Blockchain will revolutionise business, says Bankymoon CEO Lorien Gamaroff

• Join us at the FinTech Africa blockchain event happening on 25 February.

The word "blockchain" is increasingly peppering conversations and many are now asking what it is, what it can do and whether they should be afraid of it. Gamaroff explains the concept and sheds some light on what it means for the future of the financial sector.

What is Blockchain and what can it do?
"A blockchain is essentially a computer protocol which enables the storage of assets and facilitates the transfer of those assets. It takes the form of a decentralised, immutable and transparent database or ledger. Records of transactions cannot be edited or deleted and parties involved in the transactions can only be known pseudonymously. This ledger is not stored in a single location but is distributed among thousands of independent computers around the world. These computers work together in a network to contribute resources to ensure that the system remains secure and robust. They are incentivised by earning rewards in the form of a crypto-currency. There are many blockchains, though the first and most well known is the Bitcoin blockchain."

"The full implications of this technology are yet unknown but the disruptive potential is enormous. There are large industries which depend on the fees they earn for intermediating the transfer of assets. It may very well be that in a few short years those incumbents will be having their Kodak moments. It is not an understatement to declare that a new technological revolution is upon us."

"The most important and revolutionary feature of a blockchain is that it allows assets to be transferred among parties who don't trust or know each other without the need for an intermediary or central authority. Typically, if two parties want to send and receive money electronically, a bank is required to manage the transaction. The bank acts as a middleman and ensures that the transaction is settled. Because of this, transactions take time and are expensive to clear. With blockchain technology, no bank is required. The funds can be transferred securely and quickly directly between the two parties. The time and cost implications are drastically reduced. In the same way, other assets like cars or shares can be transferred directly between people."

"Blockchains can be public or private. An analogy would be the public internet and an internal corporate intranet. A private blockchain is controlled by the owner who enforces the rules permitting access by known entities. Also, the validators of the transactions would be known by the owner of the blockchain."

What are the pros and cons of blockchain, and what opportunities does it offer?
"Stock exchanges are able to instantly match the trades of securities between buyers and sellers but the settlement which happens after the trade takes several days. This is because there is a long line of intermediaries, including clearing houses and custodians, which need to process the transfer of the security to the buyer and to settle the payment with the seller. This adds time and costs to the trade life cycle. By issuing securities on the blockchain buyers and sellers can instantly trade between themselves and without the costs of the legacy post-trade systems."

"Remittance of cash across the world is an expensive and time-consuming process. Traditional remittance companies such as Moneygram and Western Union charge high fees and it may take several days for the money to be transferred. Transferring small amounts is impossible. Blockchain currencies allow people to send any amount of money around the world in minutes and at barely a fraction of what it would typically cost. This is because there is no concept of geographic borders with blockchain technologies. As long as there is an internet connection people can transact using the protocol. Remittance companies will probably be the first to have their business models disrupted to such an extent that they may cease to exist altogether."

• Join us at the FinTech Africa blockchain event happening on 25 February.

"An immutable decentralised ledger also can improve record keeping. Sensitive documents can be registered on a blockchain. If the information in the documents needs to be confirmed or checked for unauthorised amendments, the blockchain record can be compared. The blockchain record can be time stamped and used to prove a registration date. This can be used for copyright enforcement."

"Smart Contracts allow rules between people to be agreed upon and then enforced autonomously. For example, two people can enter into an agreement about the outcome of a football game. The agreement will state that if Team A wins then the first person will get paid a reward and if Team B wins the second person will get paid. The rules will be inserted into the Smart Contract and, depending on the outcome, it will pay the correct person without a third party needing to execute the terms of the contract. This has huge implications for industries which focus on enforcing contracts."

"There are many use cases for the technology beyond that of a decentralised currency, yet it remains to be seen how far reaching it will be. A huge amount of venture capital has been injected over the last few years into startups that are busy developing prototypes."

"Blockchain technology is still relatively new and will need to be further development before it can scale to process transactions at the same speed as the major credit card companies. The Internet had a similar stage in its evolution when speeds were slow and so it is reasonable to believe the these technologies will follow the same trajectory. Also, as it was with the early Internet, it requires a certain level of skill and consumer-friendly services are yet to be developed which will make it easy for non-technical people to use it. We are still waiting for the killer apps of blockchain."

How will blockchain technology affect the finance industry?
Blockchain technology has enormous disruptive potential and will unquestionably affect the finance industry. Deutsche Bank said, 'Banks must partner with FinTech and digital currency businesses or risk disappearing altogether'. If there is no proactivity to establish partnerships with blockchain service providers or to develop blockchain prototypes internally by those within the industry then the future will certainly not have any place for them."

"The finance industry has much to gain from blockchain technology. For instance, interbank settlements can be streamlined and cross-border payments can be made cheaper and quicker. The information on a blockchain ledger is transparent, albeit pseudonymous, and so the money flow around the financial system and markets can be known. There is no central authority, as the system is decentralised, so there is no risk of a single point of failure. Smart Contracts can automatically execute insurance claims without the administrative overhead, and wages can be paid automatically. Asset ownership can be verified and the provenance of those assets can be recorded."

