Tag Archive for: blockchain

ECB and a Digital euro: positive consultation results

03-05-2021 | Carlo de Meijer | treasuryXL

Last year I wrote a blog on the ECB plans to investigate if one should introduce a Digital euro. They announced to launch a public consultation on the desirability of such a central bank digital currency for the euro zone.

Now we are a half year later and in a comprehensive analysis of the results of this consultation the ECB published the findings of this inquiry that mirrored a rather positive attitude. The report thereby provides important input into the ECB’s analytical and experimental work and into the upcoming decision of the Governing Council on whether (or not) to launch a formal investigation phase in view of the possible issuance of a digital euro as a payment instrument. So nothing has been decided so far!


Why a digital euro?

In that same blog I mentioned the various reasons why central banks all over the world, including the ECB, are investigating the need and viability of central bank digital currencies (CBDCs). Such as the further digitalisation in the payments world and the continued trend towards a more cashless society. And China’s advancements with their own digital Yuan and the fear that it would become a dominant currency eroding other international used currencies like the dollar and the euro. But also Facebook’s  plan to launch its stable coin named Diem that could be used globally and the big interest of private people and companies to invest in cryptocurrencies such as Bitcoin and Ether with the danger of crowding out fiat currencies.

According to the ECB these developments may undermine central bank’s control over monetary policy and endanger financial and monetary stability in the EU. So in fact the launch of a Digital euro is increasingly becoming a strategic issue for Europe. EU members like France but also the Netherlands have recently begun experimenting with a Digital euro. But any decision would require intensive cooperation between member states.

ECB Digital euro consultation

The ECB recently released its report on the consultation on a digital euro. The consultation that was launched in October last year, received over 8200 responses. The large majority of respondents were private citizens (94%), of which mostly men between 35 and 54 years old, while the other participants were professionals, including banks, payment service providers, merchants and tech companies. Most responses came from Germany (47%), Italy (15%) and France (11%).

Main findings

The consultation report shows that Europe’s citizens are in favour of a digital euro, but under a number of conditions.

The results show that citizens as well as professionals (esp. merchants and other companies) are in favour of such a development, provided that the Digital euro respects privacy (43%) and confidentiality of transactions and that it is sufficiently secure (18%) to prevent fraud. They also support requirements to avoid illicit activities with fewer than one in ten responses from members of the public showing support for full anonymity.

 

“The record level of participation in our public consultation and the willingness of citizens and professionals to support a digital euro are encouraging. Their responses show the high expectations that prospective users have for a digital euro and provide valuable input for our work.” Fabio Panetta, ECB Board member 

 

According to the document, two in five respondents thought that “Digital euro transactions should be visible to either intermediaries or the central bank, which would effectively allow the application of anti-money laundering and combating the financing of terrorism (AML/CFT) requirements.” Additionally, one out of ten respondents believes that transfers under a certain threshold should remain private.

 

“A digital euro would therefore allow people to make payments without sharing their data with third parties, other than what is required by regulation. This differs from private payments, where services are generally offered in exchange for personal data that are then used for commercial purposes.” Christine Lagarde, president ECB

 

The respondents also want a Digital euro that is easy to use, without additional costs (9%), and that allows for fast and reliable payments via payment cards and iPhones (8%).

More than two-thirds acknowledge the importance of intermediaries providing innovative services that allow access to a digital euro and indicate that it should be integrated into existing banking and payment systems. They would like additional services provided on top of basic digital euro payments.

Around a quarter of the respondents take the view that a Digital euro should make cross-border payment faster and cheaper. They also want to be able to use the digital euro outside the Eurozone, though with limits.

 

“A digital euro can only be successful if it meets the needs of .Europeans.” “We will do our best to ensure that a digital euro meets the expectations of citizens highlighted in the public consultation”. Fabio Panetta, ECB Board member

Next steps

The feedback is now to be communicated to the European Parliament as well as the Commission and the Council. And it is up to the Euro system – which includes the ECB and central banks of countries that have adopted the euro – to decide whether the project should be launched.

Following the findings of the consultation, the ECB is set to take a decision on starting formal investigation on a Digital euro on whether to commence central bank digital currency trials by the middle of 2021, before a further six months to one year practical trial of the technology.

And if this decision will be a positive and the green light is given, the Digital euro, a complement (not a replacement) to banknotes and coins, could see the light of day in four years from now, according to ECB president Lagarde. She indicated it may be 2025 before any digital currency would be ready.

 

“Because it’s a technical endeavour as well as a fundamental change because we need to make sure that we do it right. We owe it to Europeans, they need to feel safe and secure. The need to know that they are holding a central bank-backed equivalent of a digital banknote. We need to make sure that we’re not going to break any system, but enhance the system”. Christine Lagarde, president ECB

 

The ultimate design of the digital euro lies with the ECB that will take the public consultation into consideration and look into various possibilities, including use of distributed ledger, definition of spending limits, use of a device for transfers and payments, online/offline capabilities, or availability of cross-border transactions outside Europe.

The Dutch positive stands towards the Digital euro

In narrow cooperation with the ECB and the other national banks in the Eurozone, the DNB is also exploring the possibility of issuing a Digital euro in addition to euro banknotes and coins.

In a recently published report, the Dutch Central Bank said it was ‘ready to play a leading role’ with research and development into its own digital currency as well as a Europe-wide digital currency. The Netherlands would be a suitable testing ground, according to the report, being well placed to develop and trial a Digital euro. The Netherlands is the country where the move out of cash is the largest in Europe. Nearly two thirds of all payments in the country are digital.

The main findings of the report

In this report the DNB researched the satisfaction with the current payment system and the willingness to hold a Digital euro account among a representative group of Dutch citizens. The findings are broadly in line with those of the ECBs public consultation.

While citizens are very satisfied with the current payment options, half of the Dutch population would be interested in opening a current account for Digital euros, an electronic form of central bank money that is available for all citizens and businesses – similar to banknotes and coins, but exclusively in digital form. Relating top the amount they would be willing to deposit into a digital euro account, most of the, opted for €101-500.

Main condition is that privacy is well protected, security features should be adequately safeguarded if people want to open such an account and the risk of theft and fraud of their assets is minimized.

Familiarity with the concept of a Digital euro increases people’s willingness to use it as a means of payment. Almost half of Dutch citizens are familiar with the concept, although most people indicated they did not knew exactly what it entails. 53% said they had never heard of it, 33%had heard about it but do not know what it means while 13% knows exactly what it means.

The most frequently cited reason why the Dutch public believe a Digital euro would be useful and could be a reliable complement to cash and existing electronic payment instruments, is that central banks, unlike commercial banks, do not operate on a for-profit base.

Balancing act

While earlier discussions on CBDC were mostly academic, the focus has increasingly turned to the technical aspects and financial and monetary issues. The ECB received many technical suggestions from the respondents. According to a quarter of individual respondents, end-user solutions comprising (smart) cards or a secure element in smartphones would be preferred to facilitate cash-like features. Building a Digital euro for retail payments may require an infrastructure that is interoperable with existing point of sale terminals or with digital platforms

What may it bring?

A Digital euro could bring many benefits to the population as it would grant greater usability, speed and safer payments transactions while it could leverage technology. It could also enhance digital inclusion, facilitate monetary policy implementation, and help protect against frauds and thefts. Being issued by the ECB and supposed to be not more expensive than the use of cash, it would be a cost-efficient payment solution for individuals and businesses with limited interchange fees, if any.

What about the future of commercial banks?

A digital euro however could pose a number of problems in a number of areas. These should be attention points in the further discussion that should be addressed before the release of the Digital euro to ensure the stability of the financial and monetary system.

First of all for banks, what will be there future?  What about the already identifying competition by fin techs and big techs using crypto currencies?

Lagarde raised that certain intermediaries – that is, banks – are apprehensive about what the issuance of this Digital euro may mean for them, noting that they should not be concerned.

 

“We need to also make sure that we are not going to break the system but to enhance the system.” “Those intermediaries will continue to co-exist, to develop their business and conduct their activities with cash which will continue to be available as will digital currency.” Christine Lagarde, president ECB

 

But in an increasingly digitised world banks may increasingly have to ask themselves how they may serve their customers’ future needs and how they can distinct themselves from their competitors.

And what about financial and monetary stability?

And how to avoid in times of financial crisis that a digital euro will “blow a hole” in commercial bank’s balance sheet. Especially in the event that savers would massively transform their deposits in banks into central bank money, in case of economic or financial crisis. This bank run could increase the cost of financing for banks, and in turn the interest rates on bank loans.

Almost half of the respondents of the ECB Consultation mention a need for holding limits, tired remuneration, penalty rates to excess balances or a combination of the two, to manage/control  the amount of digital euro in circulation and prevent a massive flight to digital euros in times of a financial crisis. A similar share of professional respondents agree.

Competition or cooperation?

Another issue is: will CBDCs trigger competition between central banks or cooperation? With the exception of China, most central banks are looking for (some sort of) cooperation. Under the auspices of the Bank for International Settlements (BIS), the ECB is part of a core group of central banks including the Bank of Canada, Riksbank, the Bank of Japan, the Swiss National Bank, Bank of England (BoE) and the Fed, who are jointly exploring CBDC.

The way forward

The topic of a Digital euro has gained much more public attention in the Netherlands and that is not strange as a much higher proportion of their payments is digital compared to other countries in the Eurozone. But for a Digital euro to get more footing in Europe, what is required is a more in-depth policy debate to be held more broadly across the euro area. This given that it is the Euro system that will decide on the potential introduction of a Digital euro.

If the decision should be taken within the Euro system to experiment with some more concrete type of digital euro the Netherlands said it is ready to play a leading role!

 

Carlo de Meijer

Economist and researcher

 

 

 

 

Source

Blockchain Technology Challenges: new Third-generation solutions

| 09-03-2021 | Carlo de Meijer | treasuryXL

Notwithstanding the various benefits of blockchain technology, there are still a number of big challenges to overcome before mass adoption can be realised. These range from low scalability to lack of regulation and limited  number of qualified people.

In some of my previous blocks I already went into more detail into these challenges and possible solutions to overcome them. In this blog I will limit myself to the main technological ones including scalability, privacy and interoperability that are limiting its uptake. But above all I will show what third generation solutions have been or are being implemented to tackle the various issues.

A. Scalability

One of the main problems related to blockchain’s technology is scalability, or better said the lack of scale. It refers to the limited rate at which transactions are being processed on blockchain compared to existing methods. Large blockchain networks like Bitcoin and Ethereum are not able to handle as a result of their technological set up. Caps are placed on the number of transactions that can be processed on-chain. This scalability issue is especially a problem for companies that have to process massive transactions and need networks that enable high transaction throughput while maintaining low latency.

Off-chain scaling solutions

For this reason, many view scalability as something to be achieved off-chain, while security and decentralization should be maximized on the blockchain itself. Off-chain scaling refers to approaches that allow for transactions to be executed without overcharging the blockchain. Protocols that plug into the chain allow users to send and receive funds, without the transactions appearing on the main chain.
There are a number of interesting off-chain solutions that are being explored to solve the scalability issue ranging from the implementation of so-called accelerated chips, the use of sidechains and sharding.

Accelerated chips

Accelerated chips could be used to speed up confirmation and transaction times. A forerunner in this is Skynet Core.

Skynet Core

Skynet aims to resolve the issues of blockchain adoption and the functionality of the Internet of Things (IoT). They aim to deliver an end-to-end system that includes a hyper-scalable IoT blockchain network and the licence free blockchain IoT chip named Skynet Core. The project that includes billions of licence free blockchain chips will deploy to devices worldwide, connecting via the Skynet blockchain network.
This blockchain chip can replace an existing CPU and features a core optimized for blockchain technology as well as the Internet of Things. The hardware makes it possible for Skynet Core devices to run blockchain networks with high throughput while providing secure protection from theft of cryptocurrency.  

Side Chains

Another tool to speed up scalability are so-called side chains. A sidechain is a separate blockchain. However, it is not a standalone platform, as it is pegged in some way to the main chain. The main chain and the sidechain are interoperable, meaning that assets can flow freely from one to the other

Side chains are aimed to reduce the load on a given blockchain by sending transactions via these connected sidechains and putting the end state of the transaction on the main blockchain – thereby offloading all the processing of transactions from the main blockchain. There are a number of ways to ensure that funds can be transferred. In some cases, assets are moved from the main chain by being deposited into a special address, and a matching amount is issued on the sidechain. A more straightforward (albeit centralized option) is to send funds to a custodian, who exchanges the deposit for funds on the sidechain.

Next to the first and second generation solutions like Bitcoin’s Lightning network and Ethereum’s Raiden Network, there are a growing number more advanced applications to upgrade scale including AION protocol and Neo’s Trinity.

Sharding

Another scaling solution being worked on is sharding. Main example is the Ethereum Blockchain. Sharding is a way of spreading out the computing and storage workload from a blockchain network into single nodes. This technology divides a blockchain network into many separate areas, called shards, with each shard assigned a small group of nodes to maintain. Each node no longer has to process the entire network’s transactional load. Each node will only maintain the info related to its specific partition or shards, removing the need for all nodes in a network to be apart of a transaction.

Sharding includes transaction sharding and state sharding. Transaction sharding refers to assigning different transactions to different shards. This way, parallel processing becomes possible, leading to high TPS. In contrast, state sharding allows the data state to be stored in different pieces on different nodes. In essence, it means that a single node is only responsible for saving a portion of the ledger.

Multi-layered structure

Another solution to upgrade scale is the use of a multi-layered structure, which is the isolation of transaction processing and data storage. Main projects are Cardano and CPCChain.

