A chip off the new block

I wanted to learn more about blockchain technology given all the hype surrounding it as a game changer and came across a video by Duke University Professor, Campbell R. Harvey in which he describes what it is, how it works and, perhaps most interestingly, some of its practical applications.1

Most of the time blockchain is mentioned in the media it’s used interchangeably with cryptocurrencies like Bitcoin. While the two are related, they are not the same thing: blockchain is the underlying technology while Bitcoin is just one of the uses or applications of the technology.

There are four key properties of blockchain technology. The first is that it’s a real-time ledger or spreadsheet of transactions or information – these are lumped into blocks, with the last line of one block being the first line of the next one (hence the term blockchain). Secondly, blockchain technology can be shared and anyone can acquire a copy. The third property is that one can add to a blockchain but cannot change past entries. The last is that the ledger is password-protected.

A boon for our industry
This technology has numerous potential applications in the financial services industry. It can be used to verify a particular transaction or ownership very quickly because the blockchain is updated in real-time. Professor Harvey points out that settlement times of transactions on securities of  t+X days would be a thing of the past as a blockchain can be used to verify and settle transactions in minutes. Another application of the technology is in financial reporting where financial statements would be available in real time – a particular company could have a blockchain for all accounting transactions so users would no longer have to wait for a company to release its quarterly or annual statement.

There are also a number of non-financial applications. Blockchain could be used in a motor vehicle to check if you actually own it – greatly reducing the risk of someone stealing or taking control of your car. Another use of the technology could be in purchasing a home. Currently, a lawyer has to do a time-consuming title search, but a blockchain could solve this: every municipality could put every land title into a blockchain, which could then be downloaded by anyone.

Is blockchain secure?
It’s a lingering and legitimate question. The cost of the computing power required to create and maintain a blockchain for a cryptocurrency like Bitcoin runs in the billions of dollars – this makes it challenging for hackers trying to cause problems. The technology itself is secured through cryptographic hashing, which is a process of generating a code of unique and specific combinations of letters and numbers associated with a word, sentence or document. It is that code that links the bottom of a block to the top of the next one. Therefore, if one tries to change the information in a block, a different code would be generated and the blocks would not match. If a code is generated with a large combination of numbers/letters, the probability of finding the correct combination would be virtually impossible and would require incredible computing power.

There are many challenges with trying to implement the technology. Firstly, there is the massive cost and infrastructure needed to implement a complex blockchain. Secondly, it would take a tremendous amount of time and human capital to input the quantity of information required. Finally, although the blockchain technology is very secure, it’s still technically possible for breaches even though they’re highly unlikely.

There’s a lot more to blockchain than the overview provided here and it’s fairly certain that the technology and its applications will be a game changer in financial services and other industries in the very near future.

[1] Campbell R. Harvey, “The Blockchain Identity”, 2017 CFA Institute Annual Conference Video, 1:30:58, May 23 2017, https://www.cfainstitute.org/en/research/multimedia/2017/the-blockchain-identity-conference-collection.

Cory Bruner, CFA® is an Associate Investment Advisor with HollisWealth®, a division of Industrial Alliance Securities Inc., which is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. The opinions expressed herein are those of Mr. Bruner alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or any of its affiliated companies.