We're just about to start Blockchain Week – and the breadth and depth of organisations represented this year adds weight to the hype surrounding the blockchain technology's 'big moment' in 2017.
Cutting through that hype isn't always easy but here's what we know…a blockchain is a shared database (sometimes called a distributed ledger) that records the transactions validated across a peer-to-peer network. The database technology works on a network like the internet and is "shared" or made available to each member of the network: members install the application locally and hold a copy of the database. Once a transaction is validated by the network it forms an immutable block of data that is added to the database. Advanced cryptography is used to keep transactions secure. Think of it as next-generation business process software used to automatically validate transactions taking place across a network without the need to defer to third party intermediaries. Blockchain networks can be "permission-less": open to anyone (e.g. Bitcoin) or "permission-only" – closed networks where members join on an invite-only basis.
While the cryptocurrency of bitcoin is best known as the first iteration of blockchain, 2017 is suggested as the year when 'blockchain 2.0' takes flight – disrupting processes across the gamut of financial services and beyond into other industries.
Because any validated transactions added to the database are instantaneously updated across all parties' copies, transactions can be completed more quickly. Because all details on the database are transparent, everyone's data is made more robust and secure. Financial services organisations, in particular, are very interested in blockchain technology as a way to makeover creaky back-office IT systems or streamline other infrastructure reliant on third party intermediaries (e.g. settlements and stock exchanges).
For me, one of the most exciting elements of blockchain is smart contracts. It's a misnomer as smart contracts are not contracts in the legal sense: they are computer-coded instructions that sit on a blockchain that articulate contract terms and which then execute those terms when an event occurs. For example, funds would be transferred in accordance with the terms of an insurance policy when a validated insured event (e.g. stolen mobile phone) happened. They extend blockchain's use beyond a shared database of transactions to the ability to execute the terms of a contract automatically. The use of smart contracts is still in its early phase and so raises a number of legal questions to be answered: will developers of smart contracts be able ensure their code meets the regulatory requirements relevant to the transaction taking place across the network and will lawyers be required to vet their code? How will the inherent transparency of all blockchain 2.0 applications being open source interact with the privacy rights of users? How will the immutability of the blockchain deal with certain legal principles such as the invalidation of contracts because of fraud or duress?
Regulation will no doubt play a large part in turning the hype around widespread use of blockchain into reality. We are already seeing financial regulators engage with innovative financial products like those based on blockchain – the FCA's creation of a 'regulatory sandbox' as part of its Project Innovate initiative with the Bank of England being one such example. A stronger regulatory regime will no doubt help in blockchain's transition to the mainstream – and it is hoped that we'll see more progress in this arena in 2017.
The main conference at Blockchain Week will see arts organisations and charities join the bankers and techies – suggesting that the use of blockchain in the near future won't be limited to financial services, or even the private sector. In order for the 'big moment' of blockchain to arrive, it's clear that the regulatory and legal hurdles need to be addressed – and soon.