Blockchain: opportunity or imminent threat?
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William Mougayar
By Nam Hyun-woo
The move for blockchains spreading from the fringe economy to the mainstream is picking up speed in Korea.
With experts pointing out that blockchain technology will change the concept of trust in the next 10 to 15 years, the technology is not only coming as a great opportunity but also an imminent threat to those who fall behind.
The World Economic Forum said in its August report that the technology will become the “heart beat of the global financial system,” which alters the way banks conduct business by lowering operating costs and making financial services securer and more accessible.
Such a conclusion is possible because the technology is going to disrupt any intermediaries that used to provide a trust related function. A blockchain is a decentralized peer-to-peer ledger that enables transmission of electronic value without intermediaries.
In a traditional transaction where Company A wants to send money to Company B, a bank has to be involved to record the transaction. To keep the record safe, the bank has to spend an enormous amount of money on security to have an authority on the record ―what experts call centralized consensus.
Blockchain technology takes an opposite approach to this. Instead of having one entity to keep the record, it gives the authority and trust to all participants or entities joining ― decentralized consensus. In the blockchain world, not only Company A and B but also Company C, D and all participants of a scheme records the transaction. All participants of blockchain continuously and sequentially record transactions on “blocks” which are “chained” to each other.
Through the decentralized consensus, participants can keep records that are the latest and safest. In order to tamper with the records, those who want to do so have to manipulate all or at least half of the ledgers that blockchain users have.
With companies showing increased attention on the technology, consulting firms are already gearing up their efforts to cope with the increasing number of inquiries over blockchain. Samjong KPMG has recently issued a report, titled “Management Paradigm Shift Brought by Blockchain,” to assist domestic firms to come up with appropriate strategies.
In the report, Samjong KPMG said: “Blockchain’s introduction will pose a mega impact all over the society and the impact can be compared to the introduction of the internet 20 years ago.”
“Firms must precisely understand the industrial paradigm shift which will be brought by blockchain and prepare strategies to survive in the blockchain ecosystem,” it stressed.
Being relatively aggressive in embracing the technology is the banking sector.
KEB Hana, Shinhan and KB Kookmin Banks are members of a consortium of some 60 of the world’s largest financial institutions. The consortium, led by a U.S. startup R3, was created to develop commercial applications of blockchain in the financial industry. Other members are Citi Group, Morgan Stanley, JP Morgan Chase, Deutsche Bank and Bank of America.
In August, Shinhan Bank launched a gold bullion trading service based on blockchain technology. In the service, gold investors can receive their certificates not only through physical papers but also through records on blockchain.
Among credit card issuers, KB Kookmin Card said on Oct. 24 that it will launch a blockchain-based individual authentication service in November.
Brokerage houses are also taking a step into the technology. The Korea Financial Investment Association (KOFIA), six securities firms and five fintech startups, recently finished proof of concept (PoC) on individual authentication through blockchain replacing accredited certificate.
The KOFIA said that through the PoC, it learned that blockchain technology enables individual authentication, adding that it will commercialize the concept among its members within the first quarter of next year.
KOSCOM, an IT systems developer and operator of the Korean capital market, also placed its blockchain efforts on track. It said on Oct. 19 that it will develop a blockchain platform that local brokerage houses can use within next year.
In the plan, the KOSCOM platform will be based on the technology developed within the Hyperledger Project, whose members are Intel, IBM and a number of other leading corporations in the world.
Keen interests are on Samsung’s move. Samsung Group is known to have had its financial affiliates embrace blockchain technology as early as October.
Samsung Group has six financial affiliates under its arm _ Samsung Life Insurance, Samsung Fire Insurance, Samsung Card, Samsung Securities, Samsung Asset Management and Samsung Venture Investment. Given those firms’ presence in the Korean economy, market observers say the impact will be huge.
Despite those moves, however, many companies’ approach to blockchain remain at the level of curiosity, with plenty of doubts whether the technology will actually bring a huge change on how the economy works. Companies still have the conventional idea that the technology will remain an alternative method of transaction in the fringe economy dominated by tech-savvy people.
Many leading financial firms contacted by The Korea Times said they are not sure what is going on with the technology, with some admitting that they vaguely understand what blockchain is.
Gentle introduction
William Mougayar, the author of “The Business Blockchain” and advisor or board member to blockchain organizations including Ethereum, explains the complex technology in three different approaches.
“Technically, the blockchain is a database that maintains a shared ledger that can be accessed by different parties,” Mougayar said in an interview with The Korea Times.
According to him, everything today runs on databases. For example, all the banks’ transactions involve one database that has to synchronize with another database. This creates an enormous amount of integration work for all parties involved.
Blockchain can replace that with a commonly shared ledger that participating parties have joint access to. Instead of spending time and resources reconciling two databases and not being sure which one is the most up-to-date, when an update is made, everyone involved is always on the same page in the blockchain world.
Also, blockchain can be a marketplace which is not just for money but for any asset that has digital value. “If you can move money on the blockchain, any financial asset can be transferred or traded on the blockchain. The blockchain becomes a rail or a new network for moving any type of value,” Mougayar said.
Blockchain’s strength lays in its data encryption. In the long term, software applications that are written on the blockchain have the potential to be more secure and effective in combating fraud than traditional applications.
However, it may also be a challenge to firms who fall behind. Since the introduction of blockchain will disrupt any intermediaries that used to provide a trust related function, Mougayar predicted that existing intermediaries will adapt the technology and change, or will be replaced. Also new types of intermediaries can emerge.
“Blockchain is a fundamental new technology that is influencing how the future of the Internet is unraveling,” he said. “Today, we are entering a new phase that might last another 10-15 years, and it will be denominated by the decentralization of trust, enabling value flow without intermediaries.”
Another point that should be considered is its regulatory or legal aspect. Mouyagar stressed that in order for blockchain transactions to be legally binding, regulators should accept the fact that transactions through this new record keeping are bona fide transactions that need to be recognized.
As part of such a perception, fintech and other financial firms are asking the financial authorities to clear their stance on blockchain throughout this year.
Korea is yet to have specified regulations on blockchain and there are views that amendments should be made on existing financial acts. Instead, Financial Services Commission Chairman Yim Jong-yong said on Oct. 24 that the government will help financial firms to form a consortium to study blockchain.