By @Skoylesy: For those of you who follow anything to do with blockchain and blockchain technology, you will know that the space has had its ups and downs in the last couple of weeks.
The exciting news is that two major players in the gold market, the Royal Mint and CME Group have announced a blockchain-backed gold project, and the surprising news is that the R3CEV consortium is apparently under threat.
Making a mint on the blockchain
The Royal Mint and CME Group have announced that they are working on a blockchain project together. The project will see the creation of Royal Mint Gold (RMG) digital tokens which will each be backed by 1g gold.
We will look at the Royal Mint’s announcement in more detail shortly, particularly at how they expect the implementation of a blockchain-backed platform to mean that they are able to remove storage fees.
But the focus of today’s research note is to look at why blockchain is grabbing everyone’s attention.
The use of blockchain technology in the gold space is nothing new, it is something we discussed recently in regard to changes in the gold market and the risks posed to the London gold market.
However, the move by the world’s oldest gold organisation is an illustration of just how complimentary the technology that was first known for backing ‘digital gold’ (bitcoin) and the longest surviving money, really are.
Goldman Sachs and Santander Drop Out of R3 Consortium
In recent weeks, both Goldman Sachs and Santander have dropped out of the R3CEV consortium, whilst a further five (including Morgan Stanley and National Australia Bank) are also rumoured to be about to leave.
R3 is a blockchain company formed of a consortium of near 70 banks and financial institutions (including those focused on insurance). It leads research and development in distributed ledger technology, and is currently raising $150m.
However the move by those mentioned above is a positive sign, and one that shows the blockchain (or distributed ledger technology) industry is maturing. Shake-outs are inevitable in new technology industries as institutions, governments and regulators negotiate their way through new developments and working out what it means for them.
Those companies that are set to leave the consortium are still committed to the ground-breaking technology. Goldman Sachs and Santander are both, for example, still shareholders in Blythe Masters’ Digital Asset Holdings. The former co-led a $60 million investment into the business alongside IBM.
Even CME Group, as mentioned earlier, are involved in multiple blockchain projects, as a member of the industry body Post Trade Distributed Ledger Group (PTDL) (fellow members include the London Stock Exchange, Euroclear and HSBC) and the Hyperledger project.
But what is it about this technology that is so groundbreaking and has the likes of Goldman Sachs investing millions and ex-senior JP Morgan banker, Blythe Masters breaking rank and joining a (well-funded) start-up?
Why are established gold-market participants deciding this is the technology they need to bring the space into the 21st century?
Uncertain about blockchain?
Bettina Warburg, presented a TED Talk over the summer in one of the best explanations we have seen for a long-time, that will help you to understand the power of blockchain technology.
Ultimately blockchain’s genius comes down to its ability to reduce uncertainty in the transfer of value – whether that value is information, a digital asset, a contract note, an agreement or a deed – you name something that is effectively information and it has value.
The exchange of value is something we have sought for millennia to reduce the uncertainty of, and it has resulted in the formal and informal institutions and systems we have today.
Ranging from regulators, to oversized banks like Goldman Sachs, to lawyers, to barter systems.
What is blockchain?
“So what is the blockchain?” Warburg explains it well:
“Blockchain technology is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. It’s basically a public registry of who owns what and who transacts what. The transactions are secured through cryptography, and over time, that transaction history gets locked in blocks of data that are then cryptographically linked together and secured. This creates an immutable, unforgettable record of all of the transactions across this network. This record is replicated on every computer that uses the network.”
Never seen before
The concept of blockchain, something that can be decentralised, can operate autonomously, is auditable and apparently immutable is something that is difficult to get our heads around. The closest description Warburg can provide is Wikipedia.
“We can see everything on Wikipedia. It’s a composite view that’s constantly changing and being updated. We can also track those changes over time on Wikipedia, and we can create our own wikis, because at their core, they’re just a data infrastructure. On Wikipedia, it’s an open platform that stores words and images and the changes to that data over time.”
There are of course further technical details to blockchain, but at its core it is a very similar concept.
“On the blockchain, you can think of it as an open infrastructure that stores many kinds of assets. It stores the history of custodianship, ownership and location for assets like the digital currency Bitcoin, other digital assets like a title of ownership of IP. It could be a certificate, a contract, real world objects, even personal identifiable information….It’s this public registry that stores transactions in a network and is replicated so that it’s very secure and hard to tamper with.”