Cardano

Cardano (ADA) is the most well-known project which proposes this multi-layered structure. Cardano that can be categorized as a third-generation blockchain (with Bitcoin and Ethereum considered the first and second-generation chains.

Cardano is an open-source and decentralised blockchain project with a layered architecture that is composed of two main elements, the Cardano Settlement Layer (CLS) and the Cardano Computational Layer (CCL), which makes Cardano truly unique. Most other existing blockchain platforms only function with a single layer, which often causes network congestion, slows transactions and drives fees higher.

The settlement layer powers Cardano’s unit of account. This is where peer-to-peer transactions are facilitated, such as the transfer of tokens between users. The settlement layer is responsible for transaction confirmation and the flow of the coin. The computational layer maintains the chain’s security, deploys smart contracts and is programmed to recognize the ID of the data. This layer also serves as a framework that is designed to ensure regulatory compliance with various jurisdictions.

CPCChain

Another promising solution to tackle the scalability issue is CPCChain. CPChain, which is partnered with High Performance Blockchain (HPB), VeChain, Qtum, and ETP Metaverse, intends to build a blockchain-based data platform for next generation IoT systems in combination with distributed storage and encryption computation.

It is aimed to provide the whole process solution from data acquisition, storage, sharing to application, for large-scale distributed IoT systems, enabling high TPS and low transaction latency. CPChain thereby separates its blockchain layer from its application layer, so the blockchain only has to store data IDs (which are on a cloud) rather than the data itself – thereby reducing block sizes.

B. Privacy

Another important challenge to overcome is the privacy issue. Blockchain is built in such a way that all transaction are transparent while its actors can be identified. This is especially a problem for public blockchains, like Bitcoin and Ethereum, where the network ledger is open to anyone and all transactions are transparent – so they can be tracked. This lack of privacy might be an issue for certain types of transactions, for instance in the case of confidential corporate deals.

Protocols

In the meantime several protocols have been developed as alternatives to Bitcoin’s pseudo-anonymity. The three main ones being CoinJoin, Ring Signature and Zero-knowledge proof.

Coinjoin

CoinJoin is the technology used by Dash, developed to introduce a layer of privacy to otherwise public Bitcoin transactions. It is an anonymization strategy that protects the privacy of Bitcoin users when conducting transactions with each other. The protocol requires multiple parties to jointly sign an agreement to mix their coins in a single Bitcoin transaction, making the transaction more difficult to trace. The process is also known as coin mixing.

In the meantime, in order to prevent masternodes from being attacked, Dash introduced Chaining and Blinding, allowing senders to choose multiple masternodes randomly with which to send the transaction. The system enables the mixing of transactions among these master nodes, and transactions appear to be sent by the masternodes and not by the users themselves.

Ring signature

Ring Signature as used by Monero is one of the most famous privacy protocols. A ring signature is a type of digital signature in which a group of possible signers are merged together to produce a distinctive signature that can authorize a transaction. It is composed of the actual signer, who is then combined with non-signers to form a ring. Monero utilizes ring signature technology to protect a user’s privacy in the input side of a transaction by helping the sender mask the origin of a transaction by ensuring that all inputs are indistinguishable from each other.

Because Monero makes use of ring signature technology, it must include a feature that allows for the verification of outputs that are being spent in a ring signature transaction, or else, a user would be able to spend the same transaction output twice i.e. a double-spend. This potential issue is addressed by Monero’s use of key images.

A key image is a cryptographically secure key that is derived from an output transaction being spent, and is made part of every ring signature transaction. This process masks the origin of the transaction, and ensure that all inputs are indistinguishable from each other. Only one key image exists for each transaction output on the Monero blockchain.

On top of the Ring Signature, Monero also utilizes Stealth Address technology to automatically generate one-time addresses for every transaction initiated on the Monero network to ensure the privacy of the recipient. It prevents outputs from being linked to a recipient’s public address. Thanks to Stealth Addresses, this transaction process occurs without publicly linking any transaction to the merchant’s wallet address.

Zero Knowledge Proof

Another solution for blockchain privacy issues, used by Zcash to allow anonymous transactions, is Zero Knowledge proof (ZKP). It is a technique by which a prover can convince the verifier of a fact without revealing the actual content. The technology automatically conceals transaction information, such as sender information, receiver information, and the amounts. Only users who own the private keys of the smart contract being performed have full access to the information. In such cases ZKP can ensure that others only know that a valid transaction has taken place, but no information is available to them about the sender, recipient and type/quantity of asset transferred.

Alternative Methods

At the same time other alternatives are available, such as Permissioned or private blockchain platforms like Quorum, Hyperledger Fabric and Corda, which provide the capability of executing private transactions between two or more participating nodes. This ensures that the transaction details pertaining to the sender and recipient are part of a private ledger and will not be revealed to unauthorized participants.

Or self-Sovereign Identity management platforms that provide the concept of pair-wise decentralized identifiers and verifiable claims that can be presented to third party service providers without revealing all the details of a person or entity and thus protecting privacy

C. Interoperability

While blockchain was conceived as a decentralized technology, individual blockchain networks are not inherently open and are not able to communicate properly to each other. There are a large number of blockchain projects, all of which have different characteristics – such as the type of transactions, hashing algorithms, or consensus models – and which focused on a particular area.

The problem is further deepened by different networks and financial institutions running completely different governance rules, blockchain technology versions and regulatory controls. This has resulted in a series of unconnected blockchain ecosystems operating alongside, but siloed from each other, preventing the industry from reaching its full potential.

Isolated inter-blockchain communication can put a strain to blockchain’s scalability and mainstream adoption. To solve this problem, various new-generation cross-chain technologies that could help different blockchains to interconnect are being explored.

Top Interoperability projects

Most blockchains enable the creation of sidechains, that are blockchains running in parallel to the main blockchain. Next to the more well-known examples of cross-chain communication that are mostly first- or second-generation, like the Bitcoin Lightning Network, or the Raiden Network of Ethereum and the Ripple Interledger Protocol, there is a growing number of interoperability projects that are exploring third-generation solutions such as Cosmos, NeoX and Polkadot blockchain.

Cosmos Blockchain

Cosmos blockchain is an interesting blockchain interoperability project, running on the fault tolerance protocol – Tendermint Byzantine. The blockchain project is aimed to become the hub of many projects  Cosmos blockchain architecture consists of several independent blockchains called Zones, attached to a central blockchain dubbed as the Hub. Zones, which are independent blockchains are plugged into the Cosmos Network. These zones can interact with each other because of the Cosmos Hub and new ones can be connected.

A salient feature of Cosmos is permitting zones to preserve their consensus mechanism. Tendermint Core that enables high-performance as well as consistent and secure Practical  Byzantine Fault Tolerance (PBFT)-like consensus engine, powers each zone in this case.

The cosmos Hub connects blockchain projects to enhance interoperability via the Inter-Blockchain communication protocol. Because of the interconnection, people can send tokens from one zone to another in real time and securely, without engaging the services of a third party. Cosmos blockchain can connect different zones from public to private project thanks to the IBC connection.

NeoX

NeoX is a protocol that implements cross-chain interoperability, to allow multiple participants to exchange assets across different chains and to ensure that all steps in the entire transaction process succeed or fail together. But instead of most protocols NeoX is divided into two parts: cross-chain assets exchange protocol and cross-chain distributed transaction protocol.

Essentially NeoX is the functionality of fusing the concept of Atomic Swaps with Smart Contracts. This means it can allow cross blockchain contract collaboration in a single smart contract. In order to achieve this function, one needs to use NeoContract function to create a contract account for each participant. If other blockchains are not compatible with NeoContract, they can be compatible with NeoX as long as they can provide simple smart contract functionality.

NeoX makes it possible for cross-chain smart contracts where a smart contract can perform different parts on multiple chains, either succeeding or reverting as a whole. This gives excellent possibilities for cross-chain collaborations

Polkadot blockchain

Polkadot blockchain is a high-profile multi-chain technology that is aiming to advance blockchain interoperability. It seeks to enhance the transfer of smart contract data through various blockchains. Polkadot’s ecosystem contains of multiple parachains which are individual blockchains thar differ in characteristics but have become part of the Polkadot environment. In Polkadot blockchain, transactions can be spread over a wide area given the number of chains in the network. All this is done while ensuring high levels of security on dealings. A relay chain is the central connector between these parachains.

Polkadot Blockchain interoperability project seeks to ensure a seamless connection between private chains, public networks, oracles as well as permission less interface. Aim is to enable an internet where independent blockchain solutions will be able to exchange information via a Polkadot relay chain. 

Blockchain Industrial Alliance (BIA): Teaming up

What we also see is that a growing number of these projects are teaming up in order to allow their blockchains to communicate with each other. One main example is the Blockchain Industrial Alliance formed by ICON, AION, and WANChain. This teaming up is aimed at solving the blockchain isolation problem. The Alliance has the shared goal of promoting interconnectivity between the isolated blockchain networks. The Alliance’s main priority is collaborate on research on interchain transactions and communication. The Alliance will focus on developing common industry standards, sharing researching, and protocol architecture. All three blockchain projects that are participating in BIA have the common goal of connecting blockchain protocols.

AION

The AION network is a multi-tier federated blockchain network designed to interconnect the various blockchain entities, making it possible to integrate disparate blockchain systems in multi-tier hub. AION aims to become the common protocol used for these blockchains, enabling more efficient and decentralized systems to be built.

At the core of AION blockchain is a “purpose-built, public, third-generation” blockchain called AION-1,  specifically designed to not only be self-sustaining but connect with other blockchains as well. The AION protocol enables the development of a federated blockchain network, making it possible to seamlessly integrate dissimilar blockchain systems in a multi-tier hub-and-spoke model, similar to the internet. This protocol will enable the transfer of value and data between all AION-compliant blockchains by utilizing bridges.

In essence, AION allows networks to communicate with each other, allowing any DApp to run on any blockchain within the network. On top of that, AION will also allow the participating blockchains to create common chains between them in order to conduct on-chain transactions.

Through AION each participating blockchain will be able to transact with all the chains connected to the ecosystem. Along with solving the interoperability problem, AION also wants to create a system which can work with both private and public blockchains and help in solving scalability. In addition AION helps organizations create blockchains which are interoperable but can have its own unique consensus mechanisms, issuance, and participation.

ICON (ICX)

The second partner is ICON, an  interconnected  blockchain technology and network framework designed to allow independent blockchains to interact with each other. In other words a system of sidechains in order to connect all industry chains to the main network.

ICON is supported through a cryptocurrency token, ICX. Communities are connected to the ICON Network through a decentralized exchange. That allows for the maintenance of a verified ledger shared within the community network itself, allowing participants in a decentralized system to “converge” at a central point. That is done by connecting a community to other communities through the ICON Republic and Citizen Nodes.

WanChain

WANCchain is an online interoperable blockchain solution, with secure multi-party financial platform computing. It relies on a proprietary protocol, the WANBridge model, that allows interconnection of private, public and consortium chains, making it easy to transfer digital assets between different blockchains. The blockchain interoperability solution seeks to rebuild finance by housing all digital assets on one blockchain, aiming to unite the world in isolated digital assets. The current WanBridge model allows for digital assets and data to securely and cheaply be transferred between different ledgers using cross-chain smart contracts.

Based on Ethereum, WanChain enables the deployment of private blockchain smart contract execution aiming to unite the world’s isolated digital assets. Privacy on the blockchain is enhanced by the use of Ring signatures as well as one-time stealth addresses. The Wanchain DeFi ecosystem includes WanSwap and WanLend, as well as several other major products that are now under development such as WanFarm and other DeFi applications. This will allow for much more efficient use of collateral and for WanBridge technology to salescalablyably connect any number of different blockchains.

Forward looking

For blockchain technology to become mainstream and implemented at a larger scale, the bottlenecks current blockchain platforms suffer from – scalability, privacy, and interoperability – need to be addressed. While blockchain technology has undergone rapid improvement since its creation, it’s a relatively young technology and some of the main problems still remain today.

Fortunately, many projects are working on some of the solutions proposed above. As more efficient techniques get invented in the near future these technological barriers will likely be overcome sooner rather than later.

 

 

Carlo de Meijer

Economist and researcher

 

 

 

 

Source

Bitcoin and Regulation: Towards a Balanced and Coordinated Approach

| 02-03-2021 | Carlo de Meijer | treasuryXL

Cryptocurrencies, especially Bitcoin, are facing increased regulatory scrutiny, and that is not strange. Warnings from regulatory watchdogs all over the globe have come amid a wildly volatile ride for Bitcoin and other crypto currencies. Bitcoin prices quadrupled in 12 months’ time reaching an all-time high of more than $ 40.000 on 8 January after falling back even below $30.000. This is feeding concerns by financial regulators over the lack of a robust and a clear regulatory framework for this rapid evolving crypto marketplace. Regulators worldwide are sharpening their focus on cryptocurrencies and are increasingly looking for a stable framework of regulations and monitoring.

Issues that come up are: why is regulation of the crypto market needed at all and what should be the best regulatory approach?

Existing regulatory patchwork

Crypto regulation in many countries is still lagging behind whereas crypto’s regulatory puzzle is far from complete. Many jurisdictions have looked into regulating cryptocurrency related operations. Thereby they however have taken different approaches on how to go about regulate these which has led to a regulatory patchwork.

These approaches range from a complete outright ban, to a wait-and see approach how matters would play out, while others have introduced some sort of regulation. Major countries and bodies continued introducing regulation just for one area or aspect of the cryptoasset industry at a time. And areas of crypto asset regulation vary from one nation to another, according to each nation’s priorities and values.

