auto-reconcile transactions information, thereby eliminate netting processes and improve FX management to provide treasurers with streamlined efficiency and improved, real-time visibility on cash positions.

Virtual accounts

Another interesting feature is that it enables a limitless number of virtual or “sub-accounts” for reconciling customer and suppliers payments. Companies can thereby consolidate costly, physical bank accounts into a selected number of blockchain virtual accounts. Smart Treasury thereby enables “purposed drive allocation”, thereby using smart contracts to designate how much and where digitised cash can be spent from these virtual accounts.

“Money can then be debited or credited among those accounts as needed, using smart contracts and APIs to make the necessaire FX translations, apply interest on intercompany loans and similar calculations.” Somil Goyal chief operating officer at Adjoint

In-house self-service bank

Smart Treasury consists of an “always-on” in-house self-service bank with “pre-established” rules for automated intra-company transactions. Here you could think of limits on how much can be automatically borrowed by entities based on pre-established interest rates. Nowadays, intercompany transactions, often conducted via an in-house bank, have become essential for multinational corporations. They seek to leverage internal resources more effectively. However, the overnight batch systems most companies use to settle transactions, can limit the transparency into subsidiaries’ account balances.

Smart Treasury Dashboard: access

The solution allows corporate treasury departments to operate their own private distributed ledger. This may enable them to choose which internal corporate entities and third parties including customers and suppliers may have access to the network via their Smart Treasury Dashboard and settle transactions directly with them in real time, rather than overnight or even longer.

But also regulators could be added on the platform which may help notional pooling in jurisdictions with currency controls, while improving the regulatory reporting process by automatically updating records and centralising all information in the ledger.

Smart contracts

Another key feature of Smart Treasury is the use of smart contracts. The tool’s Smart Contracts System uses blockchain to help teams define and set pre-configured rules that securely enable automated, real time transactions. These may include key corporate treasury functions such as regulatory and corporate compliance requirements including KYC; account opening or transactions such as intercompany loans, FX and netting, manage liquidity in multiple currencies, transfers among any approved entities etc. so lowering the costs of booking transactions between subsidiaries.

API integration with corporate ERP and TMS systems

Smart Treasury offers a nearly real-time API-based integration with organisation’s existing systems. Instead of replacing systems such as enterprise resource planning (ERP) and Treasury management system (TMS), Smart Treasury works with current systems as an easy-to-be-integrated overlay, preventing duplicate entries. In fact Smart Treasury complement these, improving the way they interact by speeding up intercompany transaction settlement. Through using smart contracts, all transaction information is auto-reconciled and automatically posted into treasury management systems in real-time.

“With Adjoint’s solution this takes place much faster, at a much lower cost, and it will actuality accept feed from the banks using APIs, which then feed the ERP – again using API – and it carries all of the information necessaire through smart contracts”.Daniel Blumen, Partner of Treasury Alliance

API integration with banks

Smart Treasury also offers a real-time API-based integration with banks for transactions outside the organisation. The solution allows the use of APIs for real-time intra-day bank transactions processing as opposed to end of day batch processing. They enable the transfer of critical information and data between corporate entities and their banks and data providers, as well as between corporate entities within the corporate.

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Carlo de Meijer

Economist and researcher

 

Blockchain and disruption in the financial world: Will banks survive?

| 4-3-2019 | Carlo de Meijer | treasuryXL

The world of banking as we know for many years is in a fundamental transformation process, triggered by new technologies. The most important is blockchain that is said to fundamentally change the way financial transactions are handled today. It is forecasted that this technology will have significant consequences on how traditional banks do business in the future, enabling new business models, deliver new value propositions and solve longstanding challenges, with the well-needed transparency and security in transactions that nowadays involve multiple parties and large amounts of data.

Though this technology is currently still at a nascent stage, blockchain is proclaimed to be a game-changing, disruptive innovation that holds the capability of completely shaking up the landscape of banking in the coming years. Others even proclaim that blockchain will make banks (entirely) obsolete.