This is where much of the attraction comes for the gold market. In itself gold is an immutable form of money, it cannot be edited, multiplied and in many ways it is an autonomous currency.
However the market that drives the prices is none of these things. By placing gold on a blockchain, we may get the first steps to a truly autonomous gold market that is about price discovery rather than price creation.
Why do we need it? It’s about value
Bettina points out that much of human behaviour comes down to how we exchange value. This has lead to a huge number of industries developing that are, at their core, about value.
They are about how we attribute value to items, how we exchange value and how we maintain value.
Blockchain will “fundamentally change how we exchange value”.
Why is this? Because the blockchain has a capability that no human-managed organisation has yet managed to master – the removal of uncertainty through technology.
Blockchain is an extension of economics
It still surprises me the number of people who haven’t heard of bitcoin, and even those who have heard of bitcoin are unaware of blockchain. Blockchain is the technology that underpins bitcoin, but it is so much more than the ledger of a cryptocurrency.
Blockchain means that we may no longer have to use the layers of bureaucracy in order to reduce uncertainty. Warburg sees the potential of blockchain as an extension of Nobel Prize winning economist Douglass North’s ‘New Institutional Economics’.
Institutions, in this context, are just the rules (and organisations, whether informal or formal) that implement them e.g. the law or just bribery.
“As Douglass North saw it, institutions are a tool to lower uncertainty so that we can connect and exchange all kinds of value in society. And I believe we are now entering a further and radical evolution of how we interact and trade, because for the first time, we can lower uncertainty not just with political and economic institutions, like our banks, our corporations, our governments, but we can do it with technology alone.”
Knowing that these organisations exist form the rail on which we operate our lives, our businesses and our economies. In the future blockchain will act as the rails that reduce uncertainty, on top of which we will exchange value through digital assets.
The uncertainties of life
“Blockchains give us the technological capability of creating a record of human exchange, of exchange of currency, of all kinds of digital and physical assets, even of our own personal attributes, in a totally new way. So in some ways, they become a technological institution that has a lot of the benefits of the traditional institutions we’re used to using in society, but it does this in a decentralized way. It does this by converting a lot of our uncertainties into certainties.”
For Warburg there are three uncertainties when it comes to transferring value:
1) Not knowing who you are dealing with
2) Degrees of transparency in complex transactions and supply chains
3) Reneging on an agreement – no recourse if it goes wrong
The uncertainty of the unknown party
Today, with many of the transactions we are able to take part in, the uncertainty is reduced thanks to verification. Whether this be by receiving a bank transfer from someone who has been verified by their own (also verified bank) or if it is booking AirBnb which you trust thanks to social verification, GoldCore customer reviews on Ekomi, personal reviews and links to Facebook profiles.
Warburg points out this is a very fragmented system. I have bank accounts in the UK, but if I want to open an additional one in the same country I have to be verified all over again. One verification does not determine the next. “Think about how many profiles you have,” says Warburg.
“Blockchains allow for us to create an open, global platform on which to store any attestation about any individual from any source. This allows us to create a user-controlled portable identity. More than a profile, it means you can selectively reveal the different attributes about you that help facilitate trade or interaction, for instance that a government issued you an ID, or that you’re over 21, by revealing the cryptographic proof that these details exist and are signed off on. Having this kind of portable identity around the physical world and the digital world means we can do all kinds of human trade in a totally new way.”
In the project announced by the Royal Mint and CME Group there is expected to be transparency over the ownership records – to those who have access to the ‘permissioned’ ledger.
Degree of transparency
At the moment there is very little transparency and accountability when it comes to the London Gold Market and it’s over-the-counter (OTC) trading. This can be difficult to contend with given so much physical gold demand is, in its simplest from, based on transparency and trust. Yet as gold product providers such as ETFs and digital gold providers grow in power we appear to forget why we trust gold in the first place.
For many one of the key issues with the way gold products are traded is a lack of transparency over the underlying asset or currency – physical gold.
However, blockchain can potentially be used to bring some of the much-missed transparency to the gold market. This is when we start to use the phrase ‘trustless’ which is a bit of a mind-upset for those who are new to bitcoin and blockchain.