Many major countries haven’t yet introduced specific legislation or regulatory guidance that covers the sector as a whole, while others are taking a step-by-step approach. Looking at the G7 countries, they are in varying stages of implementing cryptocurrency regulation, revising existing laws, and providing more clarity to investors and companies in the space. But that is changing.

But why is crypto regulation needed at all?

There is increasingly conviction amongst regulators worldwide that crypto currencies in some form or another are here to stay and continue to play an increasingly normalised role for investors. So we are well beyond the stage where countries could completely ban crypto currencies or adopted a wait-and-see attitude.

We have reached a point where regulators should step in, motivated by the growing interest in cryptocurrency globally and the inherent risks associated with digital assets because they are largely unregulated. Cryptocurrencies should therefore come on the regulatory radar and be held the same standards as the rest of the financial world.

Main stream adoption

There is increased interest by institutional investors in crypto and expectations are that this will continue, triggered by the growing number of new use cases and wider acceptance by traditional banks and financial institutions. This has attracted a strongly growing number of private investors and as aa result to mainstream adoption.

Bitcoin and other cryptocurrencies are increasingly seen as a legitimate hedge against fiat currency weakness and inflation risk, and low returns from traditional safe havens such as sovereign debt. As a result investors are looking more closely at cryptocurrencies. So these cannot be neglected anymore by regulators.

Protection to investors

Though their total market value is still limited compared to fiat currencies Bitcoin and other cryptocurrencies are described by central banks and regulators not as a currency, but much more as a highly volatile and speculative asset. Cryptocurrencies’ volatility are largely a function of thin market volumes and concentrated holdings, possibly in the hands of a few early-adopters known as ‘whales.’ Retail investors should be protected against too much volatility. Providing a regulatory framework will give protection to investors and stakeholders

Closer interaction with the real world

Another argument for more regulation is that, on an increasing basis, cryptocurrencies are becoming part of the incumbent financial system and are increasingly integrated into the existing financial infrastructure. Cryptocurrencies took a step closer to interacting with the real world in October last year when PayPal announced that its US customers can buy, sell or hold four cryptocurrencies: Bitcoin, Ethereum, Bitcoin Cash and Litecoin.

Combat illegal activity

Because of its cross-border crossing character and the lack of surveillance regulators suspect that these cryptocurrencies can be used for criminal activities like money laundering. How many Bitcoin are from a criminal order is hard to predict. But estimates range from 1 percent to 44 percent. Regulators should therefore provide assurances and impose requirements on operators to follow stringent rules to combat illegal activity.

Changing regulatory attitude

But the attitude of regulators worldwide is changing. Recent developments have triggered officials all over the world, including the G7, ECP president Christine Lagarde and the UK CFA, to express their worries about the unregulated growth of Bitcoins and other cryptocurrencies.

The overarching regulatory trend in 2021 will be for governments and regulators to be more favourable towards crypto, increasingly shape crypto into a consumer-friendly and less risky product.

Regulators increasingly recognize that cryptocurrency is here to stay, realizing the true potential of the crypto sector, with their actions being adapted accordingly. They highlighted the need to intensify their work for more stringent robust regulations for cryptocurrencies and create a much improved regulatory landscape to control the crypto markets.

G7 Meeting

At its recent meeting early January the G7 finance ministers and central bank governors reiterated support for their joint statement on digital payments issued in October underlining the need to regulate cryptocurrencies. They discussed ongoing responses to the evolving landscape of crypto assets and other digital assets and national authorities’ work to prevent their use for malign purposes and illicit activities.

ECB President Christine Lagarde

At that same G7 meeting Christine Lagarde, president of the ECB, warned investors about the risk of these cryptocurrencies such as Bitcoin. She also dismissed Bitcoin’s claim as a currency. According to her there is urgent need to implement legislation relative to cryptocurrencies.

“Bitcoin is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity”. Christine Lagarde

UK Financial Conduct Authority

In the UK, the Financial Conduct Authority (FCA), issued a stark warning for consumers and retail investors about high-risk crypto investments and the surge of related scams in the industry. The FCA’s concerns include price volatility, the complexity of products offered and the lack of consumer protection regulation around many of the products. Consumers have no recourse to UK regulators for “cryptocurrency bets that turn sour”.

“If consumers invest in these types of product, they should be prepared to lose all their money.” CFA

US Treasury Secretary Janet Yellen

Crypto regulation will also be a top priority for the Biden team. The Biden Administration is expected to bring a renewed focus on regulation and enforcement of the crypto market. The new US Treasury Secretary Janet Yellen – former Federal Reserve Chair – described Bitcoin as a ‘highly speculative’ and not a stable store of value’ when still at the Fed in 2017.

New regulatory initiatives

From a G7 perspective, we already have seen some interesting examples of regulatory initiatives in both the EU and the UK, while the new Biden Administration is certainly coming with their proposals.

European Commission: Markets in Crypto Assets Regulation

The European Commission recently published its first draft for Markets in Crypto Assets or MiCA. A package of legislative proposals for the regulation of crypto-assets, updating certain financial market. The draft regulation should create a clear legal framework for crypto assets and more broadly for Distributed Ledger Technology (DLT), providing regulatory clarity for the industry and ensure unified legislation on cryptocurrencies throughout the EU.

It wants to support innovation while also creating a secure and trustworthy framework for cryptocurrencies, with the same level of protection for consumers and investors as for traditional financial products. The legislative process for MICA within the EU will continue before this becomes a definitive regulation. Expectations are that this draft regulation will be finalized in legal texts in 1,5 to 2 years’ time.

Basic principles

MiCA wants to create the same safe framework as the one we already know from classic financial services. This is mirrored in many of the principles that MiCA imposes on issuers and service providers of crypto assets, such as the prohibition of insider trading and market manipulation.

MiCA is primarily creating a new licensing system for crypto asset issuers and service providers at a European level. It provides substantive rules of conduct and many aspects of consumer protection. MiCA is also introducing a new EU-wide passport for operators licensed under the MiCA regime in their own Member State.

Pilot regime for market infrastructures

The European Commission therefor proposed a pilot regime for market infrastructures that wish to try to trade and settle transactions in financial instruments in crypto-asset form. The pilot regime allows for exemptions from existing rules and allows regulators and companies to test innovative solutions utilising blockchains.

For other crypto-assets that do not qualify as “financial instruments” such as utility tokens or payment tokens, the Commission proposed a specific new framework that would replace all other EU rules and national rules currently governing the issuance, trading and storing of such crypto assets. The proposed regulation covers not only entities issuing crypto-assets but also firms providing services around these crypto-assets such as firms operating digital wallets, as well as cryptocurrency exchanges.

UK Treasury: crypto consultation paper

The UK Treasury has launched a consultation paper that details a series of proposals addressing the crypto community. With the consultation, the Treasury is initiating a “regulatory approach to cryptoassets and stablecoins” for 2021. Aim of this consultation paper is to gather feedback from stakeholders concerning the government’s regulatory approach to crypto asset and stablecoins in payments and investment, as well as the use of blockchain or distributed ledger technology in financial markets.

More broadly, the UK intends to take a “staged and proportionate approach” to new crypto asset developments. Underlying the UK approach is a desire to avoid applying “disproportionate or overly burdensome regulation to entities”, particularly where the financial stability risks are low, stressing the importance of a risk-led approach to regulation.

The Treasury expects to collect insights from the “industry and stakeholders” in the crypto sphere until March 21, 2021. Input received will feed into the government’s response, which will include more detail on how the proposed approach may be implemented in law. The legislation would take the form of high-level principles, leaving it for financial regulators to specify detailed requirements through rules or codes of practice.

Focus on stablecoins

The consultation focuses particularly on developing a “sound regulatory environment” for stablecoins, which the U.K. government considers have most “urgent” risks and opportunities. Stable coins could “pose a range of risks to consumers and, depending on their uptake, to the stability of the financial system. It is not proposing to regulate further any other types of cryptoasset for now, except in relation to financial promotions (in relation to which it has already consulted and will report in due course).

This approach stands in stark contrast to the European Commission’s legislative proposals which already include a comprehensive framework to regulate the entire crypto industry (MiCA) as well as a pilot regime for the creation and testing of digital security infrastructure.

Biden Administration

The regulatory landscape took on new uncertainty as a result of the power shift in Washington to President Joe Biden and a Democratically controlled Congress.

The new US President Joe Biden has frozen all federal regulatory proposals from Trump’s Administration, including some controversial proposed rules from former Treasury Secretary Steve Mnuchin’s on self-hostedcrypto wallets, until his new administration can review them. Former Treasury Secretary Steven Mnuchin drew heavy criticism from cryptocurrency insiders with his privacy-hostile regulatory proposals.

President Biden is putting together a team of financial leaders that should provide more clarity and guidelines for crypto regulations, get clear rules for the entire crypto industry and a better coordination between the various agencies like SEC, CFTC and. The new team brings their stated support for reasonable and equally balanced cryptocurrency regulatory model.

Three of Biden’s top-level financial staff members, including Janet Yellen, the new US Treasure and former Fed chair, Gary Gensler, the new head of the Securities Exchange Commission (SEC) and former chair of the US Commodity Futures Trading Commission (CFTC), and professor Chris Brummer as new chairman of the CFTC  all have a proven understanding of how blockchain and cryptocurrency assets actually work.

Yellen pledged to do a deep review of cryptocurrency markets in collaboration with many other banking and finance regulators, hoping to establish an effective set of rules that limits “malign and illegal activities” while supporting powerful fintech innovations based on blockchain technologies.

What regulatory approach is really needed?

Notwithstanding these new regulatory initiatives, there are still many challenges. At the heart of the legal challenge is how to define cryptocurrencies; as a currency, security on par with stocks and options, tradeable commodity, or a brand new asset class of its own. Settling the thorny issues of legality, taxation, and trading rules will take time, adding to the uncertainty and volatility of the global crypto market.

To be really effective, also given its cross border character, any future regulation asks for both a balanced and above all global approach. Intelligent, well thought-out regulation communicated effectively and uniformly applied can help level the playing field and unleash innovation and further mainstream adoption.

Balanced approach

Providing a balanced regulatory framework should be a necessity for jurisdictions to protect themselves from abuse, while recognising that legal certainty can also be provided through a regulatory regime, which will in turn enable the sector to flourish. Just looking at cryptocurrencies for regulatory purposes may frustrate the underlying technology and its innovative character. The real value in cryptocurrencies is not the currency itself but the potentially disruptive technology that makes them possible, which has the potential to drive innovations. Next to that, because with cryptocurrencies, the technology behind it may develop at a space that is much faster than regulations develop, any regulation would need to be capable of continuous development.

Global coordinated approach

Global regulation continues to be top of mind at the recent G7 meeting. ECB president Lagarde also emphasized the need for countries to work together to regulate Bitcoin. Instead of competing in terms of who can provide the most attractive regulatory regime for the crypto industry, as we have seen in the past, more global regulatory cooperation and coordination and multilateral action is urgently needed. As cryptocurrencies move further into the mainstream, Lagarde therefore called for regulations of Bitcoin and other currencies to be agreed “at a global level”, potentially at the G7 or G20 groups of rich countries.

We are not there yet!

If done in this way, such balanced and coordinated regulation will help protect investors, enable growing competition, tackle cryptocurrency criminality, reduce the potential possibility of disrupting global financial stability stimulate continued innovation.

Looking at these recent regulatory initiatives, one may conclude that there are still big differences in each approaches. The European Commission proposals are the nearest to become effective meeting both the requirements of balance and overall and unified approach in the EU countries. In the UK, whilst new regulations have been introduced, they are still largely behind all the new developments happening in the crypto space. And for the US we still have to wait till the Biden Administration is coming into action. We are not there yet!

 

Carlo de Meijer

Economist and researcher

 

 

 

 

Source

Blockchain and the Corporate Treasurer: towards Smart Treasuries

| 16-02-2021 | Carlo de Meijer | treasuryXL

Blockchain is gaining growing attention in the Treasury world. Corporate treasurers are intensively looking at blockchain use cases to improve the effectiveness of their treasury management activities.

Notwithstanding the various benefits for corporate treasuries, there is still a great reluctance to adopt blockchain technology in their treasury departments. And that for various reasons. The technology is still immature, most of the projects are still in the conceptual phase while tangible real-world blockchain applications for the corporate treasurer’s day-to-day activities are still scarce. But that is – slowly – changing. A growing number of tangible treasury solutions are moving forward and being brought to the market. And there is increasing awareness amongst blockchain solution providers to come up with more integrated smart treasury solutions.

Complex treasury environment

Today’s business environment for internationally operating corporates is highly complex from a treasury point of view. These corporates have undergone many transformations in their treasury organisations triggered by technology innovations, regulatory initiatives and changed client behaviours.

In order to gain greatest visibility over their business critical functions and reach greater strategic control, corporate treasurers 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. Key challenge is to obtain consolidated real-time insight in group-wide multi-currency cash positions across a fragmented banking network in a timely manner, and manage credit facilities across all bank accounts of the group. Today’s model of international correspondent banking thereby strongly limits the ability to manage cash in a real-time environment.

As a result many corporate treasurers are still mainly using manual processes for their global activities.  Especially the world of international payments looks cumbersome. They are slow, expensive and hard to track. Operating in multiple currencies has a substantial impact on the operational capabilities of  treasury teams, and on the treasury’s ability to work efficiently.

From isolated proof-of-concept projects ……

The emergence of new technologies such as blockchain would enable corporate treasurers to take smarter, more data-driven approaches to core processes and better support the strategic side of the business.

