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Banks have a shot at a new and radical transparency that could recast the concept of identity and create new markets where the boundaries between transactions, compliance and auditing have been dissolved.
The move to a sort of online connected society has exacerbated the problem of managing identity; meanwhile, new approaches are emerging in the form of shared ledger systems, which bring us to a point where everybody can handle the database of everything.
Dave Birch of Consult Hyperion has been described as a titan of digital identity (but only by myself, he says). He has used metaphors such as "glass banks", "translucent databases" and "ambient accounting" to show that radical transparency can provide banks with the keys to an as yet undiscovered kingdom.
Birch told IBTimes UK: "There is an identity problem and it's getting worse and worse. Banks would be good people to do something about it. The fact that they are not doing anything about it at the moment, well that's slightly worrying because you can see the opportunity for third parties to come in. Meanwhile, there is another technology that comes along that offers a way of having a shared ledger, accessible so everybody can see everything."
He said he finds blockchain interesting in three key ways. Firstly, a shared ledger environment has a fundamental robustness. For example, if Natwest's system was to go down, this wouldn't matter if it were interoperable with Lloyds' version of it. "So you have this robustness and that's very interesting – doesn't change the world, but it's interesting."
Secondly, the consensus forming process across these multiple copies provides a very radical kind of transparency that never existed before. Birch said: "In addition to the sort of shared ledger, meaning 'I'm Barclays, I KYC somebody, I put them into the ledger; you're Lloyds, you KYC somebody, put them into the ledger', now we have this immutable record of these KYC'd identities and as time goes on, the transactions associated with them and their histories. But of course, not only can you and I see that, but the regulators can see it as well. Salome Parulava, an expert on blockchain who works for us, describes it as 'dissolving the boundaries between compliance and auditing'.
"You don't have these snapshots any more; you can constantly traverse the ledger looking for whatever it is you are looking for: unusual patterns of behaviour, whatever it is you are doing."
Birch said if blockchain technology could cut two thirds of the cost of KYC/AML, that alone would equate to billions upon billions of pounds. "These are not sentimental people; if there's a cheaper way of doing something they will do it," he said.
The third interesting area, waiting upstream, is this concept of smart contracts. "So the idea is that the ledger contains not just the data, but contains, in essence, programs as well. So now all of a sudden these things on the ledger become smart. My identity on that ledger becomes a smart object that can execute functions according to certain events, triggers and so on. So you have this platform for something really disruptive, none of us have any idea where that's going to go."
Code is law
Birch imagines a context where ledgers can follow rules themselves, where they are actually the new regulators. In such a completely transparent world, an entirely new concept of finance might exist. He said: "Say you and I want to put some sort of derivatives contract on the blockchain between each other – where do we get that contact from? We download it from the FCA. The ledger won't execute a contract that is illegal in some way, because there is simply no code for it. It's that Lawrence Lessig 'code is law' sort of thing."
The way finance might evolve is something Birch says he has become obsessed by. "I'm actually writing a book about this at the moment." And he draws upon a wide and eclectic range of sources to corral together insights. "Are you old enough to remember the lateral-thinking guy, Edward de Bono?" he asks me.
In the early 1990s, de Bono wrote a pamphlet called the IBM dollar, which argued that companies, instead of issuing equities or debt, could issue private currency as a claim on products or services produced by the issuer. You could buy IBM stuff with IBM dollars, or trade IBM dollars in the market place with HP dollars and Microsoft dollars. Birch said: "Because financial exchange markets are more efficient than capital markets, you could have this fantastically transparent, fantastically efficient market."
Birch suggested the shock of the new we currently face could be in some ways analogous to the time when medieval trade fairs shifted from places where people exchanged goods, to places where people exchanged money. "The idea that people would have wealth that just bits of paper was astounding to the people at the time. I wonder if we are at that shock point again. It's a new kind of market that's going to come in, structured around transparency with the potential for disruption of the smart contracts downstream."
Locating a starting point into such a radically new paradigm is bewildering, however. This is the problem facing the team at R3; the starting point of managing some particular derivative or bond via a blockchain requires legal identifiers to issue it.
"I'm not sure there is a small step and I think that's why you see consortia like R3 as the focus going forward," said Birch. "Because to even do that first thing, to have a liquid market in a simple corporate bond, you've got to have 40 international banks as part of that market, which means 40 lots of regulators and compliance.
"That's why I'm very interested in transparency. Let's imagine another kind of traded instrument –some sort of corporate bond or something – which is going to exist in this very different kind of market, radically more transparent, where you have a ledger that's shared with the regulators.
"This is just my view, but I think where you get started is the transparency side. So does that mean you will be trading bonds more cheaply? Probably not. Is it faster or more efficient? That's not obviously true. But is it more transparent? Does it mean a different regulatory structure? Does it mean the overall cost of that market is substantially lower, even if the transactions themselves aren't any cheaper or quicker? That seems to me a realistic hope."