UK: Blockchain - Enigma. Paradox. Opportunity

Foreword

You may have read about Bitcoin or heard about it at a 'FinTech' conference. You may have used Bitcoins to purchase pizza, coffee or even a spaceflight. Wherever the word has cropped up, fierce debates have often followed. Early adopters passionately claim that Bitcoin will remove dependencies on banks and governments. Hardened business tycoons advise that Bitcoin is just a 'flash in the pan'.

While the debate about Bitcoin rages on, researchers have been quietly examining the technology that underpins this and other digital currencies. This is the realm of the blockchain – a protocol for exchanging value over the internet without an intermediary – and there is a growing buzz about how it might transform not just banking but many other industry sectors, too.

In a recent survey by the World Economic Forum (WEF), a majority of experts and executives in the information and communications technology sector expected at least ten per cent of global GDP to be stored on blockchain platforms by 2025. And while the WEF doesn't expect the tipping point for the technology to occur until around 2027, we anticipate that adoption will occur much faster as a multitude of applications emerge in different sectors.

But who can benefit from this technology? What are the key blockchain applications and how will they work? How do organisations create value from them? And what are the technical, cultural and commercial challenges they will face? This paper is part of a series of reports under the title of "Disrupt: Deliver" – Deloitte's approach to developing understanding of and new points of view on disruptive technologies. And, in the following pages, we take a close look at the blockchain and tackle these questions.

In our view, there are new and emerging opportunities for organisations in all sectors to create and deliver compelling services for their customers using the power of disruptive innovation. As they formulate their plans for the coming months, we also hope that this paper helps business and public sector leaders understand the cultural and organisational challenges that are inevitably brought by the use of blockchain technologies, and provides them with the insights they need to overcome them.

We hope that you find this paper useful and we look forward to your feedback.

Introduction

Throughout history, many items have been used as a store of value, from cowrie shells and clay tablets to coins and today's ubiquitous paper money. Even distributed payment networks have existed for millennia: thousands of years before the advent of Bitcoin, the people of South Asia, Africa and the Persian Gulf were using hawala for peer-to-peer money transfer.¹

As our understanding of money has matured, so have the methods and modes for exchanging it. The Bitcoin 'experiment', which was started by Satoshi Nakomoto (presumed to be a pseudonym) in 2008, has demonstrated that there can be a viable digital alternative to cash and other mediums of exchange in modern society.² And although Bitcoin has had a chequered history, with its association with the dark net and websites like Silk Road, it has also triggered debates about the opportunities that come from the blockchain – the technology 'backbone' and protocols that Bitcoin and other digital currencies use.³

According to the Bank of England, a blockchain is "a technology that allows people who don't know each other to trust a shared record of events".⁴ This shared record, or ledger, is distributed to all participants in a network who use their computers to validate transactions and thus remove the need for a third party to intermediate.

The concept is approaching a tipping point in its adoption, according to the World Economic Forum.⁵ VentureScanner.com estimates that there are now over 800 new ventures in the global Bitcoin 'ecosystem', which have collectively raised over $1 billion in funding.⁶ These companies include specialist Bitcoin exchanges, such as Coinbase and Itbit; Bitcoin 'miners', such as Petamine and 21e6, which provide specialist computer hardware for validating Bitcoin transactions; Bitcoin wallet and payments companies, such as EasyWallet.org and CryptoPay; and many other infrastructure, news and related services companies.⁷

In the FinTech space, the New York-based financial innovation start-up R3CEV has announced that it is working with over 40 banks to conduct research and experiments with the aim of creating a new industry-wide blockchain.⁸ Separately, Visa Europe, Westpac, the Commonwealth Bank of Australia, RBS and many of the UK's high street banks have all announced that they are working on their own proof-of-concepts using blockchain.⁹,¹⁰,¹¹,¹² Citi claims to have built three blockchains and its own cryptocurrency, 'Citicoin', to test them.¹³ And the first patent for a securities settlement system using cryptocurrencies has been filed by an investment bank.¹⁴

For consumers, a growing number of mainstream merchants accept Bitcoin as payment for their goods or services. Overstock.com, one of the first major online retailers to accept Bitcoins, made more than $124,000 in Bitcoin sales on January 10, 2014, its first day of accepting the currency.¹⁵ Recently, Overstock.com became the first company to receive approval from the US Securities and Exchange Commission to issue shares using the Bitcoin blockchain.¹⁶

Understandably, the focus on digital currencies like Bitcoin has created a common misconception that blockchains are relevant only to the banking sector. "There has long been significant interest in the many different uses for blockchain technology," says one commentator, "However, the 'non-currency' use-cases... have until recently, generally commanded less total mindshare than 'currency' use-cases."¹⁷

So who else can benefit from a blockchain? How does it generate value? And, perhaps more importantly, how can the technology be applied to existing organisations and their current business models?

This paper aims to address these questions and help leaders in different sectors navigate the emerging opportunities offered by blockchain technology. Blockchain's impact is illustrated in four domains: banking, insurance, the public sector and the media industry. We also discuss some of the challenges as organisations start planning to adopt this technology.

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