During the past few years we have seen many blockchain Proof of Concept (PoC) trials for various use cases in corporate treasuries. Corporate treasury-related areas with potential use cases for blockchain range far and wide. From activities such as cross border payments, trade finance, electronic bank management, reconciliation, data storage and smart contracts to supply chain management, KYC, financial reporting, regulatory compliance intra-day liquidity management and cash management. But they mostly remained in the proof-of-concept stage. A majority of these projects have not even gone beyond the testing phase. And those that have made it and past that stage are yet to see extensive usage. Besides that most of the blockchain-based applications are focused on single parts of the treasury activity. They are mostly isolated and are not interoperable – so do not communicate with each other.

……. to practical treasury-focused Blockchain solutions

Blockchain development is however entering a new phase. Slowly, but definitely, the focus of many blockchain developers and providers is now turning from proof of concept projects to proof of work trials and further to the creation of more practical, treasury-focused blockchain solutions. Thereby they are trying to solve the various challenges such as interoperability, scalability etc. As global trades evolve and become more intertwined, we are also seeing the upcoming of collaborative blockchain models that can streamline and automate complex processes – like many aspects of treasury, thereby bypassing the cumbersome correspondent banking system.

Over time, a growing number of authentic real-world blockchain-based solutions – worthwhile looking at – have been introduced thereby using collaborative models like Ripple (global payments), R3 Corda (data management), Marco Polo (trade finance) and We.Trade (trade finance) to name a few.

Adjoint’s Smart Treasury

One of the most interesting recent blockchain offerings for corporate treasurers is Smart Treasury launched by Boston-based fintech Adjoint. 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.

Table 1 Key features of Smart Treasury

Adjoint’s Smart Treasury is implemented as an overlay and 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 accounts thereby improving the liquidity management of the corporate treasurer.

Smart Treasury does not seek to replace existing ERP and TMS systems but rather compliment them by using APIs and by speeding up transaction settlement so that the data is much more timely and secure. Thereby pushing and pulling data to connected enterprise (ERP) and treasury management systems (TMS), and creating a real-time window to treasury management. Workflow might be streamlined across various use cases, and can be automated — such as for generating international transfers, calculating accrued interest, generating invoices for a loan payment, and submitting to the systems of records to ensure accuracy and reconciled data.

 What may Smart Treasury bring?

The Adjoint Smart Treasury solution could bring a number of important benefits for the corporate treasurer thanks to greater transparency, improved efficiency in current treasury processes, reduced risk and as a result much lower costs.

Table 2 Benefits of Smart Treasury

First of all Smart Treasury will contribute to improved liquidity management thanks to greater transparency, allowing greater control over key treasury workflows. It may enable real-time insight in a corporate’s liquidity position and in how quickly they can provide liquidity to the corporate. Treasurers may see balances across the corporate group, across multiple entities, corporate departments and banks (accounts), in different geographies, and at any point in time. Via using Smart Treasury, this visibility may expand to partners, subsidiaries, vendors and customers allowing them access. The insight gained may further help drive more reliable cash flow forecasts for corporate treasurers.

Using Smart Treasury may significantly reduce current complications in the various treasury processes, including cross-border payments and billing. Using smart contracts could thereby streamline present cumbersome processes and eliminate costly third-party transactions. It allows tracking transaction status and confirmations in real-time, thanks to the greater transparency brought about by blockchain technology between the various players. As a result such transfers can be done much quicker and in some instances even instantly, thereby optimising the whole reconciliation process across various subsidiaries ERPs in terms of time spent and manual effort.

By removing the long chain of disintermediation, Smart Treasury allows outside companies within the supply chain to pull relevant information directly from the blockchain with no settlement network in between. This may create significant collateral savings thanks to shortened (or even instant) settlement cycles. Intra-group obligations may be settled instantly and at no cost. Smart Treasury will also enable full-auditability of transactions, thereby realising greater savings in both time and costs. Such immutable auditable record of transactions may for instance provide real-time ownership of underlying cash, so there will be no double spending of cash. Also intra-company loans are auditable “for arms-length transaction history” by time-stamping reference able FX conversion rates.

Smart Stream can help corporate treasuries improve risk management through data redundancy, auditability and smart-contract permissions. As the credibility of debtors and creditors is supposed to be known at all participants it will contribute to more security, while blockchain will also enable secure data storage across nodes to prevent a single point of failure. The transactions’ regulatory and compliance requirements are automatically satisfied by smart contracts, and application programming interfaces (APIs) transfer information and data between siloed corporate entities and their banks and data providers.

But also from a strategic point-of-view, Smart Treasury could bring a number of great benefits. Having a clear and real-time picture of assets and cash flows, finance has the ability to make strategic investments in a shorter period of time, helping to capitalize on potential investment opportunities and evaluate important future transactions, thereby expanding the types of transactions that can be done. In international operating companies, smart contracts may help the treasury play a critical role in successfully conducting business overseas. All these improvements could ultimately lead to a firm reduction in costs. Large savings could thereby be got from transaction costs and labour costs (esp. back office), while corporates could significantly reduce fees and costs to third parties.

Forward thinking

Adjoint’s Smart Treasury is a very interesting proposition. Some see this blockchain-based solution as a game-changer for corporate  treasuries. If well used it could bring great benefits while solving a number of present challenges.

But Smart Treasury however will not be the only proposition in this field. Still, looking further into the future, we will see the arriving of more collaborative global and interoperable blockchain networks offering more mature real-world applications that will meet the actual challenges of scalability, interoperability, and as a result lead to greater confidence at and more mainstream adoption by corporate treasures. Treasurers would thus do well to keep up-to-date with new solutions that may leverage this blockchain technology, bringing process efficiencies and improve their new role, that has become much more strategic.

Table 1 Key features of Smart Treasury

  • Auto reconciliation
  • Virtual accounts
  • In-house self-service bank
  • Smart Treasury Dashboard
  • Smart contracts
  • API integration with ERP/TMS systems
  • API integration with banks

Table 2 Benefits for corporate treasuries

  • Optimize liquidity management
  • Optimize reconciliation process
  • Shorten settlement cycle
  • Full auditability of transactions
  • Improve risk management
  • Strategic benefits
  • Cost reduction

 

Carlo de Meijer

Economist and researcher

 

 

 

15 blockchain trends in 2021: Expect the unexpected

| 22-12-2020 | Carlo de Meijer | treasuryXL

The year 2020 has almost come to an end. It has been a historically tough year for many. A number of events happened that were not included nor expected in my – and many others – 2020 blockchain trends. Especially the COVID-19 pandemic that not only intensified trends that were already underway, but also generated new trends.

It is a tradition to focus my last blog on what to expect for the next year. We will look at the top trends we may expect for the blockchain and cryptocurrency landscape to watch out for 2021 and beyond? So, how will the landscape be look like for blockchain technology in the years to come?

1. Global blockchain market size will exponentially grow

What was not forecasted is that blockchain technology exploded in popularity this year. Businesses from a multitude of industries showed a growing interest to adopt this technology for enhancing their business processes. The COVID-19 pandemic accelerated the digital transformation drive in many areas, especially via the use of blockchain or distributed ledger technology.

As a result the global blockchain market size is expected to expand from USD 3.0 billion in 2020 to USD 39.7 billion by 2025, at an effective Compound Annual Growth Rate (CAGR) of 67.3% during 2020–2025.

“Expectations for 2021 are positive” “It is estimated that next year, at least 25 percent of the Forbes Global 2000 will use blockchain as a foundation for digital trust at scale.” 

2. Covid-19 will further accelerate blockchain transition

We will see a reorientation of the various blockchain projects. Experts predict that 90% of blockchain projects will require replacement within a year.

That is because most are ignoring key features such as tokenization, smart contracts, and decentralised consensus. Next to that, the pandemic has caused more realistic and pragmatic approaches to blockchain initiatives specifically focused on the day-to-day business “to continue their growth path”. Blockchain projects with clear benefits are expected to do that next year at an even faster pace. There has also been an uptick in the number of companies interested in participating in networks that specifically help to address some of the supply chain issues that the pandemic has put forward.  

3. Long-term strategic projects will be put on hold

Volatility and uncertainty sparked by COVID-19 has led many corporates to pull back from some of  their more long-term DLT-related projects for the time being. These long-term strategic projects, in particular those requiring changes to market structure or regulatory changes, are mostly working to extended timetables now. Budgets for purely experimental and R&D projects – run in isolation from the business- are becoming harder to obtain and have been cut this year. And this will cause an even larger number of these projects will be put on hold.

4. Corporates need to accelerate their digital transformation

Digital transformation is no longer a choice for businesses – it is essential to survival. Due to the increased strain that the COVID-19 pandemic put on day-to-day business, there is a dire need at corporates to accelerate their digital transformation process to emerge stronger than before. Blockchain technology is very likely to make the most transformative and dramatic changes in the way businesses function, during the coming years. Many industries are therefore intensively looking at blockchain as a helpful tool to become all the more digital.

5. Globally, 30% of projects will make it into production. 

It is forecasted that a growing number of blockchain-based projects will switch to the production stage. This number doesn’t just reflect the more realistic approach to projects and the increasing maturity of the technology but also the pandemic-induced acceleration and initiation of projects that may bring “measurable benefit within a short timescale”. According to Gartner more than 40% of the surveyed corporates has at least one blockchain pilot running. They predict that 30% of global projects will make it into production, partly due to the impact of the COVID-19 pandemic. The majority of networks that transition from pilot to production will thereby run on private enterprise blockchain platforms. 

6. Private (permissioned) blockchains will dominate

Another trend we will observe is that private blockchains will become the main contributor to the blockchain market growth and are assumed to retain the largest market size in 2021. Enterprise blockchain solutions are developed customized according to a corporate’s business needs. Private blockchain provide more opportunities to corporates in terms of utilizing the blockchain technology for business-to-business use cases. They deliver higher efficiency, privacy, reliability, and transparency, while security is provided to a private blockchain using private keys that are known only to authorized persons in the organization.

7. China will make the fastest progress  

From  a regional perspective China is leading the global blockchain game and will continue this role in 2021. Blockchain is taking China to the level, which is well beyond the present reach of other global market players. China’s “new infrastructure” national initiative, its state-backed Blockchain Based Service Network, is aimed to make blockchain an integral part of the country’s digital infrastructure. China’s further ambition is to provide a global public infrastructure via this Network. Beyond that, while other countries or regions like Europe are thinking to launch their own Digital currency, China is almost ready to issue their Crypto yuan.

8. The banking and financial sector further dominates the market

Amongst all the industries affected by the COVID-19 pandemic, the financial sector is one area that has been hit particularly hard. Falling profits and tightening margins have forced banks to adapt and increasingly meet their customers need in a growing digital world. The adoption of fintech and blockchain technology, enables them to streamline their operations and modernize their operations. This may lead to a firm growth in contactless transactions and redesigned financial services. The banking and financial sector is expected to show exponential growth in blockchain adoption in the coming years. As a result this sector is going to hold the largest market size in the global blockchain market during the coming years.

9. Growing DLT-offerings by non-traditional financial institutions

Another trend we will see during 2021, and also triggered by COVID-19,  is the rise in the number of non-traditional financial institutions. They will be triggered by a growing number of corporates but also consumers that are going more into online blockchain-based mode of transactions and financial services. These groups nowadays have more non-bank options delivered by institutions ranging from non-bank lenders, to crypto-currency based banks to fully decentralised financial (DEFI) services alternatives.

10. Fast upcoming trends: DEFI …..

Next to a firm acceleration that is expected in the acceptance of tokenisation i.e. the digital storage of assets on blockchain, another interesting upcoming trend in 2021 and further on will be DEFI or decentralised financial services. If we look at DEFI it shows how blockchain could be used for financial use cases which up till now has been “the missing point” for enterprise blockchain offerings. DEFI illustrates successful process of smart contracts for financial services. This alternative form of financing perfectly fits into the fintechisation of the economy.

This year we already have seen a firm rose of DEFI services. The total value of fulltime decentralised financial services (based on cryptocurrencies) witnessed an impressive growth and even surpassed USD 10 billion. It is seen to be further speeding up in 2021 and beyond.

11. ……  and ZKP

Another important trend we may see in 2021 is the arrival of Zero Knowledge Proof (ZKP). ZKPs are urgently needed to meet challenges with preserving confidentiality that are currently holding blockchain projects back. Blockchain-based ZKPs allow companies with different record-keeping systems to be verifiably “in sync” on a record-by-record basis without sharing sensitive information. Much progress has been made recently around ZKPs. There are increasingly coming all sorts of solutions on the market to deploy ZKPs in a broad way. For instance to put mortgage requests on blockchain and, via ZKPs as a sort of notary, automatically grant or reject such a request. Big challenge however remains the complexity of the developments. ZKPs are much more complex to develop than coding a smart contract without privacy, but for security reasons corporates are expected to shift from developing DApps  to developing ZApps.

12. Cryptocurrencies may reach new heights

2020 has proven to be a good year for all crypto markets, and expectations are for 2021 to be even a better year for Bitcoin and other cryptos. These cryptocurrencies have taken center stage as investors search for new safe haven assets, driven by the COVID-19 pandemic. With so much uncertainty in the market, and being largely unaffected by external factors like government policy thanks to its decentralized nature, Bitcoin has proven itself to be a “valuable form of digital gold”, qualifying itself as one of the strongest players in the digital currency world. As we enter 2021 and adopt to a new normal, social distancing and cashless transactions may further set the stage for cryptocurrencies. However, with the constant fluctuations in the crypto space, anything could be expected.

13. Crypto fraud is rising

While 2020 being great year for investments in cryptocurrencies, the downside is a firm rise in crypto frauds. Global crypto exchanges, have suffered high-profile hacks, whereas hacks on decentralized finance (DeFi) companies accounted for more than 20% of the total theft volume in 2020. Expectations are that this will continue during 2021. We may see various types of cyber fraud, including fake crypto investment platforms, fake crypto wallet scams, new forms of malware targeting lesser-known cryptocurrencies and crypto-jacking.