• Learn more. Join us at the FinTech Africa blockchain event happening on 25 February.

"According to the World Bank, 80 percent of Africans have little or no access to traditional banking services. They live predominantly in a cash economy, which is expensive, insecure and inconvenient. They have no access to loans and other financial services. Banks are struggling to capture this segment of the market for a number of reasons. Mistrust, local availability and costs are some of these. Those who are not banked do have access to mobile and Internet services, however, so a blockchain-based currency will open up the global economy to them. New financial services which utilise blockchains will be developed and will target large, unbanked populations."

What should CFOs know about the blockchain, and what do they stand to gain from it?
"CFOs stand to gain a lot from blockchain technology. The blockchain distributed ledger technology is transparent and records global transactions in nearly real time. This allows for accurate and simplified audits of transactions, which can be immensely beneficial to CFOs. The ledger tracks the flow of money accurately and immutably, so payments can be viewed right through a supply chain. The blockchain ledger is secure and cannot be tampered with, which minimises fraud. Payments can be made instantly around the world without incurring remittance fees and time delays. Interbank settlements can be cleared in minutes."

"It is necessary that CFOs become familiar with distributed ledgers. It will become a vital part of the technology stack and will determine the financial success of organisations going forward. CFOs should apply their experience and drive innovation in this area. Not doing so could limit the efficiency and cost effectiveness of business processes."

Who could best benefit from blockchain technology?
"Banks and traditional financial service companies are eagerly studying the technology to see how to benefit from it but it seems that individual people will initially have the most to gain. Cheap and quick payments will transform the lives of millions of people who remit money to families around the world. New services will be available by using electronic payments outside of the banking system. Businesses will save money and services will be able to reach markets that were previously inaccessible."

How could blockchain be used in Africa?
"Utility companies throughout Africa are rolling out prepaid utility meters to their customers. This is because it is exceedingly difficult for the utilities to recover the costs of supplying the utility after it has been consumed. Most municipalities around South Africa are in arrears and are threatening to cut off their customers if they do not receive payments. Customers find it difficult to make payments because the only channel they have access to is cash payments. Cash is inconvenient, insecure and vendors need to be appointed who require infrastructure, which greatly increases the costs. I spent many years developing prepaid vending solutions for the African market and realised that because of these difficulties the perfect payment channel would be blockchain-based currencies like Bitcoin. I developed the world's first blockchain-aware prepaid vending solution which allows customers to make electronic payments for their utilities. This solution greatly reduces the costs and increases the convenience of making utility payments."

"We are now developing a crowd-funding platform for poor schools across Africa. They will have blockchain meters installed and foreign donors can make payments directly to the meter. This is a revolutionary concept where foreign donors can directly fund the causes they believe in without having to send money to an organisation which opaquely distributes the funds. They will not have to pay the transaction and administration fees and so the entire donation will go to the school."

"As more merchants and service providers start accepting blockchain currencies like Bitcoin, so people will gravitate toward it. The potential to transform Africa and emerging economies is great."

Blockchain makes some people nervous. Why is this?
"Blockchain currencies like Bitcoin allow people to send money around the world without using traditional channels. Money can be sent anonymously and without controls. Law enforcement agencies are concerned that this will enable terrorists and criminals to operate under the radar. Governments and central banks are concerned that this will greatly diminish their ability to recover taxes and enforce capital controls."

"Blockchain currencies are pseudonymous and not anonymous and so some intelligence can be gleaned by analysing transaction patterns. Companies that offer services where blockchain currencies are exchanged for fiat currencies should follow all AML and KYC regulations. By doing this it will be very difficult for nefarious activities to take place."

"Interestingly, Britain's HM Treasury recently released a national risk assessment report which listed blockchain currencies in the lowest category of risk of money laundering."

Are there any companies successfully using blockchain technology?
"Every major bank around the world is actively researching blockchains and developing prototypes. They are partnering with blockchain companies and trialling new systems modelled on distributed ledgers. The NASDAQ in the US has released a blockchain-based securities trading platform, and the Australian Stock Exchange has released a roadmap for replacing their existing trading system. Microsoft has released a blockchain as a service for their Azure cloud, and IBM is actively researching and developing blockchain integrations into their Internet of Things initiative."

"At this stage it is difficult to find any company in the world not investing significant time and money into the development of blockchain technologies."

Where is South Africa in the adoption of the blockchain?
"Companies in South Africa are hearing the buzz around blockchains but few are investing any effort into understanding it. Banks are slowly looking into the possibilities but no investment or partnerships have yet been made. This trend will soon shift as the necessity to adopt blockchains becomes too apparent to ignore."

"I am convinced that soon local businesses will feel the pressure of being left behind and will become motivated to act. Until then I will be happy to educate and spread the message. This is the next technological revolution. One that will take us into a future we can scarcely imagine."

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