The blockchain – a decentralized digital transactions ledger – sounds boring next to the trendy products grabbing the attention and wallets of the crowdfunding folks.
You may be more familiar with its high intrigue sub-theme as the platform for cryptocurrencies, led by Bitcoin, aiming to disintermediate the global monetary system. The real thriller for investors is the duller accounting function. This super secure digital database is about to change how we conduct our digital lives, including our banking, investing, insurance, and most other online transactions.
If it were not for the crowdfunding community the blockchain would not be ready to turn us all into more active netizens. Crowdfunders have sunk more money into blockchain technology than any other sector. The blockchain sector has also helped crowdfunding enter the private investment mainstream. Crowdfunding is now the largest private equity asset class, representing 21 percent of all equity investments in the UK in 2016, according to Beauhurts Deal 2016 report.
What exactly is the blockchain?
But first, the short history of the blockchain and why crowdfunders so zealously back it. It’s a story of a new age crypto-currency maker who meets the father of modern cryptography and invents a secure digital future. The new technologist is Vitali Buterin, a developer of blockchain technology and a cryptocurrency called ether, which has raised around $18 million in crowdfunding. Buterin incubated his ideas at the Canada’s University of Waterloo – incidentally, not far from the world class Perimeter Institute where real world physicists including Nobel laureate Stephen Hawking study the effect of a different kind of either on galactic stars.
The genius of the blockchain is that no one person controls it. Instead, all participants in the transaction have access to the blockchain and must approve future transactions. Tampering with the blockchain would be like breaking into a house while all 20 people with keys to the house looked in through the window and watched you.
Let’s say these 20 investors are chained together through the buying and selling of Apple stock. Each time the investors make a trade, they create a transaction block – a hacker-proof, digital imprint of the sale or purchase of Apple stock. Ethereum’s elegant solution was to add Turing complete scripts to the blockchain, which prevent attacks. These scripts are very different from the “Turing script” for the blockbuster movie on the life of Alan Turing. The brilliant World War II codebreaker’s Turing computing scripts create stronger encryption, allowing a super secure blockchain platform to host financial transactions and virtual assets.
Following are nine financial services that use the blockchain technology crowdfunding has enabled by its early and strong support for blockchain companies, such as the Ethereum and Bitcoin blockchains, exchanges and related services.
1. Payment/Banking Services
If you use digital currencies, you have used the blockchain. The first blockchain was developed by Bitcoin to facilitate digital currency exchange. In 2016, the value of trading in the seven major cryptocurrencies was over $16 billion, according to Coindesk.com.
These digital money exchanges are now expanding into more traditional banking services. An executive from payments giant Western Union Marwan Forzley is one of the innovators who saw the future of financial services on the blockchain. He started Align Commerce, a blockchain platform facilitating cross-border e-commerce through payment services, currency exchange, and wire transfers by exchanging fiat currencies in and out of Bitcoins. Since traditional banking intermediaries are not used, fees are low.
The uberization of banking services is not only lowering fees but even removing them. Abra Teller is providing free global money transfers in its efforts to replace ATMs with peer-to-peer money transfers. Competitors include Circle and BitPesa for importers and exporters. Funding Circle, the leader in P2P loans, seeks to undercut small business bank lending fees. As competition increases as new P2P financial services are introduced, consumers will be able to shop around for the lowest fees. You will find many of these services offering some free services, hoping you will eventually upgrade to higher priced services.
These virtual financial services offer lower fees by doing away with expensive middlemen. Gyft does not use third parties to manage gift card programs, which means charging higher fees to users. A gift card administered on a blockchain creates a direct transaction ledger between the user and Amazon, Starbucks or whatever retailer is behind the card.
Watch for your bricks-and-mortar and online banks to soon offer similar services to compete. Japan’s Rakuten’s acquisition of Bitcoin wallet Bitnet to provide payment services and money transfers over the blockchain is just the start of acquisitions and partnerships to compete with a suite of blockchain banking services.
The beginning of a potentially huge market in blockchain insurance services is beginning to be rolled out. inSpeer’s innovative crowdfunding platform for insurance policies for electric cars is inspiring new models. By collaborating, the peers are able to bring down the higher cost of insuring electric vehicles.
The blockchain also has an important role in the future of insured valuables. Its potential value in preventing theft and fraud is unpriceable. Twenty percent of the $60 billion art market is believed to be made up of forgeries. Everledger founder Leanne Kemp says counterfeiting is a $1.7 trillion business. These types of frauds and others cost the insurance industry over $2 billion each year.