14. The number of CBDC projects will accelerate

There is a proliferation of central banks worldwide that are exploring the possible launch of their own central bank digital currency (CBDC). According to a recent BIS report 80% of central banks worldwide are researching the pros and cons of such a currency. This process will further intensify in 2021, driven by the diminishing use of cash, the digitalisation of the economy, the upcoming of private digital currencies like Libra etc. The Chinese government is well in advance, recently indicating  to accelerate their process triggered by COVID-19. They have already executed dozens of experiments amongst citizens and corporates and are even ready for a worldwide roll-out. The ECB will take a clear decision on their Digital euro project mid-2021.

15. Governments Will Tighten Regulations Related to FinTech

A final trend we will see in 2021 and beyond is that regulators will intensify their search for stricter and tighter regulation. Long time being absent, governments around the world are sure to implement a myriad of fintech regulations over the next few years. The growing digitalisation of the economy triggered by the COVID-pandemic is an issue that is now narrowly monitored by regulators worldwide. Digital banking, cryptocurrency, and blockchain will likely be the greatest topics of concern.

As an increasing number of finance transactions occur outside of traditional institutions and mechanisms, issues like DEFI cannot be ignored anymore by regulators. Meanwhile, European Union legislators are pursuing an EU-wide regulatory system for crypto assets markets, including the proliferation of token investments as a sophisticated investing vehicle.

 

Concluding my blog and wishing all of you a merry Christmas and a good and healthy 2021:

“If we’ve learnt anything from 2020, it’s the fact that we should always expect the unexpected”.

 

Carlo de Meijer

Economist and researcher

 

 

 

Ripple Blockchain and Payments Report 2020: from rippling to spreading out

| 11-11-2020 | Carlo de Meijer | treasuryXL

Ripple, the blockchain payments platform, recently launched its third annual “Blockchain in Payments Report 2020: From Adoption to Growth”. The survey that was conducted in the August-September period this year amongst 854 respondents from payment services providers in 22 countries gives us some interesting and positive insights in the global adoption of blockchain-based payments and digital assets. Ripple believes that the COVID-19 pandemic has accelerated positive change in the global payments industry towards accepting blockchain technology.

Present challenges in payments

The respondents in the survey highlighted blockchain’s increasing role in payments. They are nowadays confronted with a number of challenges limiting their growth possibilities, including finding international partnerships, pre-funding accounts, accessing working capital, and building payment technology. According to the respondents blockchain technology could be the solution that would enable payment providers to overcome these challenges.

State of Adoption

The report found that the blockchain industry is in its final phase of adoption. Survey results show that the majority of the survey respondents are adopting blockchain for production use. It shows that 34% of participants are in the production of some solution with blockchain technology. 24% of the participants expect to complete production and move on to a pilot test and a proof-of-concept (POC) within the next two years. The rate of adoption across business types differs slightly, with digital banking/fintech businesses leading. They are followed closely by retail banks, and money transmitter or payment providers.

In emerging markets, 37% of participants are in production to implement blockchain technology. Asia and the Pacific (APAC) is thereby the leading region with 41%, followed by Latin America (LATAM). Emerging markets are recognizing that responsible usage of blockchain and digital assets can “unleash tremendous potential for their economy”. Both will drive greater financial inclusion and economic growth. Mature markets stand to benefit as well.

Use Cases

Of the respondents 59% is in production or near production for blockchain-based payments related use cases. Slightly over one-third of the report’s respondents currently use blockchain technologies for sending or receiving payments for customers.

But a key point revealed by the Ripple report is the diversification in use cases by companies using this technology. The survey showed that blockchain is now scaling beyond just payments. 98% of respondents running a payments blockchain POC have also deployed the technology for non-payments use cases – the most common ones being supply chain management (62% in production) and trade finance (51% in production). This demonstrates that blockchain can be leveraged across the enterprise.

Cross border Payments

Blockchain technology is not just adopted for in-country uses. As blockchain payments solutions continue to solve for many of the pain points related to cross-border payments, adoption has steadily grown. In fact, real-time settlement for cross-border payments is seen as a business necessity for many, as well as in demand by consumers and businesses.

Digital Assets

Another key finding in the report is that digital assets are increasingly being considered for facilitating payments, especially when connected with blockchain technology. As there has been an increase in education and blockchain experience in the industry, both payment providers and consumer confidence in digital assets have risen. Business interest in digital assets has grown sharply as early adopters look to increase the speed in payment settlements. Across the board, the report found openness to more digital asset types whereby various whereby  cryptocurrencies, as well central bank digital currency and stablecoins were considered. Almost all respondents (99%) said that their respective institutions would consider using digital assets to instantly process cross-border payments or as a medium of exchange (up from 94% recorded in 2018).

“Companies view digital assets as a means to accelerate expansion to other countries and currencies. Interestingly, 82% of respondents not yet in pilot or proof-of-concept responded with the second highest interest in leveraging digital assets in cross border payments. Early adopters recorded the highest interest. Respondents are seeing the success of early adopters and looking to kick start their own adoption—with a large majority open to leveraging more digital forms of currency.” Ripple Report

For those making cross-border payments using digital assets, financial inclusion, reduced cash usage and availablity of liquidity are strengths that rank relatively high as well, but still below the transaction features of speed and security that make blockchain so popular for domestic payments.

What is driving adoption?

There were four key benefits mentioned driving blockchain adoption, namely, improved data quality, increased data security, cost savings, and business growth.

For digitally-led businesses, transparency, security and networking are key benefits of adopting digital assets in payments. Those who are not digitally-led especially value factors like speed. Many of these institutions surveyed adopted blockchain technology to increase speed to make cross-border payment transactions (40%), achieve high levels of reliability (27%), improve data transparency and realize long-term operational cost savings (32%). Interestingly, respondents from Latin America stood out by ranking growth as the highest benefit, followed by cost-savings, whereas more mature markets ranked cost savings and data transparency as the greatest benefit of blockchain adoption. Other key contributors to the success of blockchain are a variety of blockchain technology providers that are facilitating easier implementation through APIs, hosted services, and standardization.

Growth drivers

Ripple’s report identified that blockchain adoption is key to successful growth strategies for financial institutions. Nearly half of the respondents have said that they view blockchain technology as the fuel for business growth. Nearly four out of five (79%) of blockchain-based payment businesses reported growth in 2020, despite the impact of COVID. Blockchain solutions continue to scale as businesses introduce new services to existing customer segments or expand existing services into new regions. 44 percent of respondents have said that they have recorded strong business growth in the past year, citing innovation in payment tech as a key growth driver.

Early adopters of blockchain-based payment solutions have witnessed the highest levels of growth year over year. In the past 12 months, early blockchain adopters reported nearly twice as much business growth over other respondents. 45% of survey participants that were processing digital transactions, recorded a large amount of growth. The market opportunity for innovators in fintech/retail banks and those located in emerging markets is quite significant with expectations of strong, continued growth. First movers in blockchain payment adoption and less mature markets are likely to see the most growth going forward according to the report.

Obstacles/Barriers

Among the main obstacles to blockchain adoption, participants mentioned a lack of regulatory clarity, the amount of investment required to implement the technology, and security. This year, the report also revealed that price swings experienced by the top two digital assets (Bitcoin and Ether) influenced respondents’ perception of volatility, which posed an issue. However, the results show that digital assets are increasingly becoming an important part of the development of the blockchain industry especially in emerging markets. Less than half of the respondents in Latin-America and APAC worry about price volatility, possibly these regions use digital assets as a hedge against their own local fiat currency.

Forward Thinking

“What the Blockchain in Payments 2020 report makes abundantly clear is that blockchain is no longer an exotic, emerging technology. It is a mature technology that is being battle-tested and continues to advance, both in terms of use cases and adoption. And if 2020 is any indication, blockchain will play an increasingly vital role in payments in the years to come.” Ripple Report

What is also clear is that blockchain proof of concepts (POC) are becoming a thing of the past. Today, blockchain initiatives are “leap frogging into production, moving swiftly along the adoption curve towards the late majority phase”. Not only is growth indeed possible for blockchain and digital assets initiatives, but familiarity and positive sentiment continue to spread as well, accelerating the adoption growth path.

Ripple is also spreading out!

 

Carlo de Meijer

Economist and researcher

 

 

 

Smart working with blockchain-based smart contracts

| 12-10-2020 | Carlo de Meijer | treasuryXL

Smart contracts are one of the most popular and talked about subjects being built in the blockchain industry. As processes are increasingly digitalised, it is becoming necessary to find a way to make reliable, digital business agreements. Smart contracts are a great alternative for replacing traditional contracts, that are often complex, slow and expensive.

Smart contracts are gaining widespread use and ease of creation. Today, smart contracts are available to optimize many financial and business processes, thanks to the contribution of blockchain consortia such as Hyperledger.

This blog discusses some of the current opportunities and challenges facing the adoption of smart contracts.

What are smart contracts?

A smart contract is a self-executing, self-enforcing protocol which is governed by its explicit terms and conditions, which stores and carries out contractual clauses via blockchain.

To enter into a blockchain based smart contract, the parties first negotiate and agree to the terms of the agreement before memorialising the terms (either in part or entirely) in smart contract code that are stored inside the blockchain.

Smart contracts allow the performance of dependable transactions without the engagement of third parties. It is a decentralised method, which means that intermediaries at the moment of confirming deals are not required.

Smart contracts automatically execute when predetermined terms and conditions are met, based on the rules it was programmed to do.

Smart Contract Key parts

Smart contracts consist of a number of essential parts: signatories, subject and specific terms. First of all the signatories i.e. two or more parties that use the smart contract and give their final ‘go forward’ regarding the proposed terms via their digital signature. Second the agreement’s subject itself that is limited only within the smart contract’s environment. Third the specific terms of the smart contract. They have to be described in detailed mathematical terms and implemented in a programming language that is compatible with the smart contract’s blockchain. Based on these terms, the contract will execute itself.

Smart Contracts and Blockchain

The key to these contracts is the decentralised network known as blockchain. Smart contracts use blockchain technology to verify, validate, capture and enforce agreed-upon terms between multiple parties.

Smart contracts on the blockchain allow for transactions and agreements to be carried out among anonymous parties without the need for a central entity, external enforcement, or legal system. The transactions are transparent, irreversible, and traceable.

Blockchain is the perfect environment for smart contracts, as all the data stored is immutable and secure. The data of a smart contract is encrypted and exist on a ledger, meaning that the information recorded in the blocks can never be lost, modified, or deleted.

Where could smart contracts be used?

Smart contracts can be used to perform functions in a great variety of industries. Whether regulatory compliance, contractual enforceability, cross-border financial transactions, property ownership, home buying, supply management, material provenance, document management and many other applications.

Today, smart contracts are relevant in areas such as trade in digital financial assets with legal transfer of ownership, banking and credit services, logistics processes, tracking the origin and path of goods, decentralized storage, and use of renewable energy.

Supply chain management
An area where smart contracts could be used is in supply chain management. Making supply chains more transparent via smart contracts is helping to smooth out the movement of goods and restore trust in trade. Smart contracts can record ownership rights as items move through the supply chain, confirming who is responsible for the product at any given time. The finished product can be verified at each stage of the delivery process until it reaches the customer.

Insurance
Smart contracts could also be used in the insurance sector. This sector nowadays lack automated administration. It can take months for an insurance claim to be processed and paid. Smart contracts can simplify and streamline the process by automatically triggering a claim when certain events occur. Specific details could thereby be recorded on the blockchain in order to determine the exact amount of compensation.

Mortgage loans
Smart contracts could also simplify the mortgage process. The terms of a mortgage agreement are based on an assessment of the mortgagee’s income, expenditures, credit score and other circumstances. The need to carry out these checks, often through third parties, can make the process lengthy and complicated for both the lender and the mortgagee. By cutting out the middle men, parties could deal directly with each other.

Financial industry
The most widespread use of smart contracts remains in the financial industry, as money and accompanying documents become electronic. In the financial services sector  the opportunities for smart contracts include, for example, payment processing, clearing/settlement of financial instruments, trade finance, as well as regulatory technology such as streamlined ‘know your customer’ certification.

Smart contract platforms

There are nowadays a number of smart contract platforms. They could be subdivided on the basis of technology, end-user (banking, government, supply chain, real estate, insurance etc.) and region (Europe, North America, Asia or rest of the world oriented).

Their differences are in programming languages, blockchain consensus, the cost of maintaining an application’s smart contracts, differences in blockchain security, transaction confirmation speed, trust in the main network nodes, and much more.

Ethereum was the first blockchain platform to develop codes specially made for dApp development. Their appearance has prompted the arrival of many other platforms including names like Aeternity, Cardano, Qtum, Stellar, and Waves.

Ethereum
Ethereum, the well-known global blockchain platform was the first to introduce smart contracts to a more wide-spread crypto community. Ethereum is still the most advanced platform for coding and processing of smart contracts. This open-source platform has one of the largest networks of developers available, and due to this, it can keep up with the continually changing environment in the blockchain industry.

Aeternity
Using a hybrid of Proof-of-Work and Proof-of-Stake model, Aeternity offers a method for powering so-called Turing-complete smart contracts that are capable of being executed off-chain. Thereby they deliver both privacy and security.

Cardano
Cardano is a decentralised blockchain and cryptocurrency project. Like many crypto projects, Cardano is open source. The Cardano platform is working towards implementing smart contract functionality with the Goguen update this year. This should bring their smart contracts a step further to ‘smarter contracts’.