A trustless transaction is where the participants do not need to trust one another, as instead a blockchain (which is verified, immutable and decentralised) is used to monitor and validate the information in a supply chain. Imagine what this could mean in a network of goods and data that currently can be tampered with – medicines, technology, designer items.
This means that in theory it should not matter when you are dealing with a multi-party horizontal supply chain, which each have different infrastructures, about whether you can trust them or not as there is ‘one single truth’.
This is something we have not had before – we have an unbelievable lack of transparency, which currently we rely on layers of verification agents (lawyers, compliance, personal trust) to provide visibility.
“We can create a decentralized database that has the same efficiency of a monopoly without actually creating that central authority. So all of these vendors, all sorts of companies, can interact using the same database without trusting one another. It means for consumers, we can have a lot more transparency. As a real-world object travels along, we can see its digital certificate or token move on the blockchain, adding value as it goes. This is a whole new world in terms of our visibility.”
Reneging – no going back with blockchain
The ability to solve this uncertainty is the application of blockchain that really put it on the map. Smart-contracts are where we are seeing some serious innovation. Currently we rely on legal entities and processes to guarantee our transactions.
Supply finance is one particularly complicated area that is built on layers of organisations and timings in order to facilitate deals. A more familiar example is the process of buying a house – something that is inordinately lengthy, time-consuming and expensive for what is basically the exchange of a good (too often) financed with debt.
Both of these examples rely on third parties to create trust within a transaction, to enforce it because of the checks that are put in place. But blockchain now enables us to do away with the bureaucracy and red tape, as the code acts as the enforcer.
Warburg uses the example of purchasing a smart-phone online:
“Blockchains allow us to write code, binding contracts, between individuals and then guarantee that those contracts will bear out without a third party enforcer. So if we look at the smartphone example, you could think about escrow. You are financing that phone, but you don’t need to release the funds until you can verify that all the conditions have been met. You got the phone.”
And this, I agree with Warburg, is one of the most exciting things about blockchain’s ability to lower our uncertainties:
“…because it means to some degree we can collapse institutions and their enforcement. It means a lot of human economic activity can get collateralized and automated, and push a lot of human intervention to the edges, the places where information moves from the real world to the blockchain.”
Will it change my life?
The reason blockchain is so groundbreaking is because it is both a technological disruption and economic evolution. It has combined the human need to reduce uncertainty with mathematics and technology. Its end result is a system free of layers.
“…the very thing that keeps the blockchain secure and verified, is our mutual distrust. So rather than all of our uncertainties slowing us down and requiring institutions like banks, our governments, our corporations, we can actually harness all of that collective uncertainty and use it to collaborate and exchange more and faster and more open.”
It is difficult to see how it won’t change our lives.
The implications for a world that is affected from the top to the bottom by institutions that are required to manage our mutual distrust, is unfathomable.
But this is where many will take issue. Why would an institution be it government, bank, legal entity, regulator or compliance company decide to invest in and implement a system that is, at its core, designed to do their job?
Why embrace a blockchain that could expose unethical, illegal practices?
Why operate on a blockchain that removes the need for expensive lawyers, compliance officers etc.
In truth the concept of blockchain in practice is far more complex than it initially appears. There can be multiple blockchains. Some operate privately between a select network, some are public (such as the bitcoin blockchain) and others a hybrid of the two.
Blockchains can be implemented to do an inordinate number of processes that we are hardly aware of, the whole time keeping the current status-quo just more efficient. And this is why everyone is looking into using the technology.
That may seem depressing but it will lead to many, many positive developments in terms of ethical behaviours, regulated activities, efficiencies in deal-making and even reducing payment costs.
For many the discussion is beyond this, it’s not will or how but when?
The short-answer is not for a while. Unless you are an avid bitcoin user, trader or enjoy taking part in initial coin offerings. In the long-term it probably will affect your life, but the masses may barely know about it.
At the moment there are few applications (other than bitcoin) that are up and running in the real world. But the possibilities really do appear to be infinite and it is with this in mind that regulators are launching incubators, insurance companies are hosting hackathons, banks are investing in blockchain tech projects and venture capitalists (VCs) are snapping up anything that merely mentions the phrase ‘decentralised ledger’.
