Why are blockchains important?

March 21, 2016

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Instead of involving lots of humans in the transaction pipeline and paper processes that take days, weeks, or months to complete, huge volumes of transactions could be validated automatically with the help of blockchain-style forms of consensus.

Shared digital ledgers—when judged by just the technical definition—might not sound like a big deal to those not immersed in cryptocurrencies or financial process reengineering. The shared ledger itself is certainly significant, but what it enables matters most: immutable, shared ledgers encrypted at the record level provide a way to validate transactions through little or no human intervention.

Instead of involving lots of humans in the transaction pipeline and paper processes that take days, weeks, or months to complete, huge volumes of transactions could be validated automatically. Other more complicated transactions that still require humans could at least be simplified with the help of mathematical validation.

This evolution could not have happened at a better time for the financial services market, which has become increasingly more dynamic during the past decade. The last wave of disruption, for instance, included innovations such as marketplace or peer-to-peer lending, where a web intermediary creates a platform for individual borrowers and lenders. In 2015, PwC forecast the US market for this type of peer-to-peer lending (currently unrelated to blockchain technology) to grow from $5.5 billion in 2014 to $150 billion in 2025, a compound annual growth rate of 35 percent.

For banks and other financial institutions, the symptoms of process inefficiencies are increasingly problematic. For example, the lack of transaction liquidity is a growing concern in most financial markets, including corporate bonds and mutual funds. In response, banks and other financial institutions that have invested in blockchain R&D anticipate that during the next decade, they will lower their cost bases and create greater process efficiencies through various forms of digitization.

Blockchain technology can alleviate liquidity challenges by providing a way to reduce friction through the mathematical validation of transactions. Once the transaction is validated, a single shared, distributed ledger provides unified, tamperproof visibility into the transaction record—a single, immutable version of transaction truth. Low friction and better visibility improve the performance of all transaction types, not only bond and other securities trading.

As Gideon Greenspan of Coin Sciences points out, deep cryptographic control of each element of a transaction now makes unified, immutable, and validated transactions visible and functional at a global scale. Creating a historic record that can’t be tampered with is an important consequence of that control. Once you have that control, the networked yet singularly authoritative ledger can reside anywhere on any network.

Math alone can protect and validate lots of transactions. The right cryptography and algorithms can make it possible to validate transactions quite well, in some ways superior to human validation methods. The right cryptography can also protect a shared ledger and keep it from being tampered with. The bitcoin blockchain has proven this approach.

Similarly, the mathematical validation of events, the steps taken in a process, or a list of compliance measures taken can also substantially benefit the audit function, points out Jeremy Drane, PwC’s US blockchain and smart contract leader.

Blockchain-based transaction validation won’t be sufficient in all circumstances. Complex transactions will require more humans in the loop. But the reality of blockchains and how they’re being used points to a future in which human third-party transaction validation and recordkeeping could be the exception rather than the rule. In its place, machine-centric validation is emerging. From a legal standpoint, the system becomes a “person,” a virtual third-party enforcer that never sleeps. From a computing perspective, that “person” is actually a software agent. The use of agents will be essential to scaling recordkeeping and providing visibility to the historical record.

In the public and business-to-consumer (B2C) sphere, virtual third parties already serve more and more needs of buyers and sellers. No wonder the banks are focused, looking at the piece parts incorporated into shared, private ledgers offered by dozens of startups and exploring processes that could begin to rely on them. They’re focused on near-term, less complex use cases to leverage these shared ledgers and make the efficiency opportunities real.

 

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Contacts

Chris Curran

Principal and Chief Technologist, PwC US Tel: +1 (214) 754 5055 Email

Vicki Huff Eckert

Global New Business & Innovation Leader Tel: +1 (650) 387 4956 Email

Mark McCaffery

US Technology, Media and Telecommunications (TMT) Leader Tel: +1 (408) 817 4199 Email