Qtum
Qtum is an open-sourced blockchain application platform, where security and flexibility are two of the most essential components. The Qtum team has worked intensively to assure that smart contracts can be executed safely, making the platform perfect for businesses and their enterprise clients. Qtum uses Proof-of-Stake and a Decentralized Governance Protocol.

Stellar
Stellar, unlike many crypto coins, was created by developers for developers. That means that it is capable of handling extremely complex smart contracts. For simple smart contracts, Stellar offers a clean, easy-to-use alternative for developers that want to build smart contracts delivering greater efficiency.

Waves
Waves is an open blockchain project, strongly focusing on dApps and using Web 3.0 technology. To keep their smart contract project simple, Waves offers many online courses, and other methods of support for developers that may want to work with Waves. Like many smart contract projects, Waves uses Proof-of-Stake.

Benefits of Smart Contracts

Smart contracts provide many benefits over traditional contracts for a wide range of industries. In theory, they are more efficient and trustworthy than traditional contract law, and are also thought to offer better security as all actions are recorded and verified. As a result they may reduce unnecessary costs and time expenditure while enhancing transparency.

Greater efficiency and speed
Smart contracts are able to improve the efficiency and speed with which commercial arrangements are carried out.  Smart contracts are automated so there is no need to spend a lot of time on the paperwork and also correcting the errors that are manually written in the documents. They can be executed in minutes, for a fraction of the cost, from wherever the involved parties are, and without the need for lawyers.

Accuracy and transparency
As the codified terms are fully visible and accessible to all relevant parties, there is no way to dispute them once the smart contract is established.  This facilities complete transactional transparency and may removes the likelihood of manipulation, bias or error. This, in turn leads to decreased monitoring costs and risks of opportunistic behaviour.

Trust
Smart contracts may provide parties with a degree of trust. They automatically perform transactions following predetermined laws, and the encrypted documents of these transactions are distributed over participants. The information on the contract and the terms of the contract is straight. Specific validation by everyone and the immutability of the work guarantee that the smart contract can never more be broken.

Security
Smart contracts are also thought to offer better security as all actions are recorded and verified. Blockchain transaction documents are encrypted. That makes them extremely difficult to hack. Security features can also be integrated into a smart contract to automatically generate backups and duplicates in the event of damages, data losses to the original one or hacks.

Challenges

Smart contracts could also bring a number of challenges that may prevent more massive adoption.

Human errors
Like paper contracts, smart contracts could still experience fraud, because of human errors. Smart contracts are codes, and these codes are written by people (coders). As such, there is a (high) chance of a smart contract code having many bugs. They can be delayed, intercepted and corrupted. Some mistakes have proven to be very costly.

Confidentiality, security and privacy
Unlike traditional contracts, all transactions executed via a smart contract, are propagated across all of the nodes in the network.

This may create privacy issues, particularly when the accounts of the parties are associated with known entities. Even when the parties rely on pseudonymous accounts, certain identification techniques can be used to discern the identities of parties who transact with a particular smart contract.

Lack of engineering experience
As smart contracts begin to proliferate, there will be a need for new types of cryptography experts, and forensics experts, to verify software code and to translate the code into human-readable form. A lot of engineering expertise is required to make perfectly operational smart contracts. Experienced coders however are hard to find, and costly.

 Legal and regulatory challenges

There are also a number of legal and regulatory challenges, which are preventing the more widespread utilisation of smart contracts.  Smart contracts lack a clear legal status. There is no official government regulation that applies to them.

Interpretation and enforceability
If there is a dispute about whether a smart contract accurately memorialised the parties’ intentions or whether one party has breached the contract, the parties may still bring legal proceedings or engage in alternative dispute resolution processes.  As contract law varies between different jurisdictions, so too will the enforceability of smart contracts.

Jurisdictional issues
Smart contracts also raise jurisdictional issues. Because blockchain operates as a decentralised ledger, smart contracts can be formed and accessed anywhere across the globe.  They do not reside in any one location, but exist across multiple locations at the one time.

Yet existing laws are jurisdiction-based. The differences in laws across jurisdictions can be highly problematic, and may result in incongruent rights and responsibilities, and confusion regarding the consequences if there is a contract violation.

What steps are needed?

Comprehensive/clear picture of business/operational practices
Vague contracts allow space for argument. This can lead to claims, disputes, high legal expenses, project and operational delays, as well as invoicing and payment delays. To prevent these situations (as much as possible) a comprehensive and clear picture of the business and operational practices for involved parties is necessary when defining and agreeing on terms in order to automate contracts. Participants need to agree on “specific data,” which may include the exact time zone to be used along with the specific time, the location and what that means for contractual terms and fulfilment. Legal departments drafting contracts need to consider details like this in advance.  

Creating Logic Parameters
Parties should also ask themselves a number of questions. What data source will the companies use for their contract? And what are the tolerances? Furthermore, what type of rounding will the smart contract act on? These types of questions must be discussed prior to translation for smart contract codification.

Legal contracts must contain terms on parameters including sources, tolerances, frequency and time frames of data capture methods among others. Specificities such as location, time, and rounding decisions inform logic parameters around data. These impact how contracts translate into code. Incongruent readings can’t be automated.

Clear, non-conflicted contract terms
Problems may arise when an older contract that is used as a starting point has irrelevant or inapplicable clauses that have been forgotten to be removed. This may result in terms and conditions that are either disparate or contradictory. The code of a smart contract cannot be made to execute contradictory terms.

Smart contracts execute exactly what they are programmed to execute and are incapable of judgment. Rules of engagement, particularly those regarding fee calculations and billing practices, must be able to be encoded from clear, non-conflicted contract terms.

Anticipating Data Glitches and Gaps
There will always be technology glitches and failures that may result in data gaps or errors. These occasions can be reasonably anticipated and protocol for them can be incorporated into both natural language and smart contracts.

With agreed-upon terms for these events, a smart contract can be programmed to navigate data tolerances and triggers that automatically recognize when a glitch or failure has occurred. It can then execute the correct predefined action, agreed upon upfront by both parties resulting in zero delays or downtime to the relationship.

Going forward

The potential market for smart contracts is great. Smart contracts can actually change the way agreements are made across various industries.

It however will take some time and require more development before it reaches its mainstream approach. We cannot implement smart contract technology en-masse, as more experimentation is needed at this point. At the moment, smart contracts are still a technology in its early stages. And existing challenges esp. the legal and regulatory ones should be solved first.

That asks for smart thinking|

 

Carlo de Meijer

Economist and researcher

 

 

Blockchain becomes a reality: growing adoption

| 23-09-2020 | Carlo de Meijer | treasuryXL

Early July I wrote my blog Blockchain and Interoperability: key to mass adoption. There I concluded that “we may say that blockchain seems to be at the threshold of widespread acceptance and adoption”.

This conclusion was confirmed by Deloitte’s Third ‘Global Blockchain Survey 2020’ studying the investment and development trends in blockchain technology. This Survey showed that attitudes toward blockchain have obviously, and measurably, shifted in a positive way. It showed progress in the adoption and implementation of real-world blockchain solutions across a variety of businesses and sectors. Organizations have increased their investments, demonstrating their commitment to blockchain technology. But what about COVID-19?

Deloitte 2020 Global Blockchain Survey

Deloitte’s 2020 Global Blockchain Survey shows the results of a poll amongst almost 1500 senior executives and practitioners from 14 countries that was conducted between February 6 and March 3 this year. Those interviewed had at least a “broad understanding of blockchain, digital assets, and distributed ledger technology (DLT)”.

Main findings

The Survey observed a change in attitudes towards blockchain, with more positive feedback. One of the main conclusions was that blockchain is “solidly entrenched in the strategic thinking of organisations”.

According to the Survey “organizations appear to be more committed than ever” to blockchain. Compared to Deloitte’s 2019 Global Blockchain Survey, there was a significant increase in the interest and implementation of blockchain across businesses. This is further confirming blockchain’s maturity as a valid solution for many institutions and enterprises.

Blockchain already is an integral and vital tool upon which—and with which—new, innovative solutions are being created, and the Survey shows confidence amongst respondents that blockchain solutions will gain even greater traction within the global business community over the next 12 to 24 months.

General consensus, as a key takeaway from the report, was around acceptance of blockchain’s scalability, which continues to increase. 88% believe blockchain is highly scalable and will eventually become mainstream.

Strategic priority for organisations

But let’s look somewhat deeper into the various results. One of the main conclusions is that blockchain technology is increasingly becoming a true strategic priority for organisations. This was affirmed by 55% (2019: 53%) of respondents saying blockchain is critical and in their top-five strategic priorities, with 66% of executives forecasting investments of $1million or more in the next 12 months.

More than four in five respondents (83%) in the Deloitte Survey believe they will lose competitive advantage if they don’t adopt blockchain (2019: 77%). 63% said it was vital to move forward in the blockchain space.

Blockchain initiatives: real-world use cases

In terms of applications, increased advances of large-scale blockchain initiatives are occurring, such as blockchain-based financial infrastructure to simplify global money movement and commerce, as well as distributed ledger technology (DLT) for trade finance and blockchain track-and-trace platforms, among others.

The Survey also revealed increased blockchain initiatives in daily processes. These smaller-scale examples of blockchain adoption, such as title transfer and protection, patient data storage and retrieval, and more efficient voting or food sourcing tracking are “proving to be just as transformational in the way people live and the way work gets done”, according to the Survey.

Adoption of blockchain-based solutions

Adoption of blockchain-based solutions is increasing across organisations, with technology, media and telecommunications (TMT), financial services and non-food manufacturing industries leading the trend.

The number of companies around the globe now driving to intensify their blockchain (and digital asset) integration is speeding up according to the recent Survey. As to what drove them to innovation, 86% of respondents cited their executive teams saying that there are compelling business cases for the use of this technology.

This year, almost twice as many firms surveyed have integrated blockchain solutions compared to 2019. The Survey discovered that 39% of respondents had already implemented blockchain into their operations (2019: 23%), clearly showing this technology is gaining traction. The production figure was even higher at 46% for organizations with more than $1 billion in revenues.

When it comes to preparations for a blockchain-based future, 82% of respondents said they are already hiring new staff with blockchain expertise or plan to do so within the next 12 months (2019: 73%).

Where are corporations using blockchain?

According to the Survey, the top five use-cases for blockchain mentioned by the respondents include digital currencies (33%), data access and sharing (32%), data reconciliation (31%), identity protection (31%), and payments (30%), while track- and trace and asset protection, were adopted by between 27% and 33% of respondents.

Proliferation of digital assets

An interesting part of the Survey is the growing acceptance of digital assets. The Survey unveils the growing role and evolution of digital assets in the near future. 70% of respondents consider the pace of regulatory changes for blockchain and digital asset solutions as very or somewhat fast.

“Digital assets are now enabling enhanced commercialisation models across industries and geographies.” Deloitte Survey

Nearly 89 per cent of those surveyed believe that digital assets will be very or somewhat important to their industries in the next three years.

“Our survey confirms what we see in the marketplace — a proliferation of digital assets used as a means of exchange, a store of value, digital representations of specific assets, or equity in a company,” Rob Massey, partner, global and US tax leader for blockchain and digital assets, Deloitte Tax LLP

Digital assets can be used for a variety of purposes. Respondents who considered digital assets in their business models were most focused on enterprise controlled (64%) followed by general asset-backed (63%), while cryptocurrency comes at number three, with 59%.

A majority of respondents from each country, 83% of the respondents (and even 94% in China) said they strongly (or somewhat) believe digital assets will serve as an alternative to, or even replacement for, fiat currencies in the next five to ten years.

“While our survey revealed great faith in digital assets’ future importance, it shows no clear or specific consensus about exactly how those assets will be used or the specific role they will play—a kind of incoherence that we have seen in blockchain use cases in the past and today,” Survey

A vast majority of respondents expressed confidence that they will meet their regulatory burdens. Some 80% claimed to be very or somewhat prepared to deal with the regulatory aspects of digital assets (KYC, Tax, GAAP/FAS, etc.).

Other areas

The Survey also deep-dived into the issues of global digital identity and consortia and governances.

The Survey explored the use of global digital identity. 90 % of respondents believe global identity will be very or somewhat important in their future blockchain and digital assets strategies. Among the applications of digital identity, global financial transactions (29%) and data privacy (27%) stand to benefit the most.

The 2020 Survey studied the issues faced by enterprises when joining a consortium. It revealed leadership perspectives around joining consortia and an increased understanding of the benefits of consortia to help address regulatory and other complexities of implementing blockchain.

These same leaders thereby shared concerns about how consortia are run, how decisions are made, and how profits are shared across memberships. The most prominent challenges for 41% of the respondents of joining a consortium were the inability or incompetence  to create fair and balanced governance rules and poorly defined roles and responsibilities of members.

These concerns can be exacerbated further based on geographic, namely cross border, and industry-specific governance.  I described that in detail in one of my earlier blogs “Blockchain consortia need good governance: but how?”.

Blockchain and the regions

While global adoption has increased, blockchain adoption proved to be uneven in different countries. Countries’ averages are varying wildly whereby China turned out to be one of the biggest supporters of blockchain and digital assets.

While in China 59% of the respondents stated that their companies have already incorporated blockchain into production, this figure is almost twice as small (31%) in the US. The APAC region stood at 53%. Other countries are also outpacing America in terms of blockchain integration. Throughout the European Union including the United Kingdom, blockchain is witnessed as a matter of priority with multiple approaches.

Countries worldwide also follow multiple approaches. Asia Pacific responses revealed a widespread recognition of blockchain’s strategic value, while China expressed concerns over cross-border implications. Germany exhibited substantial activity around crypto regulation.