If the blockchain had existed when your great grandfather bought the Picasso on your library wall, you may have been able to fund 10 college educations with the sales proceeds. Alas, every year billions in potential art sales do not take place because the provenance – a record establishing ownership and authenticity – of the artwork cannot be established. Led by Everledger, blockchain transaction ledgers are changing how assets are valued, tracked and insured. It’s smart contracts fight theft and fraud by providing a permanent record of transactions on valuable assets. Everledger has received funding on XSoar – a secondary market exchange running on the blockchain. With Everledger on the job, the Parisian thieves would have had a very difficult time selling Kim Kardashian’s stolen diamond ring, without creating a permanent record of their crime in the blockchain.
The delivery of insurance services will also be transformed by new blockchain models. Edgelogic may be a little ahead of us, but it is a fascinating example of how the Internet of Things – interconnected devices – and the blockchain could work together. Imagine sensors in your home notifying your insurer on your shared blockchain of a house fire or theft. The insurer could automatically begin an appraisal of the damage, possibly remotely through smart sensors, and then transfer the money for repairs or article replacement, conceivably within hours.
The Australian Securities Exchange ASX is promising instant gratification over the blockchain. The ASX says it can execute securities trades in milliseconds over the blockchain. With no need for traditional front-to-back office operations, traders could conceivably go to the bank a few seconds after completing a trade and withdraw their trading gains from an ATM, says ASX.
The ability to disintermediate the broker will make securities buying more efficient and cheaper, and reduce broker fraud. UBS is testing smart bonds that pay interest in BondCoins linked to real currencies. The banks reap efficiencies and cost savings from the decentralized registry replacing the back office tasks of recording buying and selling among bondholders. As a smart bondholder, you would be able to view all transparent transactions and receive automatically distributed interest rate payments.
The Korean Stock Exchange is readying to trade over-the-counter securities over the blockchain. Securities settlements take place among central registries and many brokers who do not always agree on who the owners are. Investors using a blockchain can follow the chain of ownership themselves.
In January the Nasdaq exchange in Estonia ran a test to conduct shareholder voting over a blockchain. This would finally achieve the elusive goal of Of making the voting process transparent. As the United States starts to prosecute people for voting irregularities in the US presidential election – including illegal voters and double counting – the power of a fully transparent voting system is evident. Neighbors could tell on neighbors voting illegally or more than once.
It is the moving nightmare everyone wants to avoid – you cannot get the keys to your new house because of a delay in your funds clearing. The movers are charging you an hourly fee for the furniture in their truck. You, the children, dog and two cats are in a motel waiting to get access to your new home.
Real estate completion risk creates a high level of stress for all parties in the transaction. Buyers, sellers, real estate brokers, lenders and solicitors all shuffle paper back and forth in a mortgage transaction. Business consultancy PwC sees a more efficient real estate settlement flow for its clients. If all these parties were on a blockchain, all transactions could be executed instantaneously and monitored by all parties. No more waiting for funds to clear for the sale because the lawyer is in Florida on a two-day golf trip.
HSBC is testing a system to value properties over the blockchain. Transparent pricing could make it more difficult to inflate real estate prices.
5. Wealth Management
The ambitious blockchain is going after the higher net worth banking business, too. Crypto wealth management platforms such as eStakeX could one day replace wealth advisors.
What will the replacement of a centralized broker account mean to you? Lower costs, more efficient services, and fraud detection and prevention. Let’s say a dishonest broker wants to take several thousand dollars from your investment account by understating a gain on an investment. Each security you trade in, and all related buy and sell transactions, are now performed on a blockchain. The thief will have to get permission from you and everyone else on the blockchain to lower your gain on the transaction.
6. Investment Banking
Overstock.com is the first company to do an initial public offering over blockchain technology, distributing 126,000 shares in December 2016. Regulation has not yet caught up with blockchain technology, however. To comply with financial regulation, Overstock.com had to funnel its transactions through brokers and other traditional middlemen. Nasdaq has issued pre-IPO shares on its blockchain platform called Linq.
ICONOMI, another cryptocurrency, has launched a fund management platform. After its funding period closed in September 2016, the company distributed 100,000 million in its cryptocurrency to its crowdfunding investors. In exchange, investors can invest in digital assets representing a cross-section of the new economy when the platform goes live in 2017. The value of the cryptocurrency has been steadily climbing since the end of last year.
Crowdfunded OpenLedger is one of many exchanges cropping up to specialize in trading cryptocurrencies.
7. Loyalty Programs
Canadian bank RBC is working on a safer blockchain system for reward and loyalty programs.
The gamification of the economy means more rewards, perks and loyalty points for everything from air travel to filling out a bank form. No one can provide an exact number of how big rewards fraud is because most people pay little attention to their rewards accounts.
