Europe – emerging as the bitcoin continent

Following approval of blockchain technology at a recent Cabinet meeting, the prime minister said that locally its use is only just being appreciated and he pointed out its utility ranged well beyond financial services.

In reality, it also covers land registries and health records. In his words, he said Malta could be a trailblazer in this sphere. It goes without saying that the next step is to consider the possibility of adopting cryptocurrency while he was conscious of the wariness of regulators. Dr Muscat was quite supportive of innovation and said when it comes to staying ahead of innovation we cannot wait for the regulators to reach their conclusions.

When he was speaking at the CEPS Ideas Lab conference in Brussels “Reconstructing the Union” he proposed Europe should become the bitcoin continent. In the banking sphere one can expect harsh words from regulators in Brussels who wish to protect the status quo and cocoon the banking fraternity. In contrast, we can mention the success achieved by R Imo which is behind a blockchain-based foreign exchange B2B marketplace providing faster and cheaper cross-border payments while connecting with existing banking systems.

In Europe, there are more countries where payment providers are warming up to digitization and considering cryptocurrency schemes. Quoting Dr Jens Weidmann, the president of Germanys Central bank, he said at a G20 conference that digital finance and financial technology was a priority in Germany.

Dr Weidmann went as far as saying it will bring a competitive threat to the current banking industry introducing innovation which can open the doors for new financial services, embracing cheaper transactions and facilitate crowd funding. As of February 2015, over 100,000 merchants and vendors accept bitcoin as payment charging competitive fees of 0% to less than 2% of the total purchase. Compare this to a 2-4 % fee typically imposed by credit card processors. As yet we have not heard similar comments from Dr Vella – our Central Bank governor. Will he be greeting the arrival of this technology in our banks?

Readers may ask what is block-chain and why is it so complex. The answer is that it has a number of unique qualities and principally the main advantage is that it is resistant to modification of the data as once data is recorded in a block it cannot be altered retroactively.

The technology can be described as an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and secure manner. Let us start by taking a look at the major advantages that blockchain can bring to the financial sector and also discuss some of the risks associated with it. It offers many benefits and it seems likely to be a technology that is here to stay. As it moves into the mainstream, it will be important to actively manage the risks that arise from its use. 

Bitcoin can be best described as a cryptocurrency and a payment system invented by a programmer, or group of programmers. The mysterious name of the bitcoin protocol’s creator, Satoshi Nakamoto, is widely assumed to be a pseudonym, and a number of attempts to detect his or her real identity have proven inconclusive.

Simply put it is an encrypted, distributed database shared across multiple computers or nodes that are part of a community or system. Blockchain can best be described as the technology that enables cryptocurrencies to trade and is built on the principles drawn from cryptography, game theory and peer-to-peer networking. What makes it one of the most exciting technologies is its ability to reduce the possibility of security breaches by even its own operators.

Beyond its use in the financial sector, we meet other uses such as in the media and telecommunication industries. Media sector applications include supporting low-cost micro-transactions that can be processed cheaply without the fees that existing payment networks require. To start with, a blockchain ledger in telecommunications renders it a reliable and secure way and in the process the digital block’s programmability makes it possible to enforce usage rights.

Other applications are more futuristic. One can mention DocuSign, which provides efficient digital transaction management and electronic signature technology, developed as an app for Visa cardholders, which is designed to simplify purchasing of autos and/or leasing. Moving on to its use in travel and hospitality, one finds how a shared distributed ledger can simplify the settlement process. Blockchain technology can support loyalty points programmes that include a more advantageous accounting of liabilities.

A blockchain system loaded in our public service (now employing 45,000 staffers) will definitely benefit the country due to the effective flow of information since it goes without saying that both transparency and symmetric information are key features to streamline waste and improve productivity leading to an efficient use of scarce resources.

In healthcare and life sciences, cryptographic security can enhance records security while the nature of high volume of transactions can make claims processing more efficient. Consider its implementation in our own hospitals. At clinics and hospitals around the island, we can load health records (including complex procurement records) replacing the Byzantine system of paper based files which litter every ward. It could make it easier for patients at Mater Dei hospital to share records with numerous providers while keeping discreet control of the records.

In addition, a community of users, including hospitals, doctors, patients, medical consultants, agents for medical supplies and health ministry, could be part of the overall blockchain system, thereby reducing bureaucracy. Will it succeed to release hundreds of nurses filing healthcare documents? Undoubtedly, this change will ruffle many feathers and house unions will have to be placated that reform will be beneficial to all.

This technology can also be used to create a permanent, public, transparent ledger system for compiling data on sales, storing rights data by authenticating copyright registration and payments to content providers. It can be very effective in the public sector where it can improve record keeping. Other public sector uses include police department dealing with vehicle registries, and other government agencies handling digital identities for individuals, voting records and paying of benefit entitlements. Imagine how Identity Malta can solve its current problem of duplicate ID cards and speed the reconciliation of names to voting documents.

Going back to currency transactions, it reduces significantly the settlement time and saves costs involved in verifying transactions by removing the need for trusted “third-parties” such as primary banks (especially correspondent banks) to complete transactions, the technology also lowers the cost of networking, therefore allowing multiple real time applications.

Taking the view from a macroeconomic perspective, post 2008 recession currently there is significant pressure on profitability among European banks, due to limited growth opportunities because interest rates in Eurozone are low and the transaction volume is also sluggish due to business uncertainty particularly following Brexit. Therefore, the blockchain challenge ought not be tackled by Brussels in an ostrich fashion. Regulators need to put on their thinking caps and embrace change with a positive stance to embrace the benefits of this novel innovation.

In conclusion, use of blockchain promises to bring significant cost efficiencies to global supply chains, financial transactions, asset ledgers and has uses in social, health and public sectors. Only time will tell if blockchains will succeed in Malta where regulators are so unwavering to resist it. Quoting the prime minister who favours its introduction in a controlled format recognizing its inherent quality to revolutionize our lifestyles and combat the manic over reach of unnecessary bureaucracy. Europe warrants to become the bitcoin continent. 

George M. Mangion

[email protected]

The writer is a partner in PKF an audit and business advisory firm.