The UK market is seeing ongoing and increasingly mature activity across key sectors with several substantial projects now live, typically among industries reliant on complex, multiparty, and international supply chains. UAE is evolving as a digital assets hub with a consistently growing ecosystem. While Israel is emerging as a leader in blockchain innovation.

Sceptics

However, sceptics about blockchain remain. It is important to note that 54% of respondents said that blockchain is overhyped, compared to last year’s 43%. This has all to do with remaining barriers. The respondents claim there are still a number of organisation or project barriers that prevent them from adopting and implementing blockchain.

According to the Survey the top barriers of blockchain adoption include: implementation: replacing or adapting an existing legacy system (35%), concerns over sensitivity of proprietary information (34%), potential security threats (34%) an lack of regulatory clarity.

As companies develop use cases and adopt digital assets, the most significant problem areas are new tax and regulatory compliance structures. A patchwork approach, different regulatory treatments, or improperly defined parameters could threaten the underlying advantages of these blockchain solutions. But companies are not impressed by this, and some 80% claimed they were prepared to deal with regulatory aspects of digital assets.

Along with regulatory uncertainty, 58% of respondents said cybersecurity was also impacting their blockchain and digital asset strategy. Meanwhile, 21% said cybersecurity was the only hindrance to advancing their strategy.

But what about the impact of COVID-19?

According to the KPMG COVID-19 Survey that was published in August, blockchain investments fell by 63% because of COVID-19. The report compiled by KMPG International and HFS Research, is drawing on a survey of 900 technology executives from different organizations on the Forbes Global 2000 list of the largest companies in the public that have more than $1 billion in annual revenue.

According to the report roughly 40% of the executives indicated that they had moved to entirely cease investment into the emerging technology initiatives. Distributed ledger technologies (DLT) slid from the largest emerging technology sector with an average investment of $18 million in March/April,  to the second smallest with $6.5 million in May/June.

7% of the executives said COVID-19 had significantly changed strategic priorities for emerging technologies. In the earlier survey, the priorities were cost reduction and improved brand value. Since May/June, emerging technologies are now assessed based on survival.

The report also found that 59% of the executives believe that the pandemic created an impetus to accelerate digitization initiatives. After the heavy funding cuts for blockchain that occurred in 2020, global companies are looking forward to the technology as a way to regain a competitive advantage in the business landscape after the Corona crisis. They predicted that blockchain will be one of the five emerging technology sectors that will see increased investments from enterprises over the next 12 months.

Blockchain won’t be cut across the board. Projects that are close to production or already live are less likely to be put on hold if they can show reasonably quick returns. Blockchain tools that can help improve a company’s visibility into its own supply chain are the sorts of candidates that could attract budget. Applications that combine blockchain with other more “survival oriented” emerging technologies could also do better.

Blockchain is a reality already!

The Corona-crisis will undoubtedly have negative impact on blockchain for some time. Companies will turn their interest towards less ambitious, more targeted projects.

But the substantial portion of respondents of the Deloitte Survey who already have blockchain in production in their organization highlights the growing maturity. There is however still substantial work to be done. The report does note that “it remains an iterative process, with bumps remaining in the road”.

“As companies adopt and implement blockchain solutions, and as leaders increasingly accept blockchain as a fact rather than a future breakthrough, there remains an underlying level of uncertainty about current and future applications of blockchain technologies.” “We don’t expect that organisations will sort this all out right away – this process will continue to take time, depending on industry, maturity, risk tolerance, and budgets.” Deloitte Survey

But the sentiment at companies towards blockchain has definitely changed. This technology is increasingly becoming a reality for many of them, not just in the future but already!

 

 

Carlo de Meijer

Economist and researcher

 

 

 

 

Source

Blockchain and Interoperability: key to mass adoption

| 13-07-2020 | Carlo de Meijer | treasuryXL

Blockchain‘s  potential for improving business processes, providing transactional transparency and security in the value chain, and reducing operational costs is obvious for many. Notwithstanding this the expected mass adoption failed to happen up till now. What has been holding blockchain back?

In fact, there have been several concerns in recent years preventing this mass adoption. But by far the most widely recognized problematic issue is that of interoperability. Or, more accurately, the lack of it. In this blog, I will not go into the details of the various tools that can be used to enable interoperability. There are many reports that give in-depth description. I will look at recent developments in the interoperability area, the various offerings and real word interoperability use cases that should give an idea of what we may expect.

Siloed blockchain ecosystems

While blockchain was conceived as a decentralized technology, individual blockchain networks are not inherently open and are not able to communicate properly to each other. There are a large number of blockchain projects, all of which have different characteristics – such as the type of transactions, hashing algorithms, or consensus models – and which focused on a particular area. The problem is further deepened by different networks and financial institutions running completely different governance rules, blockchain technology versions and regulatory controls. This has resulted in a series of unconnected blockchain ecosystems operating alongside, but siloed from each other, preventing the industry from reaching its full potential.

“We would be left with a scattered collection of siloed blockchains, each supported by a weak network of nodes and susceptible to attack, manipulation, and centralisation.” ConsenSys research paper

What is interoperability?

The term blockchain interoperability is increasingly being talked for some time now. It not only means the possibility that disparate blockchain systems can communicate with each other. Above all it is the ability to share, see, and access information across different blockchain networks without the need for an intermediary – like a centralised exchange. So, blockchain projects that want to implement interoperability into their platform aim to create an ecosystem that will enable different blockchains to easily communicate with each other. The vision of interoperable enterprise blockchains thereby rests on a number of functionalities and abilities including: integration with existing systems, initiate transactions on other networks, conduct transactions with other chains, transact between deployments on the same chain by integrating apps and making it easy to switch one underlying platform for another.

Why is interoperability critical?

It is easy to see why interoperability for blockchain is not only desirable, but above all critical, in a world where enterprises depend on ever-greater levels of collaboration and interaction. In fact, interoperability is crucial in any software system – it simply won’t work to its full potential if it can’t work with other software. It is the only way to realise the full promise of enterprise blockchain and get the most out of their blockchain investments. Interoperability would enable smooth information sharing, easier execution of smart contracts, a more user-friendly experience, the opportunity to develop partnerships, and the sharing of solutions.

Where is interoperability needed?

Especially in areas where the value chain is important, such as supply chain, trade finance, healthcare, aviation, etc., one blockchain network will simply be unable to provide all the needs for any given transaction. This asks for multiple networks, each providing specific value, and proper communication so that data from private networks can be routed to other relevant networks for transactions “without having to establish a one-to-one integration”. “Everyone is dependent on physical goods’ ability to move across all participants in the global supply chain with minimal friction. We need the same ability to move a digital asset from one blockchain to another without creating redundant data or a new market for intermediaries. This is why blockchain interoperability is critical.” Rasmus Winther Mølbjerg, Director, Deloitte, Denmark.
Blockchain’s characteristics allow disconnected supply chain management systems to interoperate securely without too high investment costs. Because of the pressing need for supply chain transformation, leveraging these characteristics ensures that blockchain can be useful and effective in the real world.

Interoperability Studies: WEF Report

In the meantime a number of interesting papers covering the interoperability issue have been. The most ground-breaking one is that of the World Economic Forum (WEF). The WEF described blockchain technology as being “balkanised in silos.” In collaboration with Deloitte, the WEF this year released a report on “Inclusive Deployment of Blockchain for Supply Chains – A Framework for Blockchain Interoperability”. The report covers several models, concepts, approaches and best practices for blockchain interoperability. It should help organizations understand the importance of interoperable blockchains and outlines a decision framework to support their development and execution. “Interoperability and compatibility issues are key to address in a world after the coronavirus pandemic.” “The challenge of interoperability is not only a technology problem, but even more so a problem in terms of governance, data ownerships and commercial business models.” Nadia Hewett, Blockchain and Digital Currency Project Lead at the World Economic Forum

Blockchain interoperability approaches

Broadly one could distinct two main blockchain interoperability approaches: APIs and network-of networks model.

‘Mashup’ APIs
Blockchain networks and solutions could be brought together for an organization via a so called “mashup” application. They only have to interact with one consistent application programming interface (API) and not an API for every network. This mashup application can include a variety of capabilities defined in data models and smart contracts, but fundamentally, it will serve as “the glue that joins various networks together”. However, APIs do not presuppose a governance structure, which makes them flexible and expedient but also a poor choice for organizing interoperability in the long run.

Network of networks model
The most efficient and scalable way to build interoperability is through the joint effort of establishing industry standards as well as identifying a network of networks structure that industry networks can converge around. An organizations blockchain network actually represents a ”web” of interconnected networks. This architecture would allow an organization to connect and transact with multiple solutions, not restrained to a single network, and open up a market of interoperability across solutions. By unlocking the power of the peer, organizations can use their peer to connect into multiple blockchain networks via channels. This significantly reduces the complexity and optimizes an organizations interaction with different blockchain networks. This network of networks model for interoperability continues to gain momentum, especially as we see natural blockchain hubs emerge.

Blockchain interoperability solutions

The majority of interoperability solutions up till recently were mainly focused on chain interoperability across public blockchains, thereby using crypto-directed tools like sidechains (or relay chain), notary schemes and timed hash-locks. The focus however has increasingly shifted towards solutions for interoperability between private networks and/or between private networks and public blockchains. One way to solve interoperability is to use a separate blockchain as a bridge to facilitate cross-communication. Essentially, this is a third blockchain that sits in the middle of the two blockchains and maintains a cryptographically secured timestamped ledger of the transactional and messaging activity between the two. Interoperability tools that are used range from hub and spoke, decentralised finance (DeFi) and general purpose bridges. Another way to facilitate interoperability between systems is with off-chain or middleware systems. This so-called non-blockchain interoperability approach uses tools including atomic swaps, oracles and state channels.

Blockchain Interoperability projects

A growing number of interoperability projects have entered the scene to try to bridge the gap between the various blockchains. Their aim is to facilitate interaction between networks and ensure the concept of decentralisation is fully realised. Depended on the interoperability solutions these can be used for activities like decentralised asset exchange and decentralised message exchange. Interesting projects are Chainlink, Cosmos, Hybrix, Polkadot and Wanchain. Other examples include Aion, Ark, ICON, Transledger, and Overledger.

Chainlink
Chainlink is a decentralised oracle network, an interoperability solution to facilitate secure and trustless communication between all disparate blockchain systems. The resources mostly revolve around off-chain data to trigger smart contracts and settlement outputs like established payment systems and cloud backend. This standalone function is important for many blockchains that don’t have to interact with other blockchain protocols but do need access to externals inputs and outputs. Chainlink nodes are able to format messaging and data from public APIs into a readable format for smart contracts. These nodes can connect to any API, whether it is a blockchain, enterprise system, Web API, or IoT device. Chainlink is sometimes working in combination with other interoperability protocols. Chainlink has already announced partnerships with Polkadot and Ethereum to provide off-chain data to their networks. Wanchain is integrating with Chainlink to provide off-chain  data to their on-chain smart contracts.

Cosmos
One of the most prominent interoperability solutions is Cosmos, very much focused on its Cosmos SDK platform. Cosmos aims to act as an ecosystem of blockchains that can scale and interoperate with each other. Cosmos is a smart contract platform that has prioritized interoperability as a critical component of their blockchain design. Their architecture is based on the so-called ‘hub-and-spoke’ system whereby a series of ‘spoke’ chains connect to a ‘central’ hub by means of inter-blockchain communication. Cosmos is heavily reliant on validators to provide interoperability. It makes use of the so—called Byzantine fault tolerant (BFT) consensus algorithm and uses both member chains and Peg-Zones for existing chains to improve the overall ecosystem. Their end goal is to create an ‘internet of blockchains’ – a network of blockchains that can communicate with one another in a decentralised way. The implementation of the IBC (Inter Blockchain Communication) protocol is scheduled for this year 2020. Cosmos will use the IBC protocol to allow communication between a central hub and the chains linked to the network, also called Zones. It will first only concern the interoperability of chains built on top of Cosmos SDK platform.

Hybrix
Hybrix is an open-source cross-chain solution aimed to make it easier to make cross-chain transactions, and also increase the level of ease for developers who want to offer multi-chain platforms. For that purpose Hybrix is developing an “HY” token. Each token represents an identical block of a chain and can be used to reconcile data across the entire crypto complex. Tokens form as bridges that allow transactions to be conducted on either a single chain or multi-ledger systems. Since Hybrix utilizes existing languages to build its protocol and interface, there’s no need to acquire new coding languages to use its system. Hybrix has amplified its capacity to adapt 27 major blockchains and more than 400 tokens.

Polkadot
Another project is Polkadot, which facilitates transactions and data exchange, aiming to promote interoperability between blockchains. It uses the DPoS algorithm and employs required validators which can lead to a certain degree of centralization. The concept at Polkadot is quite similar to that of Cosmos. It allows communication between the relay chain and the parachains of Polkadot’s network. By using Parachains and Bridgechains, this approach enables to transfer both value and data. Additionally, scalability will be taken to a whole new level by running multiple parallel chains. This is a bit different from other projects which are looking to bridge the gap between blockchains as well. The launch of their mainnet is planned for this year (2020). As for interoperability, there are no precise timelines regarding their protocols for chains  implementation.

Wanchain
The Wanchain network allows interoperability between very heterogeneous blockchains like Bitcoin, Ethereum and EOS. Wanchain aims to link and facilitate communication between the different blockchains as much as possible. Wanchain is already functional and allows communication and exchange of value and data between public and private blockchains through storeman nodes and the T-Bridge framework. The storeman node system combines two cryptographic concepts that ensure security and confidentiality of network transactions: secure multi-party computation and “Shamir’s secret sharing”. The Wanchain project recently announced the integration of EOS blockchain and the implementation of the T-bridge framework. Wanchain’ s next challenge is to fully decentralise its network. This is planned to be finalised in 2022.