For Warburg, we will soon see a world where blockchain technology and distributed, autonomous organisations will “have quite a significant role.”
We concur.
Source
The exciting news is that two major players in the gold market, the Royal Mint and CME Group have announced a blockchain-backed gold project, and the surprising news is that the R3CEV consortium is apparently under threat.
Making a mint on the blockchain
The Royal Mint and CME Group have announced that they are working on a blockchain project together. The project will see the creation of Royal Mint Gold (RMG) digital tokens which will each be backed by 1g gold.
We will look at the Royal Mint’s announcement in more detail shortly, particularly at how they expect the implementation of a blockchain-backed platform to mean that they are able to remove storage fees.
But the focus of today’s research note is to look at why blockchain is grabbing everyone’s attention.
The use of blockchain technology in the gold space is nothing new, it is something we discussed recently in regard to changes in the gold market and the risks posed to the London gold market.
However, the move by the world’s oldest gold organisation is an illustration of just how complimentary the technology that was first known for backing ‘digital gold’ (bitcoin) and the longest surviving money, really are.
Goldman Sachs and Santander Drop Out of R3 Consortium
In recent weeks, both Goldman Sachs and Santander have dropped out of the R3CEV consortium, whilst a further five (including Morgan Stanley and National Australia Bank) are also rumoured to be about to leave.
R3 is a blockchain company formed of a consortium of near 70 banks and financial institutions (including those focused on insurance). It leads research and development in distributed ledger technology, and is currently raising $150m.
However the move by those mentioned above is a positive sign, and one that shows the blockchain (or distributed ledger technology) industry is maturing. Shake-outs are inevitable in new technology industries as institutions, governments and regulators negotiate their way through new developments and working out what it means for them.
Those companies that are set to leave the consortium are still committed to the ground-breaking technology. Goldman Sachs and Santander are both, for example, still shareholders in Blythe Masters’ Digital Asset Holdings. The former co-led a $60 million investment into the business alongside IBM.
Even CME Group, as mentioned earlier, are involved in multiple blockchain projects, as a member of the industry body Post Trade Distributed Ledger Group (PTDL) (fellow members include the London Stock Exchange, Euroclear and HSBC) and the Hyperledger project.
But what is it about this technology that is so groundbreaking and has the likes of Goldman Sachs investing millions and ex-senior JP Morgan banker, Blythe Masters breaking rank and joining a (well-funded) start-up?
Why are established gold-market participants deciding this is the technology they need to bring the space into the 21st century?
Uncertain about blockchain?
Bettina Warburg, presented a TED Talk over the summer in one of the best explanations we have seen for a long-time, that will help you to understand the power of blockchain technology.
The exchange of value is something we have sought for millennia to reduce the uncertainty of, and it has resulted in the formal and informal institutions and systems we have today.
Ranging from regulators, to oversized banks like Goldman Sachs, to lawyers, to barter systems.
What is blockchain?
“So what is the blockchain?” Warburg explains it well:
“Blockchain technology is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. It’s basically a public registry of who owns what and who transacts what. The transactions are secured through cryptography, and over time, that transaction history gets locked in blocks of data that are then cryptographically linked together and secured. This creates an immutable, unforgettable record of all of the transactions across this network. This record is replicated on every computer that uses the network.”
Never seen before
The concept of blockchain, something that can be decentralised, can operate autonomously, is auditable and apparently immutable is something that is difficult to get our heads around. The closest description Warburg can provide is Wikipedia.
“We can see everything on Wikipedia. It’s a composite view that’s constantly changing and being updated. We can also track those changes over time on Wikipedia, and we can create our own wikis, because at their core, they’re just a data infrastructure. On Wikipedia, it’s an open platform that stores words and images and the changes to that data over time.”
There are of course further technical details to blockchain, but at its core it is a very similar concept.
“On the blockchain, you can think of it as an open infrastructure that stores many kinds of assets. It stores the history of custodianship, ownership and location for assets like the digital currency Bitcoin, other digital assets like a title of ownership of IP. It could be a certificate, a contract, real world objects, even personal identifiable information….It’s this public registry that stores transactions in a network and is replicated so that it’s very secure and hard to tamper with.”
