When the digital currency bitcoin surfaced in 2009, many viewed its technology with suspicion because of its potential to support illegal activities.
Its pseudonymous nature and lack of a central issuing authority made it ideally suited for people who did not want their transactions traced. Drugs, weapons or worse could be traded on the Web with little fear of reprisal from law enforcement. Cryptocurrencies lived only online, shunned by banks and the institutions that lend our financial networks legitimacy.
Five years later, the narrative has changed. People have recognized the power of bitcoin's underlying technology, known as the blockchain. Perhaps because of bitcoin's growth and acceptance in the financial services industry, or because of a wider sense that some form of digital tender will inevitably succeed, the financial establishment is now looking for ways to be part of the cryptofinancial ecosystem.
Recent data compiled by CoinDesk, an online digital currency news publisher, show that investments in bitcoin companies rose from $95 million in 2013 to $362 million in 2014. Even the New York Stock Exchange has dipped its toe in the market by creating a bitcoin price index, while companies as large as Dell, the U.S. computer maker, and Dish Network, an American satellite television provider, now accept bitcoins as payment.
In July, BitX, a Singapore-based cryptocurrency platform, raised $4 million in an initial round of fundraising. Also that month, Hong Kong-based startup Bitspark entered the FinTech Innovation Lab Asia-Pacific run by Accenture, the management consulting company. Bitspark, which has a remittance platform that uses bitcoin and blockchain technology to send and receive payments in emerging markets, captured the attention of the 12 multinational banks that selected participants.
Even now, Bitcoin is not without controversy. The trading platform Mt. Gox, based in Tokyo, filed for bankruptcy in 2014 after admitting that it did not know the whereabouts of 850,000 bitcoins (valued at around $473 million at the time). An investigation into the disappearance of the bitcoins is still underway, generating hotly followed media coverage.
Bitcoin is also not the only cryptocurrency. Ripple is one alternative platform. XRP, Ripple's "bridge currency," allows for seamless exchanges of currency. For example, in China, where multiple providers have cropped up in the past year, customers can swap Chinese yuan for XRP and perform real-time payments through the Ripple network in any major currency. Some of these gateways have also built "bridges" to popular online payment networks, such as China's Alipay, so that customers can make payments to recipients not on the Ripple network.
The key here is not whether users do business in bitcoins or XRP but the underlying technology of blockchains and their potential power to transform transactions in Asia and beyond. The coming years will bring big changes as blockchain technology finds its way into many processes and markets besides cryptocurrencies, lowering costs, boosting efficiency and upending paradigms.
Verifiable cash
A blockchain is really an accounting system. What makes it unusual is that, often, the ledger of this accounting system is public. Anybody can access it -- if you run the software you can see it. For bitcoin, for example, the blockchain is preserved on millions of PCs as well as in data warehouses. No single bank owns the record, and every instance of the bitcoin blockchain holds a total account of all transactions within its market.
Crowdsourced processing power is used for cryptography that verifies transactions. This means users can ensure that a party actually owns the bitcoins pledged in a transaction; they need not rely on a regulator to monitor that. Anybody can accept cash as payment because, like anything within the blockchain, its existence is utterly verifiable.
Blockchain technology can also be used for other purposes. Take, for example, the purchase of a home. A buyer could use a blockchain to remit payment directly to the seller, and the seller would then satisfy the other side of the transaction by transferring the property. What would make the use of blockchains unique in this instance is that the immutable chain of records contained in the block would ensure the property is free of liens during the transaction process. If it is not, the transaction parameters would not be satisfied and no transfer of assets would occur. The potential exists to use a single blockchain to verify a property title's status in minutes, significantly reducing the price of title insurance.
Given this transparency, blockchains have huge implications for Asia or any market in which the who, where, when and why of a transaction have been questioned. The blockchain technology that powers bitcoin can be utilized in the same way for currencies and fixed income instruments. Any institution that clears and settles trades could use it to streamline processes by replacing its current front and back office technology.
There are drawbacks. The original iteration of the blockchain for bitcoin has insufficient security features for institutional use. Indeed, the Mt. Gox case seems to highlight that very issue. It is also likely that regulators will step in to define "good practice" for the industry; it remains to be seen what that is deemed to be, and whether the majority accepts it.
In short, it is early days, but blockchains are building blocks that could change the way capital markets operate.
Owen Jelf is global managing director of Accenture's capital markets practice. Chin Wei Min is managing director and leader of its Asia-Pacific capital markets business.