Other interoperability offerings

And there are many more interoperability projects including Aion, which is working towards integrating artificial intelligence in its consensus model. Or Ark which uses Smartbridge to link existing chains, and will also allow for the transfer of both data and value. And the Loom Network, which uses its DPoS blockchain Basechain to connect and transfer value among several blockchains, including Bitcoin, Ethereum, and Binance. A rather unknown but interesting player is Block Collider. Its proof-of-distance (PoD) consensus algorithm ensures that ledgers can operate with one another. It is also the only project that, in its current form, requires any validators.

Real world interoperability use cases

During 2020 we have seen a number of interesting real world interoperability use cases.

AVA Network (Defi Apps)

The AVA network is an open-source platform for building and deploying decentralized finance (DeFi) apps and enterprise-grade blockchain solutions that can be run in one interoperable, highly scalable ecosystem. AVA has officially released the codebase of its AVA blockchain platform to the global community. Interoperability between different DLT networks has thereby been built into the AVA protocol, using the Avalanch consensus protocol. The AVA platform has coupled this protocol with a network model that enables the system to span permissioned and permissionless networks, making AVA a self-serve platform for new blockchains and digital assets. Instead of one network with thousands of tokens, the AVA ecosystem is one platform with thousands of subnetworks and tokens on each subnetwork . AVA’s infrastructure allows anyone to build their own private, public, permissioned or permissionless blockchain networks or subnetwork, so-called “subnets.”

Kava Labs and IRISnet (decentralised finance)

Another  real world  example is Kava Labs that has teamed up with IRISnet in order to provide a technology foundation for facilitating the development of distributed business applications. Kava is a Cosmos SDK (software development kit) blockchain. The collaboration will involve the whole interchain ecosystem that has been developed by  blockchain interoperability solution provider Cosmos. Aim is to further support and promote decentralized finance (DeFi) application development on each other’s respective blockchain or distributed ledger technology (DLT) networks. Kava’s Interblockchain Communication Protocol (ICP) will be used by both development teams to expand the nascent DeFi ecosystem. IRISnet aims to offer iService and Coinswap applications to Kava in order to improve liquidity. “Cosmos’ value proposition is that “if you make a blockchain and it has a similar consensus mechanism to another blockchain …[then by using] … the inter-blockchain communication protocol (IBC), you should be able to connect those two blockchains and transfer data [or assets] between them.” Brian Kerr, CEO at Kava Labs

Quant Overledger and Oracle Cloud (banking lifecycle)

Quant Network, a technology provider, delivering blockchain enterprise-grade interoperability for the secure exchange of information and digital assets across any network, platform or protocol, at scale, has partnered with Oracle. Quant will use Oracle Cloud to run mission critical business applications on interoperable DLTs that will be powered by Overledger, which connects global networks to blockchain-based platforms. Banking institutions may deploy an extensive set of APIs that aim to cover all areas across the banking lifecycle. “Quant helps Oracle’s customer banks by providing a single API to all supported blockchains to power interoperability across platforms. Giving clients choice and flexibility to freely use any blockchain technology and go cross-platform with only three lines of code.”  “Clients gain benefits of market access, new products and revenue streams without the challenges of managing complex underlying blockchain technology stacks.” Gilbert Verdian, CEO at Quant Network

SIA and Quant Overledger (financial services)

Banking users of SIA’s private blockchain infrastructure, SIAchain, will be able to link up with other distributed ledgers following successful testing of interoperability via Quant Network’s Overledger technology. Quant’s Overledger complements and connects existing systems and DLTs, to drive innovative and efficient growth for companies, public entities, and regulatory bodies alike. This integration provides the ability to bridge permissioned blockchain instances between SIAchain’s 580 European network nodes and other external networks in order to have crossplatform applications and services covering the likes of notarisation, payments and KYC. SIA, that provides its services in  50 countries, is European leader in the design, creation and management of technology infrastructures and services for Financial Institutions, Central Banks, Corporates and the Public Sector, in the areas of Card & Merchant Solutions, Digital Payment Solutions and Capital Market & Network Solutions. “The achievement of a fully interoperable blockchain network, through our collaboration with Quant Network, is another key-element in our path of bringing innovation and state-of-the-art technologies for supporting banks, financial institutions, corporates and public administration bodies to extend their capabilities in integrating different DLT business applications.” Daniele Savarè, innovation & business solutions director SIA.

Telos and Transledger (crypto currency transfers)

Transledger, a blockchain interoperability platform that aims to facilitate cryptocurrency transfer between separate or independent DLT networks, has chosen the Telos blockchain network to perform cross-chain digital asset transactions with its utility token in a fast and secure manner. Transledger Inter-blockchain Communication (IBC), allows different blockchains to interact with each other and perform tasks together. Use cases for blockchain interoperability solutions include peer-to-peer (P2P) networks such as decentralized or non-custodial cryptocurrency exchanges (DEXes). These types of trading platforms allow digital asset users to trade their tokens without requiring centralized, third-party exchange platforms. DEXes may use Transledger IBC to run P2P networks across several different blockchain platforms. This allows trading on DEXes to take place at speeds that are comparable to centralized exchanges, however, these non-custodial platforms allow users retain control of their funds. They also allow investors to manage their cryptocurrency portfolios with “faster and more powerful” smart contract functionality and features.

Skuchain and Corda (trade finance)

Skuchain network, a blockchain platform for supply chain, recently launched the DLPC CorDapp, a Skuchain application that promotes interoperability in trade finance blockchain applications. This application is the first example of The Bankers Association for Trade and Finance’s Distributed Ledger Payment Commitment (DLPC) operating in a real network. A DLPC is a fundamental piece of trade transaction. Everyone needs to commit to a payment. Skuchain’s DLPC CorDapp allows transactions to take place between its enterprises on Hyperledger Fabric and their bank partners on the Corda Network. The ultimate goal of brokering interoperability between Skuchain EC3 and Corda is to allow Skuchain’s enterprise customers to receive trade finance from banks on a Corda implementation without any party having to onboard onto another platform. Enterprises can now easily access trade finance as native part of their own supply chain platform.

Moving forward

The arrival of interoperability solutions may fundamentally change  present attitudes towards blockchain and will be an important step in persuading networks that the seamless exchange of data is crucial to the success of the entire market. As more progress towards interoperability between blockchain protocols is expected in the coming years, and we already may see successful cross-blockchain projects this year, interoperability is likely to become an important game changer for the blockchain industry. We may say that Blockchain seems to be at the threshold of widespread acceptance and adoption.

 

Carlo de Meijer

Economist and researcher

 

 

 

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How SMEs should select a BAAS platform?

| 08-06-2020 | Carlo de Meijer | treasuryXL

In my last blog BAAS and SMEs: New Opportunities I explained what Blockchain-as-a-Service is, where it could be used for and what the benefits are for SMEs. But another question is: how should SMEs select BAAS providers and their offerings. What are the various issues they should look at to get the most out of it. In other words: how should SMEs deal with this?

Why many SMEs move to BAAS?

But first, why this growing interest by SMEs for Blockchain-as-a-Service (BAAS)? There are various reasons for that. Such a the promised benefits in terms of efficiency, simplicity, transparency, speed, costs etc.

BAAS has some interesting use cases ranging from smart contracts, document origin tracking, resource sharing, single window, contract execution and spend rationalisation.

And BAAS could be used in various business activities like food safety tracking, international transactions, retailer industry, supply chain management, and trading.

What issues for SMEs to consider?

But before a company decides to start integrating BAAS services in their existing infrastructure it is important for them to consider a number of key issues. They should ask themselves a number of key questions.

Such as, does the company really need BAAS (or blockchain)? If so, for what purposes? And what are the specific (basic) requirements to look for at the “ideal” BAAS provider? What other factors to be considered? And finally, which BAAS provider offers the right and best type of solutions for the company?

Do you need BAAS or Not?

One of the first questions a company should ask themselves is do they really need BAAS. Whether or not BAAS matters to a company will depend on a number of issues.

Does the company already works efficiently from a cost and processing point of view? There may be hurdles in the company in the form of managing varied database, browsers, firewalls, application servers, and hardware, that could make it very difficult to integrate BAAS offerings into the legacy network of the company.

And does the company have the team skills that are comfortable and confident (or not) in using BAAS? Do they already use (one or more) cloud providers? And if so, do they have enough experience with these. This question is especially relevant because BAAS offerings are evolving quickly.

Other questions that may determine all or not choosing BAAS will be the tools available, choice of operating systems, ease of use, and pricing, thus costs.

So many things to think about, investigate and discuss.

Some broad guidelines for Selecting a BAAS Partner

Given the lack of readily available guidelines and best practices a lot of discussions and evaluations are needed into the process of selecting a BAAS provider or solution. Here are some broad guidelines a company should consider.

BAAS provider experience
First of all the company should ask themselves has the BAAS provider prior experience in setting up blockchain infrastructure? A company should ensure that the BAAS provider has proven experience in developing and deploying Blockchain technology. Companies should be ensured that the implementer department of the BAAS provider has professional staff that could easily attain the complex solutions for the enterprises. Companies should also ensure that the BAAS provider disposes of a good developer community, thereby guaranteeing “excellent output”.

BAAS provider’s commitment
There is also the question of BAAS provider’s commitment? Delivering quality is of great importance when choosing the right BAAS provider. A company should therefore probe their commitment to quality, process and standards of BAAS offerings.

Security assurance
Another critical issue that a company should investigate is can the BAAS provider deliver security assurance? In the first place they hey should ensure that –  for privacy and security reasons – BAAS offerings are built on permissioned blockchains. Given the variety of security issues ranging from application level to server level, it is important to look for potential gaps in security assurance in the proposed BAAS implementation plan.

Seamless deploying
A company should also look if the BAAS provider has enough experience in deploying. A company should evaluate the BAAS provider’s experience in deploying cloud-based solutions for operating systems similar to that of their organization. SMEs should  thereby look for BAAS providers that offer quick and economic deployment, testing, staging, and good production line. Companies also need to ensure that the new Blockchain infrastructure integrates seamlessly with their legacy systems.

User-friendly
A company should make sure that the proposed BAAS systems and processes are user-friendly and easily to adopt. After all, they look for  a system that their employees do not find difficult to use or navigate.

BAAS innovation
SMEs should also ask how innovative BAAS providers are. As BAAS solutions may vary from provider to provider, innovations might be a real trigger in case of any blockchain deployment. Innovations in the BAAS marketplace can create a more different type of BAAS architecture for a company’s organization.

Cost control
But also in terms of costing control the company should be aware of the real costs. Can a company be assured that they just pay for the value proposition delivered by the BAAS provider? Companies should therefore carefully analyse the pricing options and post-deployment support options and modalities. They should investigate if there are hidden costs linked to the BAAS contract.

Other features of BAAS offerings to look at

But next to these issues there are other basic features of BAAS offerings a company should look for. These include, amongst others, things such as offering good backend or backup solutions, quickly add up new additions to the platform, offer technical support in case of self-deployment etc.

Need for backend services
One key issue that should be investigated thoroughly by SMEs is how BAAS could deliver a company’s unique need for backend services such as integration of popular features and mainstream technologies. A BAAS provider should at least provide some key deliveries including data security, process control, costing control and integration. These backend services should support a wide range of applications without changing the legacy network, often characterised by multiple layers of the data sources, processes and workflows.

Companies should also know  the ins and outs of the blockchain platform in order to avoid risks. This asks for adopting proper monitoring and managing tools to manage the BAAS solution network effectively. For security reasons it should be made sure that the application data and user data “should stay within the boundaries of the platform” .

There are also a number of process control requirements for the application. SMEs should be guaranteed that the new BAAS environment needs to keep maintaining the original performance all the time. Some performance checking tools could let companies know how much capable their blockchain solution really is. It also needs to have protection mechanism from hackers, controlling data flow, computer resources, active monitoring tools etc.

Smart contract offering
When considering BAAS a company should make sure that the BAAS provider offers the smart contract integration with the deployment. As you have read in my former blog smart contracts are an important part of any BAAS solution. These allow the companies to electronically measure and encode all terms of the contract so there can be no dispute. Though they are not (yet) legal contracts, they allow the enforcement of an agreement between parties under pre-agreed rules, but also enforces the penalties in case of any rule breaking situation.

Access management
And there is the issue of who and who may not have access to certain information within the organisation. Companies should look for identity based consensus solutions as all the enterprise will operate with known identities. Not everyone in the company should have access to internal securitised information.

It is therefore also important to look for secure Identity and Access framework integration with the BAAS solution. It will enable companies to control the user access from critical information in the organisation, helping the administrator to regulate and control access all over the network.

Flexible deployment
And there is the issue of flexibility in deploying BAAS solutions. BAAS providers should offer versatility when it comes to BAAS frameworks. This asks for the availability of a variety of toolsets for companies. Companies need to have a choice in case of choosing the perfect framework. They should choose a BAAS operator that offers optimal support.

What else to consider?

A final, and may be the best way to select a BAAS architecture is the existing customer ecosystem. In many cases BAAS companies that can offer the most advanced and trouble-free BAAS have a large customer base. So, a BAAS provider with good and positive customer base could be a sign of good quality services.

After having answered all these many questions a company may (or may not) be able to select their favourite BAAS provider. On Google you may find various oversight lists of BAAS providers with many ins and outs.

Enjoy your BAAS journey!

 

Carlo de Meijer

Economist and researcher

 

 

 

Source