This is where much of the attraction comes for the gold market. In itself gold is an immutable form of money, it cannot be edited, multiplied and in many ways it is an autonomous currency.
However the market that drives the prices is none of these things. By placing gold on a blockchain, we may get the first steps to a truly autonomous gold market that is about price discovery rather than price creation.
Why do we need it? It’s about value
Bettina points out that much of human behaviour comes down to how we exchange value. This has lead to a huge number of industries developing that are, at their core, about value.
They are about how we attribute value to items, how we exchange value and how we maintain value.
Blockchain will “fundamentally change how we exchange value”.
Why is this? Because the blockchain has a capability that no human-managed organisation has yet managed to master – the removal of uncertainty through technology.
Blockchain is an extension of economics
It still surprises me the number of people who haven’t heard of bitcoin, and even those who have heard of bitcoin are unaware of blockchain. Blockchain is the technology that underpins bitcoin, but it is so much more than the ledger of a cryptocurrency.
Blockchain means that we may no longer have to use the layers of bureaucracy in order to reduce uncertainty. Warburg sees the potential of blockchain as an extension of Nobel Prize winning economist Douglass North’s ‘New Institutional Economics’.
Institutions, in this context, are just the rules (and organisations, whether informal or formal) that implement them e.g. the law or just bribery.
“As Douglass North saw it, institutions are a tool to lower uncertainty so that we can connect and exchange all kinds of value in society. And I believe we are now entering a further and radical evolution of how we interact and trade, because for the first time, we can lower uncertainty not just with political and economic institutions, like our banks, our corporations, our governments, but we can do it with technology alone.”
Knowing that these organisations exist form the rail on which we operate our lives, our businesses and our economies. In the future blockchain will act as the rails that reduce uncertainty, on top of which we will exchange value through digital assets.
The uncertainties of life
“Blockchains give us the technological capability of creating a record of human exchange, of exchange of currency, of all kinds of digital and physical assets, even of our own personal attributes, in a totally new way. So in some ways, they become a technological institution that has a lot of the benefits of the traditional institutions we’re used to using in society, but it does this in a decentralized way. It does this by converting a lot of our uncertainties into certainties.”
For Warburg there are three uncertainties when it comes to transferring value:
1) Not knowing who you are dealing with
2) Degrees of transparency in complex transactions and supply chains
3) Reneging on an agreement – no recourse if it goes wrong
The uncertainty of the unknown party
Today, with many of the transactions we are able to take part in, the uncertainty is reduced thanks to verification. Whether this be by receiving a bank transfer from someone who has been verified by their own (also verified bank) or if it is booking AirBnb which you trust thanks to social verification, GoldCore customer reviews on Ekomi, personal reviews and links to Facebook profiles.
Warburg points out this is a very fragmented system. I have bank accounts in the UK, but if I want to open an additional one in the same country I have to be verified all over again. One verification does not determine the next. “Think about how many profiles you have,” says Warburg.
“Blockchains allow for us to create an open, global platform on which to store any attestation about any individual from any source. This allows us to create a user-controlled portable identity. More than a profile, it means you can selectively reveal the different attributes about you that help facilitate trade or interaction, for instance that a government issued you an ID, or that you’re over 21, by revealing the cryptographic proof that these details exist and are signed off on. Having this kind of portable identity around the physical world and the digital world means we can do all kinds of human trade in a totally new way.”
In the project announced by the Royal Mint and CME Group there is expected to be transparency over the ownership records – to those who have access to the ‘permissioned’ ledger.
Degree of transparency
At the moment there is very little transparency and accountability when it comes to the London Gold Market and it’s over-the-counter (OTC) trading. This can be difficult to contend with given so much physical gold demand is, in its simplest from, based on transparency and trust. Yet as gold product providers such as ETFs and digital gold providers grow in power we appear to forget why we trust gold in the first place.
For many one of the key issues with the way gold products are traded is a lack of transparency over the underlying asset or currency – physical gold.
However, blockchain can potentially be used to bring some of the much-missed transparency to the gold market. This is when we start to use the phrase ‘trustless’ which is a bit of a mind-upset for those who are new to bitcoin and blockchain.
