Blockchain

What Are Blockchains?

When people talk about blockchains, at the broadest level, they mean a
network of databases spread across multiple entities that are kept in sync,
where there is no single owner or controller of the data. The databases tend
to be append-only, that is they can be written to, but historical data can’t be
altered without broad agreement from the participants of the network. This
means that a user or system administrator in one entity can’t alter data held
on a blockchain without agreement from the other participants.

Benefits of Blockchains

In situations where trust levels are low, due to differences in operational

and regulatory landscapes, such as multi party cross border transactions,
the transparency offered by blockchain could help by making the lack of
trust less of a hurdle in these interactions.

Efficiency

Blockchain technology could improve efficiency when financial entities are

reconciling trades. Typically a bank will nominate one of its systems as the
golden source of trade data for any particular security. That golden source
could be an in-house built system or an off-the-shelf solution. Reconciling
this against an external party (whether that’s the trading counterpart or an
industry third party) has drag and inefficiencies due to system
incompatibilities and processes. This leads to reconciling using the “best
common technology” – typically end-of-day batch files. A blockchain will
mean that the agreed trade data is already in-house, removing the need to
reconcile externally, as the blockchain has already done that in real time.

Transparency

With trade data published to a common platform, regulators or other

interested parties can plug into this and get a real time view of the trades.
This gives regulators oversight into one common source, rather than
receiving reports in different formats at different times from each
institution. The transparency offered by blockchains could help regulators
detect systemic risks sooner.

Reslience

Storing data over a large number of nodes benefits the resilience of the data
– the larger the number of blockchain participants, the more robust the
data, with longer life. In this respect, a blockchain system is similar to a
massively replicated database.

Governance and Trust

 Blockchain
In a blockchain system, a majority of participants need to agree on data
being added before it becomes part of the definitive blockchain. This is very
different to central, often secretive ledgers held and controlled centrally.
When multiple parties have a say over what data is written, the ability to
alter data, or remove dubious data, it creates a more honest system.

How blockchains can benefit financial services

Take for example a centrally cleared, over the counter trade like an interest
rate swap. For the entire lifecycle of a trade, which could last many years,
the two parties to the trade and the clearing house keep track of events,
including:
Initial booking of the trade
Calculation of the premium paid
Payment of the premium
Calculations of accrued interest for the fixed and floating legs of the trade
on each coupon date
Payment of interest on each coupon date
Foreign exchange revaluation entries during the course of the trade
Termination of the trade

How It Works

To be a part of a blockchain system, participating entities will each install

and run some software that connects their computer or server to other
participants in the network. By running this software, the participants act
as individual validators, called network nodes.

The network of nodes manages the database, also known as the blockchain.
The nodes are entry points for new data, as well as the validation and
propagation of new data that have been submitted to the blockchain

But in a distributed system with no golden source of truth, how does the
network come to consensus, or agree on what data to write on the
blockchain? How do you resolve a situation where equivalent people can say
conflicting things, but there is no boss to arbitrate?
The answer – using protocols. In a blockchain system there will be protocol,
i.e. pre-agreed rules for technical and business validity of data to be
written, and a rule to determine how consensus is achieved.

A block is created by grouping similar transactions together. These blocks

are added in chronological order, in a way that resembles a chain, hence
the name blockchain. The nodes then store these new blocks on the local
blockchain database on their computer or server.
 Blockchain
What about conflicting data entries?

One node may receive two pieces of mutually conflicting data. For example
A is, “I sell all my shares to Alice,” and B is, “I sell all my shares to Bob.”
Each node will have to keep one and reject one as they cannot both logically
coexist.

An intuitive solution is for nodes to act on time priority, keeping the first
and rejecting the second. However different nodes may hear the messages
in different orders. The messages will propagate and some proportion of the
network will believe A has happened (and B hasn’t) and the rest of the
network will believe B has happened (and A hasn’t). The network is in an
unstable state.

Across a network, there is a possibility that two different blocks are added
at the same time by different nodes, creating a fork in the chain. In this
case, there is a ‘consensus rule’ that helps nodes figure out which is the
block they should believe. In bitcoin, the rule is called the ‘longest chain
rule’ – each node acknowledges the legitimacy of both contender blocks and
the situation resolves when the next block is built on one of the contenders.
The longer chain becomes part of the de-facto blockchain.

