Blockchain is the hottest bit of jargon in the financial world and potentially the most exciting development since the invention of the internet. According to one expert, it ‘promises to do for finance and payments what the shipping container did for world trade’. But what the devil is it, and if it’s really that big, how the devil do you invest in it?
Anyone who knows about blockchain starts by throwing around phrases like ‘distributed ledger.’ The simplest way to visualise what they’re talking about is to imagine a giant public spreadsheet. Everyone involved in a transaction can see what’s in it and can make changes based on actions they’ve taken or transactions they’ve completed. When certain cells in the spreadsheet are filled, they automatically generate a contract or apayment.
Ownership of the blockchain is not centralised — no one ‘owns’ it. Rather it is ‘distributed’ between the parties involved and, most importantly, it’s designed to be tamper-proof. You can use it to record who owns a physical or digital asset (a pound sterling, a house, a truckload of goods, or a unit of virtual ‘alt currency’ such as a bitcoin). Once ownership of the asset is transferred, all parties are alerted and the transaction complete.
As you might expect, the reality is a little more complicated than that. Dr Windsor Holden of Juniper Research told me that the reason blockchain technologies are so revolutionary is that they combine these ledger functions with leaps forward in ‘transparency, security and speed’.
According to Peter Randall, chief executive of blockchain venture SETL, blockchains can handle more than 100,000 transactions per second. Even in the case of buying a house, the contract, the bank transfer and the transfer of ownership could all happen (if the parties so wished) in a matter of milliseconds.
It’s Randall who offers the analogy of shipping containers, which revolutionised the logistics of international trade in the 1960s and 1970s. Blockchains, he says, will effectively become a new standard ‘that will remove significant amounts of complexity and thus expense’ from the current process of exchange.
But isn’t blockchain really all about Bitcoin?
This story is most definitely not just about bitcoin and other alt (or ‘crypto’) currencies, as early reporting suggested it might be. Holden says: ‘The alt currency applications are and will remain a small part of what the blockchain is about. For all the hype around decentralised crypto-currencies, in reality they account for only a tiny proportion of global exchange transactions.’
Blockchain is still in development, but Randall says it will certainly become mainstream in banking and finance over the next decade. The way banks currently operate (made all the more elaborate by mandatory anti-money-laundering checks), sending money from place to place can be slow, unreliable and expensive. That’s because, as Marcus Treacher of San Francisco-based blockchain company Ripple says, ‘banks are still using antiquated systems that don’t inter-operate, so they can’t move money easily between them’.
Ripple is now partnering with 75 banks in Europe, North America, the Middle East and Asia to change this. In July 2016, Canada’s ATB Financial sent C$1,000 to Germany’s ReiseBank over a platform developed by Ripple, which they claimed was the first real-money international transfer using blockchain technology. It took only 20 seconds to complete, compared to the several days most international bank transfers take to clear.
The Bank of England is now in this game as well: its FinTech Accelerator is trialling Ripple’s technology to make cross-border payments and currency transactions more immediate. According to Treacher, this collaboration marks the first instance of a central bank exploring blockchain technology. And there are also several trials aimed at increasing the speed and transparency with which property purchases are recorded officially recognised.
But André Brunner, of fintech consultancy Capco, warns: ‘Blockchain by itself does not solve any business problem. The industry is still looking for the first “killer app” which will take blockchain mainstream.’
Much as HTTP (hypertext transfer protocol — the building block of online data communication) took the internet into the mainstream almost 30 years ago, the potential uses for blockchain are still being explored. Legal structures will also need to change to fit the challenges that it brings.
OK, I’m convinced.so how do I invest?
First, via crypto-currencies: even though these digital means of exchange are only a small part of what blockchain is, they’re still the least expensive way to get exposure to the companies building the blockchain such as Ripple and Ethereum, which issue ‘coins’ or tokens that you can buy on exchanges such as Kraken and Coinbase. Caveat emptor applies here: a product built on Ethereum’s code base was compromised last year by a fraudster taking advantage of a loophole in the structure. More than 2.4 million units were vacuumed out of the system by someone who understood a kink in the code and took advantage of it.
Next, crypto-currency syndicates: Hub Culture (disclosure: I am Hub Culture’s executive editor) has several funds offering syndicate exposure to the crypto-currencies using Hub’s own digital currency, called Ven. Syndicates include Ethereum, Ripple and Dash. But again, this isn’t for the novice. Hub Culture says the syndicates are for sophisticated or professional players seeking ‘speculative investing’. The entry point is low: you can buy into the syndicates for as little as $100, but beware: even Ripple’s coin has suffered a 90 per cent drop in price, from which it only recently recovered.
Then there’s crowdfunding: if crypto-currencies are still a step too far, you might consider crowdfunding investment in fintech companies that are developing blockchain ideas. Crowdfunding platforms range from the lower-end FundersClub and Crowdcube with entry points at $3-5,000, to AngelList at $2-300,000. If you want to experience the blockchain yourself, you can try crowdfunding platforms where collected funds are accounted for and tracked via a blockchain. Blockchain-based crowdfunding allows startups to raise funds by creating their own crypto-currencies; investors receive digital tokens which represent shares in the project, with the hope that the shares will appreciate. Check out OpenLedger and Wings.
And Venture Funds? Blockchain-related venture capital funding has reportedly already passed the $1 billion mark. Funds specialised in the fashionable fintech sector are highly likely to be looking for blockchain companies to invest in. Deutsche Börse recently announced the launch of a dedicated fund called DB1 Ventures and Citibank has a Silicon Valley-based fund called Citi Ventures. For UK-based funds, check out Santander InnoVentures and a new fund from Motive Partners.
And finally, equities: you’re probably hoping by now that there’s a simple choice of blockchain-related shares you can buy. Not yet. One of the few is Coinsilium Group, a London-based ‘accelerator’ that backs early-stage blockchain ventures: the shares trade on the Nex Exchange Growth Market. In Canada there’s BTL Group, offering blockchain solutions across multiple sectors from banks to fantasy sports; and First Bitcoin which acquires bitcoin startups and funds companies developing bitcoin software and hardware.
There are bound to be more blockchain-related shares in a couple of years time — but bear in mind that they may also experience their own dotcom-style bubble.
Summary: blockchain will change finance for ever, and for the better. Investing in it now may feel like prospecting for gold in a freezing mountain stream, but if you’ve got a strong constitution and can sift through the financial jargon, you may just strike it rich.