A trustless transaction is where the participants do not need to trust one another, as instead a blockchain (which is verified, immutable and decentralised) is used to monitor and validate the information in a supply chain. Imagine what this could mean in a network of goods and data that currently can be tampered with – medicines, technology, designer items.
This means that in theory it should not matter when you are dealing with a multi-party horizontal supply chain, which each have different infrastructures, about whether you can trust them or not as there is ‘one single truth’.
This is something we have not had before – we have an unbelievable lack of transparency, which currently we rely on layers of verification agents (lawyers, compliance, personal trust) to provide visibility.
“We can create a decentralized database that has the same efficiency of a monopoly without actually creating that central authority. So all of these vendors, all sorts of companies, can interact using the same database without trusting one another. It means for consumers, we can have a lot more transparency. As a real-world object travels along, we can see its digital certificate or token move on the blockchain, adding value as it goes. This is a whole new world in terms of our visibility.”
Reneging – no going back with blockchain
The ability to solve this uncertainty is the application of blockchain that really put it on the map. Smart-contracts are where we are seeing some serious innovation. Currently we rely on legal entities and processes to guarantee our transactions.
Supply finance is one particularly complicated area that is built on layers of organisations and timings in order to facilitate deals. A more familiar example is the process of buying a house – something that is inordinately lengthy, time-consuming and expensive for what is basically the exchange of a good (too often) financed with debt.
Both of these examples rely on third parties to create trust within a transaction, to enforce it because of the checks that are put in place. But blockchain now enables us to do away with the bureaucracy and red tape, as the code acts as the enforcer.
Warburg uses the example of purchasing a smart-phone online:
“Blockchains allow us to write code, binding contracts, between individuals and then guarantee that those contracts will bear out without a third party enforcer. So if we look at the smartphone example, you could think about escrow. You are financing that phone, but you don’t need to release the funds until you can verify that all the conditions have been met. You got the phone.”
And this, I agree with Warburg, is one of the most exciting things about blockchain’s ability to lower our uncertainties:
“…because it means to some degree we can collapse institutions and their enforcement. It means a lot of human economic activity can get collateralized and automated, and push a lot of human intervention to the edges, the places where information moves from the real world to the blockchain.”
Will it change my life?
The reason blockchain is so groundbreaking is because it is both a technological disruption and economic evolution. It has combined the human need to reduce uncertainty with mathematics and technology. Its end result is a system free of layers.
“…the very thing that keeps the blockchain secure and verified, is our mutual distrust. So rather than all of our uncertainties slowing us down and requiring institutions like banks, our governments, our corporations, we can actually harness all of that collective uncertainty and use it to collaborate and exchange more and faster and more open.”
It is difficult to see how it won’t change our lives.
The implications for a world that is affected from the top to the bottom by institutions that are required to manage our mutual distrust, is unfathomable.
But this is where many will take issue. Why would an institution be it government, bank, legal entity, regulator or compliance company decide to invest in and implement a system that is, at its core, designed to do their job?
Why embrace a blockchain that could expose unethical, illegal practices?
Why operate on a blockchain that removes the need for expensive lawyers, compliance officers etc.
In truth the concept of blockchain in practice is far more complex than it initially appears. There can be multiple blockchains. Some operate privately between a select network, some are public (such as the bitcoin blockchain) and others a hybrid of the two.
Blockchains can be implemented to do an inordinate number of processes that we are hardly aware of, the whole time keeping the current status-quo just more efficient. And this is why everyone is looking into using the technology.
That may seem depressing but it will lead to many, many positive developments in terms of ethical behaviours, regulated activities, efficiencies in deal-making and even reducing payment costs.
For many the discussion is beyond this, it’s not will or how but when?
The short-answer is not for a while. Unless you are an avid bitcoin user, trader or enjoy taking part in initial coin offerings. In the long-term it probably will affect your life, but the masses may barely know about it.
At the moment there are few applications (other than bitcoin) that are up and running in the real world. But the possibilities really do appear to be infinite and it is with this in mind that regulators are launching incubators, insurance companies are hosting hackathons, banks are investing in blockchain tech projects and venture capitalists (VCs) are snapping up anything that merely mentions the phrase ‘decentralised ledger’.
For Warburg, we will soon see a world where blockchain technology and distributed, autonomous organisations will “have quite a significant role.”
We concur.
Source
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