Blockchain has the promise and potential to lead the next wave of banking and finance. But how long will it take before it comes to full fruition?
By Ariel Chew
Blockchain, a distributed ledger technology (DLT), made its foray into Malaysia circa 2012/2013 following the popularity of bitcoin.
Blockchain is the foundational technology layer that powers bitcoin, the digital crypto-currency that has revolutionised the electronic payment industry. Although bitcoin was the first to use it, blockchain has gained tremendous traction and is now used by hundreds of applications worldwide.
By doing away with intermediaries and offering a trusted network of shared data, blockchain is revered for enabling easy sharing of data that are highly secure and independently verified by third-parties.
It also provides an established tamper-proof audit-trail of the transactions, improved transparency and increased resiliency as there is no single point of failure. With fewer reconciliation errors, it also reduces costly mistakes.
Blockchain in Malaysia
“Five years ago when blockchain first hit our shores, Malaysia was one of the global leaders in mining bitcoins and secured the network whilst doing so”, said Mark Smalley (right), Co-Founder and CEO at Neuroware.io (part of the R1 group), a blockchain infrastructure provider incorporated in Delaware USA and based in KL.
“However, it’s now estimated that over 60% of the entire network hash-rate is being produced in China,” he added.
Smalley, who started developing blockchain apps five years ago, co-founded Neuroware.io with Johnny Mayo and Adam Giles in 2014, with a mission to help businesses explore, adopt, and implement DLT in Asia.
The Blockchain Embassy Asia (BCE.Asia), which first took form as an informal bitcoin meetup community, later evolved as an official consortium of technology providers, banks, legal advisers and such for the SEA region.
R1 is one of the nine founding members of BCE.Asia, as well as RHB Banking Group and Maybank.
“Being focused on digitalisation, it is important for us to ensure our business is continuously updated with the best that the market has to offer,” said Rohan Krishnalingam (right), Chief Operations Officer, RHB Banking Group
“At present, we are exploring blockchain technology as means to optimise our services, such as in the area of remittance, to offer low cost and fast fund transfers. We are also researching on potential usage of blockchain to provide crypto-trustee services,” he pointed out.
“We also believe blockchain will have a significant impact in the next three to five years and we are closely exploring and monitoring developments and use-cases that can benefit us as a bank and industry,” added Rohan.
Blockchain & Equity Crowdfunding
At this point in time, blockchain is still at the proof-of-concept stage and the Securities Commission of Malaysia (SC) has yet to come up with a regulatory framework for it.
On a positive note, Tan Sri Ranjit Ajit Singh (left), Chairman of Securities Commission Malaysia has commented on the promising potential of blockchain technology at the SCxSC Digital Finance Conference 2016 in Kuala Lumpur.
“Today, our capital market systems are built on multiple ledgers, or systems of record which require constant reconciliation. With DLT, there could potentially be a single ledger, which is distributed across all parties in the value chain and kept in sync near-real time,” he said in his speech.
“DLT could be leveraged to build a more resilient financial infrastructure, more effective clearing, settlement and depository functions and new methods to encode legal agreements and obligations,” highlighted Tan Sri Ranjit.
“DLT could also help evolve our infrastructure for the unlisted and OTC markets. Using our equity crowdfunding (ECF) market as an example, a distributed ledger could be used as an ‘equity register’ for equities of SMEs raising funds through ECF, and this register could later form the foundation for a secondary market for ECF equities,” he suggested.
One of the six ECF operators that were granted licenses by SC 18 months ago is ATA-Plus, the world’s first fully regulated and licensed blockchain-enhanced ECF platform, which was developed by Neuroware.io.
“With this, Malaysia became the first ASEAN nation to regulate this crucial foundation for the fintech ecosystem. In combination with the recently licensed P2P operators, this will likely help to form the basis for new secondary markets that will be springing up within the region soon,” said Smalley.
He added that ATA-Plus is the first licensed ECF platform in the world to not only use blockchain technology for data storage backups, but by also accepting direct Bitcoin investments. ATA-Plus is also one of the nine founding BCE.Asia members.
Potential and Risks
Blockchain has many applications and uses across a range of industries, be it banking, healthcare, accounting, legal, governance, logistics, gaming, assets and insurance.
Analysts, such as McKinsey, are predicting savings of up to US110 billion in three years in the financial services industries. Not surprisingly, 80% of top banks are launching DLT projects this year according to the World Economic Forum, while IBM reports that 15% of large banks will use blockchains this year, and 65% of banks will have blockchain trials by 2020.
Roy Ng (left), co-founder of ReCAL, a technology solutions provider that simplifies credit origination and know your customer (KYC) on a mobile first platform, believes that the biggest real world application of blockchain would revolve around the equity post-trade settlement flow.
“Despite the online and digital nature of equity trading, settlement still requires three days at the very least due to the need to reconcile the ledgers of the respective value-chain components i.e., brokers, counter-brokers, stock exchanges, banks, etc.,” he said.
“However, for blockchain to realise its full potential, there needs to be an end-to-end flow compliance to the agreed blockchain implementations by all stakeholders,” Ng commented, adding that this is usually challenging to implement in the real world.
In addition to implementation challenges, other risks include the extensive education needed to understand and implement this complex technology, regulatory implications and the emergence of competing platforms.
The Way Forward
According to a 2016 joint report by JP Morgan and Oliver Wyman called “Unlocking Economic Advantage with Blockchain: A Guide For Asset Managers”, there will most likely be four successive waves of deployment for blockchain technology spanning 2016 to beyond 2030.
“The first two waves will most likely focus on the usage and sharing of data (2016-2025), and the third wave will be revolved around a growing confidence in DLT leading to an expansion to critical infrastructure (2020-2030). The fourth wave is the most ambitious and uncertain, where a truly decentralised financial ecosystem emerges,” the report stated.
The experts acknowledge that the adoption of blockchain technology would not happen overnight, and its implementation would mostly be driven by multinationals.
Still, PwC Malaysia, in their blog post on blockchain, advocates that players can better prepare themselves to fully realise the potential of blockchain by moving away from manual operations and adopting a technology-focused strategy.
As for Smalley, his mission is clear, “I’m committed to continuous education for as long as my time and resources allow. I think what’s most important now is that the community continues to develop collaborative use-cases that fully benefit from the neutrality offered by blockchain technology – and that we then use those working examples as ways to better educate consumers, so that they can fully embrace this technology.”
– Blockchain first gained visibility in Malaysia
– Malaysian fintech start-ups started discussing the opportunity in using blockchain for payments.
– Organisations such as “hackinthebox” (HITB) organised hackathons around blockchain.
– The first blockchain consortium was announced by Microsoft and several banks in Taiwan.
– DBS and Standard Chartered were one of the early adopters of blockchain where they implemented blockchain-based trade financing in Singapore.
– OCBC performed interbank transfers using blockchain.
– The official set-up of Blockchain Embassy Asia as a consortium of tech providers, banks, legal adviser and such for the SEA market.
Source: RHB Banking Group