A distributed ledger called blockchain could be as revolutionary as the Internet itself. It promises to transform a wide range of industries, enabling loans without banks, contracts without lawyers and stocks traded without brokers.
If blockchain works as it is claimed, and no one really can cheat, and transactions can be carried out automatically with high levels of safety, then it could potentially disrupt whole new areas outside of pure finance that in the past have relied on trusted third parties.
Such services open up the opportunity for a new group of start-ups — including some in London — to become global giants.
Although the VC funds that have invested in the greatest number of Bitcoin and blockchain companies are almost all in the U.S., funds in London such as Mosaic Ventures, which invested in Blockchain and Blockstream, and Index Ventures, which backed U.S. companies Xapo and BitPay, are placing big bets of their own.
Entrepreneurs from outside London, such as Pascal Gauthier, the ex-COO of French adtech company Criteo, are coming to the UK capital to set up Bitcoin and blockchain companies.
“The great thing about Bitcoin is that you don’t start with a disadvantage compared to the U.S.,” says Gauthier, who chose London for his new venture, Challenger Deep Project, a company that aims to deliver market news, data and analysis about Bitcoin when it launches in September.
London not only offers access to capital and talent from the financial sector, the UK government’s policies are friendlier than those in the U.S., where Bitcoin companies are forced to shell out huge legal fees, says Gauthier. That is why he considers the UK capital “one of the top places to start a Bitcoin company.”
Among other aspirants is Blockchain, the London-based company behind the Bitcoin wallet with the most users globally — some 3.5 million people. The company also claims it is the most popular Bitcoin developer platform, home to some 24,000 companies (see box).
The Google Of Blockchain
Blockchain: The company offers a search engine that helps people track assets in the blockchain’s decentralized database, a bitcoin wallet used by 2.4 million people and a developer platform.
BlockOps: Compliance and business intelligence for blockchain.
Blockverify: Blockchain-based anti-counterfeiting technology. The company has been testing its technology in pilot programs with both a Swiss pharmaceutical company and a London-based company specialized in beauty products.
Blockchain Bio: Provides weekly market intelligence reports on the cryptocurrency industry.
Blockvue: Tools to extract insights from blockchain.
BTC.sx: Bitcoin trading platform that allows holders of the alternative currency to place long and short positions. Finalist in SWIFT Innotribe’s London Start-Up Challenge 2015.
Coinfloor: UK-based bitcoin exchange. Backers include Passion Capital, TransferWise co-founder Taavet Hinrikus and Adam Knight, co-founder of Social and Sustainable Capital.
Challenger Deep Project: This stealth-mode company, founded by Pascal Gauthier, Criteo’s former COO, aims to become the “Bloomberg” of cryptocurrencies when it officially launches in September.
Elliptic: Custodian for blockchain assets. Its offerings include a vault service that has international accreditation from KPMG. Finalist in SWIFT Innotribe’s London Start-Up Challenge 2015.
queueco: Market maker for digital currencies.
But that is not all. The company, which last October raised a $30.5 million Series A round led by Lightspeed Venture Partners with participation from serial entrepreneur Richard Branson and Mosaic Ventures, among others, offers a search engine that helps people track assets in Blockchain’s decentralized database and has some 90% of the market in global search of blockchain.
“We organize information, make it accessible and build software that enables people to leverage the protocol in their business or life,” says CEO and co-founder Peter Smith. “We are agnostic as to their usage and remain focused on that critical task of organizing information and building software that makes it easy to use the protocol. In a way, you could think of us to Bitcoin as what Google is to the Internet.”
Other companies in the UK’s financial services sector — both big and small — are hoping to mine the Bitcoin and blockchain opportunity (see the table).
Even traditional banks are testing blockchain in London. UBS has set up a crypto lab in Canary Wharf at Level39, which bills itself as Europe’s largest fintech accelerator, to investigate the use of distributed ledger technologies for smart contracts and everything from settlement and clearance to securities and loans.
The City — one of the world’s global financial services hubs — can’t afford to ignore Bitcoin’s transformation from an alternative currency into an open-source, distributed financial exchange mechanism that can handle payment processing, deposits, withdrawals/overdrafts, foreign exchange, float, transfer/wire services, title insurance, exchange trading, collections and notary services.
My Smart Bond Is My Word
Rather than viewing blockchain as a threat, traditional financial institutions could use the technology to their advantage, because it has the potential to enhance transparency and trust while significantly reducing transaction and processing costs, says Alex Batlin, Group CTO Applied Innovation (R&D) and Market Research Director at UBS and head of the bank’s crypto program at L39.
“Blockchain assets including crypto cash can be made much smarter than normal cash … (e.g. transactions that self-pay VAT). There are huge advantages to having transactions on the chain rather than off,” says Batlin. Cutting out the middleman reduces cost and risk and increases the speed of transactions. “If we can settle a few days faster for our clients we can better manage their capital with less risks.”
The bank is also testing a “smart bond” using a platform called Ethereum, a network developed by Vitalik Buterin, which can be used to codify, decentralize, secure and trade just about anything. So what does a “smart bond” on blockchain look like? “The terms are inside the digital asset — who to pay and when and how much,” says Batlin.
How Blockchain Is Used
The most well-known use of blockchain is as the technology that underpins Bitcoin. Bitcoin relies on a peer-to-peer network that authenticates all transactions using blockchain — effectively a ledger of record. Every transaction is processed by the network. All of the transactions in this “block” are processed through a highly complex mathematical process to generate a hash that also contains every previous block (hence “block chain”), so the integrity of the system is built in. While Bitcoin is one use, blockchain technology also makes it possible to transfer property rights such as shares without the involvement of a trusted intermediary using “smart contracts” that will embed the contractual terms.
Other uses being developed on UK start-up Blockchain’s platform include:
- Asset tracking;
- Connecting Bitcoin ATMs;
- Settling transactions;
- Placing bounty prizes inside games;
- Digital contracts transferring value;
- Banks, and others, are using blockchain for internal settlement.
UBS is additionally running a number of experiments to determine not only if smart contracts can work technically but “whether there is a business case,” he says.
A whole raft of issues have to resolved before smart contracts are put in use, he says. What happens in a cross-border transaction when one party fails to settle and the other sues? Which country has jurisdiction? And would a judge accept a contract that has been notarized in a digital ledger? “Nobody knows,” says Batlin. UBS said it was planning to organize a mock trial at L39, with lawyers and technologists, to try to identify the issues and solve them.
What Need The Current Banking System At All
The impact of blockchain on the role of banks — including central banks — is potentially huge. “The Bank of England and the FCA [UK Financial Conduct Authority] are interested in these technologies and are taking them seriously,” says Batlin, noting that the Bank of England has teams looking at how sterling might be placed on blockchain. “If you follow this to the logical conclusion potentially you don’t need the current banking system at all.”
The introduction of blockchain could also change the role of central banks to a dynamic one where compliance code is baked into the digital ledger, says Batlin.
UBS is working with start-ups to test the technology “What we are running this year is an experiment — we are not expecting a production outcome.” says Batlin.
It doesn’t have to be a zero-sum game in which disruptors win and banks lose, says Batlin. “My focus at the lab is to determine what are the roadblocks and socialize the community to the challenges so we can address some of those aspects and apply blockchain to real-world business problems.”