Questions that arise are: how will blockchain technology drive disruption in the banking industry, what are the main areas that will be touched, and how will the banking ecosystem look like in say five to ten years from now.

But what is disruption (not!)?

But before answering these questions, it is important to agree what disruption really means. Since the word disruption was launched in the nineties this term has been used for so many things that it has lost their original meaning. Everything that is ‘new’ is described as disruptive and/or innovative.

It was the US professor Clayton Christensen who introduced the idea of disruptive innovation in 1997. According to him disruption means “any innovation that transforms a complicated, expensive product into one that is easier to use or is more affordable than the one most readily available”.

Disruption has three components: responding to competitors effectively; identifying new growth opportunities; and, improving understanding of what customers want.

“A disruptive business is likely to start by either satisfying the less-demanding customers or creating a market when none existed before. So, when mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred”.Clayton Christensen

It is however very difficult to know in advance what real disruptors are. The process is often very long. It could take years before the true effects of disruption are presenting themselves in the market.

Though the classic examples of disruption involved technological advancements, disruption is not all about technology. Not every successful business or product needs to disrupt. But disruption is any time organizations find a more efficient, better way of doing things that attracts customers.

What makes blockchain (so) disruptive for banks?

What makes blockchain so disruptive for the banking industry? Why is this technology forecasted to revolutionising the way banks are nowadays doing business? The answer to this question lies in the three specific in-build properties of a blockchain: Decentralized, distributed and Immutability. These differ completely from those of banks that are centralised organisations.

Decentralized network

Blockchain operates on a decentralized network, that is acting on a peer-to-peer basis. It handles all operations similar to a bank, but without any central authority that monitors all data. So it potentially cuts out the middleman, giving back the power to the owner of the assets (i.e. data or tokens carrying some financial value).

All information is stored across its network via blocks. These blocks, that are time-stamped and linked together with all past and current transactions, are permanently recorded and consistently reconciled and updated in a cryptographically secure way. By storing data across its network, blockchain eliminates the risks that come with data being held centrally.

Distributed ledger

A second property of blockchain is the distributed ledger, that allows sharing of a ledger of activity – such as arbitrary data or virtually anything of value between multiple parties. What makes blockchain so important is its ability to automate trust and transparency among all parties using it. Because the ledger is distributed among all transaction participants, it exists simultaneously in multiple places. Each of the computers in the distributed network maintains a copy of the ledger to ensure transparency and also prevent a single point of failure and all copies are updated and validated simultaneously. This makes it extremely difficult to manipulate entries or tamper with the data without the other parties noticing.

Immutable records

A third unique property is its immutability. By design, blockchains are inherently resistant to modification of data. All blockchain networks adhere to a certain protocol for validating new blocks. No changes can be made once the system is set with the initial standards. Once recorded, the data in any given block cannot be altered without the alteration of all the subsequent blocks, which requires the consensus of the network majority.

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Carlo de Meijer

Economist and researcher

Blockchain and big Data​: A great mariage

| 12-2-2019 | Carlo de Meijer | treasuryXL

Blockchain and Big Data are among the emerging technologies that are high on many companies’ agendas. Both are expected to radically transform the way businesses and organizations are run in the upcoming years. Long-time developing in a separate way, at first sight one might assume that these technologies are mutually exclusive. But that idea is rapidly changing.

There are growing expectations that distributed ledgers will help enterprises finally get to grips with Big Data, which thus far is struggling with a number of challenges. They are both powerful on their own, however when combined they may bring a large number of opportunities. Some even say that blockchain and Big Data are made for one another.

“Big Data is an incredibly profitable business, with revenues expected to grow to $203 billion by 2020. The data within the blockchain is predicted to be worth trillions of dollars as it continues to make its way into banking, micropayments, remittances, and other financial services. In fact, the blockchain ledger could be worth up to 20% of the total big data market by 2030, producing up to $100 billion in annual revenue.” Chris Neimeth, COO of NYC Data Science Academy.

In this blog I will look at what the interception of these two innovations may bring. Could blockchain be the solution for the existing Big Data issues and challenges?