Many companies are even unaware they are being defrauded for millions of dollars before a rewards audit is performed. You may already have been a victim of this fraud. A store clerk swipes her card instead of yours each time you make a purchase in her store. She then goes to another store branch to make purchases with her ill-gotten rewards. A blockchain would have revealed the high number of rewards going to the employee’s card.
8. Investment Forecasting
Could the blockchain one day replace investment analysts? The madness of crowds has been blamed for every major market crash. But what if you could leverage the “wisdom of crowds to improve forecasts? Investment forecasting meets swarm intelligence.
Augur, which took in over $5 million on crowdfunding platforms is out to prove that collective intelligence makes better predictions than individuals. Is Google stock going up or down? The prediction markets use the blockchain’s decentralized, distributed computing networks to bring many investors together to vote. For now, the forecaster sells virtual shares in the outcome of real world events, such as who will win the World Series, the Oscar or presidential election. Soon, these crowd analysts could be predicting stock prices.
Wings uses swarm intelligence to conduct due diligence and vote on blockchain projects funded through crowdfunding. Community members collectively decide on and forecast the viability of projects. A project is reviewed, improved upon and approved by the collective intelligence of its over 17,000 community members before it can start crowdfunding.
Massive, open-sourced online investing democracies are a good anecdote to the rise of the passive, centrally controlling robo-advisor.
What’s next? Projects raising crowdfunding include community consensus derived credit ratings by Ofyz.
Wings is an example of the trend towards using blockchain technology to host decentralized crowdfunding services, whilst bringing more money to blockchain development, as well as other projects. The administration of these sites is low and less costly than traditional fundraising since blockchain technology is used to administer the payments, and can directly send investments to the company founders.
New funding models are developing, making it easier for anyone to finance blockchain and cryptocurrency technologies. SatoshiPay allows investors to make ongoing monthly contributions to companies in the Bitcoin ecosystem. The nano-payments system, named after the elusive inventor of Bitcoins and the blockchain Satoshi Nakamoto, only accepts funding in Bitcoins.
There’s An App for That
If you have tried to download the Bitcoin Blockchain to pay for a service – 100 gigabytes and growing – you may long for the bricks-and-mortars days when you could simply whip out your wallet. Digital wallets using the blockchain have a major shortcoming – the time to download these huge and growing digital transaction ledgers. Remember, each time someone uses Bitcoin they are added to the ledger. For smaller universes of transactions, such as a mortgage deal or even a couple thousand pre-IPO investors, the ledger would be manageable.
The industry answer is Lite blockchain clients. The Waves Platform accesses BlockChain information through public Waves nodes, instead of downloading, and can also facilitate address creation, signing and verification to complete the transaction. These innovations are leading to the development of blockchain apps – led by companies such as Waves and Lisk, the top crowdfunded project in Germany at $11.6 million. Stratis raised $100,000 in an initial coin offering (ICO) for its enterprise-level technology aimed at making the development of blockchain apps faster.
Most users will use these apps in the same way they do online banking or process payments through PayPal and be oblivious to the technology behind them. If they do, however, run into fraud in a financial transaction, they will have the entire transparent record of transactions on the blockchain to back them up.
How more efficient can the blockchain be? Hyperledger, a digital ledger system being supported by banks, says it can do thousands of transactions a second. Its funding has come from mainstream blue chip banks, who are now signing up to develop, finance and use the ultra-secure digital ledger system in the delivery of financial services to compete with the smart first-movers in this article.
The biggest challenges for the blockchain are regulatory compliance and integration with existing centralized technology and databases. The regulations preventing Overstock.com from foregoing traditional brokers for its IPO have been an exception rather than a rule, but as the blockchain moves into securities trading and settlement, and wealth management more regulatory hurdles may be ahead.
Over 40 major global banks have joined blockchain startups Digital Asset Holdings and R3 to collaborate on blockchain technology and integration issues. They have already begun operationalizing front-to-back office banking services through trials on the blockchain. The over $50 million Digital Asset raised by banks in January 2016 is a testimony to their confidence in a future for the blockchain in financial operations and services.
The new services and advances on the blockchain have not left the original developer Bitcoin in the dust. To the contrary, the market capitalization of bitcoin hit $18 billion in February. The crypto-currency, now valued at over $1,000 a Bitcoin, trades on over 40 exchanges worldwide. As the currency grows, it is starting to confront regulatory hurdles. China stopped trading on a Bitcoin exchange in February due to its lack of regulation. Regulators from Hong Kong to Poland have called for regulation of the decentralized currency. For the foreseeable future, the blockchain technology is the safe bet — the currency it was built to host may become volatile in shifting regulatory winds.
The Internet economy has long promised us a faster, better, smarter economy. A platform smart enough to deliver on these promises looks to have finally arrived.