Public Versus Private Blockchains

In finance and trade, in general, we have a set of known entities who are
trying to legitimately do business with each other and who don’t have a
problem with revealing their identity. The issue before blockchains is that
they may struggle to reach a common understanding of events. To solve
that, they have always used third parties, such as banks and escrow
services, which then involve a high amount of risk, or avoid the situation
altogether.

Public blockchain, e.g. Private blockchain

Bitcoin
Anyone can write Limited set of known entities
can write
Anyone can read Read-access is configurable

Bitcoin

The first widely known and discussed blockchain was The Bitcoin
Blockchain, and it serves as the de-facto example of how blockchain systems
can work. The Bitcoin Blockchain is a database file that sits on thousands of
computers worldwide, where the individual copies are kept aligned through
the rules of the Bitcoin protocol. The Bitcoin Blockchain file (actually it is a
series of files, because large files are difficult to manage) contains a list of
 Blockchain
every single bitcoin transaction that has ever happened: it is the ledger of
record for Bitcoin and has been growing since January 2009.
The Bitcoin Blockchain is an open or ‘permissionless’ database. That is,
should you wish to write entries to the database you may do so without
signing up, logging in or asking permission from anyone in charge. In
practice, this is done by downloading some open-source software and
running it. By doing so, your computer will connect over the Internet to
other computers running similar software. The software lets you start
sending and receiving bitcoin transaction data with neighbours, and allow
you to add data to the bitcoin blockchain, by playing a computationally
intensive lottery known as ‘mining’.

When Blockchains Can be Used

blockchains have yet to find their niche for single entities where data
governance is under one structure as general databases perform
adequately. However, we see a role for blockchains when there are
concerns around rogue employees, more secure logging (for any
application), and also where regulators want to “plug in” to institutions to
validate and see transactions in real time.
For example, currently system administrators with the right level of access
can alter a database, and then modify log files to remove all traces of their
activities. In the case of a distributed database running with nodes in
separate data centres, a system administrator would need to have access to
each of the data centres to make a change to an organisation’s blockchain –
a significantly harder task.
Improve National and Corporate Governance
Blockchain systems have a lot more potential between entities, i.e. where
entities need to work with other entities to achieve a common goal. This is
due to governance: Within an entity, bosses and the traditional hierarchy
can mandate a golden source of truth and resolve conflict. However where
entities interact, there needs to be another method for conflict resolution.
The potential for blockchains to add value is higher if used collaboratively
across an industry or a workflow.
Reduces risks of double invoicing: It can protect the interests of entities
within a nation if used appropriately, for example in invoice financing – if
banks within a country can share data (without necessarily revealing the
data to each other) about invoices that have been factored, then certain
double invoicing scams can be avoided. Looking further afield, if an invoice
can be issued on a blockchain by the issuer and signed, then you have a
guaranteed unique digital record of the invoice that cannot be copied and
cannot be financed more than once.
 Blockchain
Replaces centralised registries: As Singapore looks to build a smart nation,
blockchains can replace centralised registries with decentralised ledgers.
With political will, Singapore can lead the way in creating trusted, tamper-
proof repositories. Share registries, property, assets, insurance, and
national identity can all be stored in secure blockchains, allowing for easier
verification of “the truth”, reduce settlement times when assets change
hands, and by using smart contracts, even automated title transfers could
be done when specific parameters are met. Digital identities can be used
across systems without systems necessarily touching or interacting. One
blockchain for identity, that is validated against when needed, and with the
user in control of which data is shared with the merchant
Storing national currency: One of the most exciting advances would be for a
national currency stored on a blockchain, enabling seamless payments that
are much more secure and privacy-aware than credit cards. Disassociating
the transmission of personally identifying information with the transmission
of the payment would be a huge improvement over traditional systems.
Streamlines backoffice operations: Additionally, with smart contracts, logic
can be written into accounts enabling payments to occur automatically
when triggered by events. No longer will we need to rely on operations
departments to follow straightforward “if this, then that” rules, and no
longer will we need to chase down people who renege on a financial
commitment. A smart nation would have front doors that unlock only if the
rent has been paid, and have assets that automatically settle according to
digital wills, reducing the need for costly probate.
We believe that the most transformative blockchains will be those that can
work across geopolitical boundaries. Southeast Asia has the most potential
that can be unlocked with this technology, but we acknowledge that it may
also be the hardest blockchains to implement.
Blockchain