Big data and data science/analytics: present challenges

Big Data is one of the fastest growing sectors in the world. Every business wants to get insights into usage patterns of their consumers. Massive datasets are thereby analysed using advanced statistical models and data mining. These Big Data sets will become even more prevalent over the coming years.

“It’s not the amount of data that’s important. It’s what organizations do with the data that matters. Big data can be analysed for insights that lead to better decisions and strategic business moves.” Data Analytics Company SAS

“Data analytics has become the key to corporate competitive advantage because of its role in identifying emerging market trends. In turn, companies can use this information to make quicker and better decisions that help them drive profitability”.EY

The rise of Big Data has presented a slew of issues for both big businesses and everyday consumers. With the growth in data good analytics is becoming all the more problematic. Some major problems to data management and analytics include so-called dirty data, inaccessible data, and privacy issues. And as Big Data increases in size and the web of connected devices explodes, it exposes more of companies data to potential security breaches..

With the advent of Big Data, data quality management is both more important and more challenging than ever. Companies that are dealing with large datasets should ensure that the data are clean, secure and not been modified and come from an authentic source. They have to make sure that the latest version is synchronized among all of the data centres in real time. It should also be ensured that these data are accessible. For most, however, the data silos are still a major issue and a full company-wide digital transformation is still more concept that reality.

Blockchain and Big Data: two sides of the same coin

Main question is: how do both technologies relate to each other, if any? Notwithstanding blockchain has not been explored extensively in aspects of Big Data management and analytics, both technologies could and should be seen as two sides of the same coin.

While blockchain is focused on recording validating data (data integrity), data science analyses data for actionable insight, making predictions from large amounts of data (prediction). While blockchain is changing data management, the latter is transforming the nature of transactions. Or said in another way: “If Big Data is the quantity, blockchain is the quality”.

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Carlo de Meijer

Economist and researcher

 

Crypto-assets and EU regulation: to a global format

| 28-1-2019 | Carlo de Meijer | treasuryXL

It is increasingly becoming a certainty that crypto-assets are here to stay. Also regulators are now more convinced that these will be here for the long run. Long time taken a wait-and-see attitude, there is growing consensus at European regulators to come up with EU-wide regulation. While on the one hand EU regulation could give the crypto market legitimation and encourage the adoption of crypto-assets. Doing nothing could endanger both investors and financial markets.

Question is however: how should this regulation be shaped taken account the various specifics of crypto-assets and its users. And to what extent may the EU intervene on existing local member state regulation. Early this month, both the ESMA and EBA published their advice to the relevant EU institutions.

So let’s have a deeper dive.

What are crypto-assets (not)?

What makes shaping regulation for crypto-assets so difficult is that these are a unique phenomenon when compared to conventional financial instruments. According to Oliver Wyman they are governed by “a fundamentally different set of constraints, and as a consequence regulators have to take into account these specifics”.

First of all crypto-assets are not tied to national governments and central banks. No government regulation or guidance currently exists around managing crypto-assets. Most crypto-assets are not based within any one specific jurisdiction.

Second, the crypto-asset environment is not bound to one country. There is no single sovereign state that is responsible for regulatory oversight at all times. This will make it difficult to apply traditional regulation to control these crypto-assets.

A third complicating factor for shaping regulation is that cryptocurrencies as they are generally known today in fact do not perform all the functions that are generally understood to define the term currency. They are not acting as a medium of exchange; they are not particularly good as a store of value, given their volatility; and they are not being used as a unit of account. That is why for reasons of regulation it is better to use the term ‘crypto-assets’ instead of the more commonly ‘cryptocurrencies’

Why regulation for crypto-assets?

Regulatory certainty is a critical prerequisite and catalyst for technology adoption in financial services in general, also for crypto assets. It is becoming more evident that regulatory certainty can support safe innovation in the crypto-asset sector.

There are a number of issues that ask for specific attention by regulators.

First (and foremost) from a risk point of view. There are the inherent risks to investments due to volatile crypto-asset markets, when compared to conventional fiat currencies. Related to this is the vulnerability of crypto-assets to market manipulation given that the exchanges currently “sit outside of market abuse regulations”.

