R&D Coming Full Circle in 2017
The past few years have signaled a clear period of research and development and market exploration for financial services firms as it relates to distributed technology and blockchain. The technologies offer a different take on trust, where transactions exist in a trustless system, and due to its inherent design transactions can be reconciled in the absence of a trusted central authority to verify transactions. Complicated? Maybe so, yet the consequences may be even more unanticipated.
Already in 2015, Nasdaq announced its commitment with the first ever private securities transaction documented with Nasdaq Linq, a blockchain-enabled technology. In a press release on Dec 30th 2015, Nasdaq went as far as stating that ‘blockchain holds potential for 99% reduced settlement time and risk in capital markets’, which can be seen as quite a strong signal.
The interest is however much broader than marketplace operators. The US State of Delaware has pushed blockchain as a distributed ledger to increase speed, security through distributed automation mainly of document handling and filings. The State has made the implementation of blockchain technology a core tenet in their strategy to adopt new technologies. With 66% of Fortune 500 companies and 85% of initial public offerings (IPOs) in the state, the ramifications are significant.
It’s clear the potential is there. However, embracing a trustless architecture leads us to ask different questions, such as where should trust be placed in the future if not in the parties themselves.
Should you Trust a Banker in the Future?
Speaking at conferences and in private meetings with bank and asset manager CEOs around the world, one thing that keeps coming up is the notion of trust. “We work with people we trust” and “why would we work with anyone we do not trust”. For years I’ve been saying that once a transaction can be handled faster, more securely and more efficiently than currently, trust becomes secondary. If you can provide more value to each and every party along the value chain – where is the value of trust?
The terminology for ‘trustless’ transactions or systems may be a bit misleading. The trust is still there, however it encounters a fundamental shift from the actors to the system. Indeed the only way to transact with another party that you do not know, is to be able to have 100 per cent confidence in the system to have nullified the opportunity for a fraudulent, incorrect or otherwise unproductive transaction. Through distributed verification, immutability and various levels of privacy and encryption these concerns are addressed through the technological design rather than the actors involved.
It should also be noted that blockchain still suffers from limitations, which are indeed being worked on, such as full homomorphic encryption support and upward transaction scalability. However, distributed technology and distributed finance is far larger than only blockchain.
Trust in a Trustless Future
Distributed technology offers higher security by enabling impartial and immutable distributed validation of chains of events and transactions, but I would argue it goes even further and will fundamentally change our collective attitude toward transacting online. By virtue of ‘trustless systems’, what if you in the near future could trust anyone by nature of system design and seek out the best transactions independent of the parties involved and their reputations? Would this ‘trustless’ system drive higher deal making efficiency and indeed focus on the goal at hand, versus bandwidth being spent on the mechanics rather than the transaction itself?
Digital challenger banks such as Germany’s N26 and the UK’s Monzo have won customer appeal by being digital first and far more efficient than their traditional counterparties. They market their utilization of innovative approaches such as Artificial Intelligence for better customer value and decision-making, yet establishing trust in their services still largely relies on heavy banking regulations and licenses which establish these digital banks as ‘trusted actors’.
In a ‘trustless’ future, could we see this trust established elsewhere by virtue of network design rather than heavy infrastructure and oversight? If a trustless system is set to be more sophisticated and secure than any individual and fallible trusted parties, then are trusted central actors truly a thing of the past?
Maybe even more tellingly, we need to ask ourselves, do we now have an opportunity to build a distributed finance platform, that is trustworthy and unbiased by design and can we leave our industrial era concepts of trust aside in this pursuit?