There is also increased scope for hacking, leading to the theft of the crypto-assets. Crypto-asset platforms are widely considered to provide opportunities for money laundering and other criminal activities because exchanges allow anonymous access and are not governed by any (AML) regulation.

Each of the above concerns underpin the need of a secure regulatory environment that offers investors and consumers sufficient safeguards. There are however many ways to create a workable, balanced regulatory framework. One that addresses consumer and market risks while supporting innovation, efficiency and competition. But finding this is a real challenge.

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Carlo de Meijer

Economist and researcher

 

Some blockchain predictions for 2019

| 10-1-2019 | Carlo de Meijer | treasuryXL

2018 was a challenging year for the blockchain world. Not all my predictions were realised. But what is sure: the hype is over. The adoption of this technology by the industry was less outspoken than predicted. Blockchain spending by companies went slower than expected, while many ongoing projects were stalled or even stopped. This had much to do with the turbulences on the crypto markets. And that is not that strange as many still see a narrow link between bitcoin and blockchain technology. The crypto markets lost more than 80 percent of their overall value from the beginning of the year. Add to that increased government scrutiny and outright bans of certain activities like crypto currency trading, ICOs etc.

As 2018 has come to an end, many are wondering what awaits us in the near future. Where are things going, and what are the trends and developments CIOs and other leaders interested in blockchain should be aware of. It is thus time to give an insight into predictions for blockchain technology for 2019 and beyond. I know, it is always difficult to predict what is in store for the future. But here are a number of my predictions in 2019 concerning the blockchain technology that should be on their radar screen. So let’s take a look at how things are likely “to work out” over the next 12 months.

The blockchain industry is working to improve its image

Blockchain has a bit of a reputation problem. It is believed that a lot of businesses are actually sceptical of blockchain and unwilling to adopt this technology just because it is too much associated with cryptocurrencies, and especially bitcoin.

The blockchain industry is expected to further try to work on its image in 2019, and separate blockchain from crypto in the minds of business. This in order for blockchain adoption to happen on a larger scale. It should be broadly communicated that blockchain technology can have numerous use cases that are completely unrelated to cryptocurrencies.

We will also see a shift in terminology. It is reasonable to expect that the term blockchain will be gradually replaced by another more neutral one: DLT or distributed ledger technology. This to send a clear signal to executive teams within corporates that their projects have nothing to do with the hyped world of cryptocurrencies and ICOs. Once this becomes clear to more people in business, blockchain will be able to experience much wider adoption.

The trilemma problem will (largely) be tackled

Another challenge for the blockchain industry is to solve the so-called trilemma problem. Despite the hype and huge investments in existing blockchain projects, the great promise of this technology has largely gone unfulfilled. A major stumbling block the industry faces is the imbalance between scalability, decentralisation and security. This seemingly intractable trilemma of technical barriers has undermined the trust and capabilities necessary for mainstream adoption and business relevance.

Much work is already being done to figure out solutions to this trilemma. Major research on possibilities to overcome the key shortcomings in existing architectures have been exploited, this to allow blockchain transactions becoming faster while preserving security and decentralisation.

This should enable  developers to build applications that solve real-world business challenges. Though it took time to attain a consensus, scaling solutions such as sidechains are already showing promise. And as we move further into 2019, these solutions will become more and more sophisticated. Real breakthroughs in scalability and performance are expected to begin coming to fruition and the blockchain trilemma largely being solved in two to three years from now.

Companies will look for best-fit applications

Moving further down the line, we will begin to see a separation between hype and reality. 2019 will be a year where the industry will shift its focus toward the real-world problems that blockchain technology could solve, with the goal of making “incremental and necessary changes to operations”.

Blockchain technology has long time be wrongly seen by many as a “magical way” to resolve all issues that we struggle with today. While it is true that blockchain can help with a lot of them, there are still numerous other problems that are better suited to be solved by alternative technologies, such as robotics, AI, and similar ones.

According to Deloitte’s 2018 Global Blockchain Survey, companies are starting to move from proof-of-concept projects to real-world applications. There will be a particular focus on discovering not just where blockchain could fit, but to find places where it is the best fit.

We will therefore see a transition of enterprise interest towards identifying tangible, productive use cases for blockchain. Projects will thereby move away from a “blockchain-for-everything” approach to back-to-earth implementation.

Blockchain projects may become more mature …

In 2018, companies have implemented a large number of high profile blockchain pilots but the results of these developments have yet to come to full fruition. Earlier this year Forrester Research anticipated that 90% of blockchain pilots won’t become complete products or services.

For the industry to mature and gain legitimacy, this shake out had to happen. 2018 has been a tough testing ground to establish how this technology could be improved, and what problems they could solve. The successes and failures of blockchain technology have given technology providers the tools they need to launch into the next stage of development: clear, targeted goals and expectations.

In 2019, it is expected that blockchain technology will come off age. As technology and valuation start to converge at rational levels the stage will be set for the blockchain industry to enter the next phase of maturity. A level of maturation within the blockchain space, with sustainable blockchain projects on the rise as dedicated blockchain teams are steaming up their efforts to deliver “exciting” projects.

…. and will raise visibility for blockchain

In 2019 we will see a growing number of new projects and new platforms continue to emerge. Developers and the innovative projects they work on will continue to advance blockchain capabilities, by creating ground breaking proofs-of-concept and building and achieving product-market use cases.

We may expect to see projects ranging from supply chain, identity, transparency, and governance proving the true value of blockchain. Several prominent blockchain projects will significantly raise its visibility and if delivering as promised it will positively influence corporate interest in this technology.

As a result we will see a wave of widespread and compelling specific use cases and real applications coming into the market emerge in 2019 as corporates are looking to implement more focused blockchain applications.

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Carlo de Meijer

Economist and researcher

 

Ripple Report says Blockchain is reaching critical mass in global payments

| 15-11-2018 | Carlo de Meijer | treasuryXL

Recently Ripple launched its “Blockchain in Payments Report 2018”. Main finding of this Report was that global payments based on this technology is reaching critical mass this year. And on top of that organisations are already ‘looking to incorporate digital assets into payments flows’. I was wondering where these findings were based on, so this blog. But what is even more important, did they also tell the whole storey: i.e. what about the various challenges?

Blockchain and cross border payments

The Ripple report showed, a fast majority of respondents acknowledged that improvements in cross border payments can be made, especially in regards to the pre-funding system and real-time gross settlement (RTGS), and that may help expand business scope and sale.

According to Ripple, the consequence of this is, if they want RTGS for global payments ‘without any incremental costs’, the only way to achieve that is by using blockchain and digital assets to source liquidity.

Blockchain’s potential

Respondents did not only acknowledge that blockchain could bring improvements to cross border payments, they also attribute benefits such as speed and greater geographic access to this blockchain technology. Of these benefits speed ranked first (42%), followed by greater geographic access (40%), cost reduction (38%) and, improved transparency (36%).

Respondents in the financial and broker area show the strongest recognition of blockchain’s potential: 60% were very interested; followed by FinTech (47%); and, banking (46%). Based on the services provided remittance providers showed the strongest recognition of blockchain’s advantages (49%).

Nearing blockchain momentum

The findings in the Ripple Report clearly showed that blockchain is ‘moving from experiments to production’ in 2018. And acceptance of blockchain technology will accelerate in the coming five years.

There are various indicators for that. The activity of the so-called Early Majority, including innovators, early adopters and those that are running blockchain pilots or PoCs (totalling 45% of all respondents) are convincing signals that ‘we are nearing the tipping point for mass adoption of blockchain’, says the Report.

Another interesting finding is that while first movers (mostly large companies), thus those that already have started deploying blockchain technology in production as a way to survive in their markets, ‘ stand to lose most in the face of’ the smaller, more agile mid-market organisations that make of the largest part of Early Majority and Late Majority groups.

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Carlo de Meijer

Economist and researcher