Marion Cromb interviews Arifa Khan, an advocate for Blockchain, a pioneering new way to bank, buy and transfer property.
Arifa Khan is the Managing Director of Genius Incubator, which raises investment funding for businesses, and is the founder of Fintech Storm, a monthly series of talks on innovations in the financial technology sector. She has 15 years’ experience in the financial and investment banking industry, and has an MBA and a B.Tech. in Chemical Engineering.
A blockchain is a decentralised public ledger of online events, the cryptocurrency bitcoin being the most well-known example. However, blockchains can have many other applications, especially where verification and ownership of assets is needed. Potential applications include land registry, voting data and contracts. This ledger is shared among the users of the network. Using advanced cryptography, transactions are encoded to contain information about all preceding transactions. All changes to the ledger are permanent. This record means that the status of the system is always known, and it makes fraud virtually impossible. The blockchain has security built intrinsically into it. It uses a system of public and private keys. An analogy to the encoded transactions can be thought of as sending messages between people in locked boxes. If A wants something in secret from B, then A can send B an open padlock (a public key), to which only A has the key (private key). B can then send a box with the object in it locked with that padlock, just by clicking it shut. B then sends the locked box back to A, who can then open it with their key. If the box is intercepted, it cannot be opened without A’s key. (In the digital world, these padlocks cannot be broken or picked, as the cipher algorithms make decoding the messages an extremely time consuming task). If the padlock is intercepted, if used, only A will be able to open it, not the interceptor. Keys are able to verify ownership, acting as a digital signature. If A encodes something with their private key, only A’s public key can open it, and thus if a receiver can open something with A’s public key, they know that it is from A and has not been tampered with.
Thank you for talking to me. What I’d like from you is the basics of what blockchain is and how that fits in with your field of finance.
An analogy to blockchain technology is the iPhone. Since the advent of the iPhone our lives have changed irreversibly, and it has had a farreaching impact not only for the developed world, but also the emerging world. The iPhone has made unimagined developments possible, for example IoT [Internet of Things], and using the gadget for monitoring your health, and managing your finances. This has liberated the entire world, in that the workforce is not chained to their desks or offices anymore. Very rarely, we come across technologies that have this humungous impact on every aspect of our lives. One emerging consensus is that blockchain is one of them. Blockchain is a very simple thing – it’s not a very sophisticated technology – it’s just a database network protocol. The world has come to believe that for a transaction to occur, two parties need to trust each other; or we bring in an intermediary, for example a bank or trust, or an external mechanism, where we ask the counterparty to put down a deposit in case they fail in delivering their promise. The entire financial services industry is based on this premise of an intermediary which is a substitute for direct trust between party A and party B. So now this premise is being broken down with the blockchain, because the blockchain makes it possible for parties to interact directly without this substitute of trust.
So is it like an alternative to a deposit, but hard-coded?
No deposit exchanges hands, it’s just an advanced mathematical algorithm which can make sure that A happens, and B happens, and it’s as simple as that: entirely mathematical and therefore eliminating the need for an intermediary and deposit. If you deliver a product to me, then the mechanism automatically charges me what is owed. So for example, Amazon can deliver you goods first and then receive cash on delivery. Such a thing can be done by Blockchain without having an intermediary or deposit. The deposit is just one example. In securities industries there are hundreds of such instruments which use alternatives to deposits – call it collateral, call it settlement and clearing – where we have three days for a transaction to settle; all this requires locking up of capital for a period of time, which is unnecessary. If the ecosystem is perfect and there were no risks of fraud or failure, you wouldn’t need clearing time. Blockchain eliminates the time and the capital that is required to be put aside, it reduces risk.
Can you expand on the wider implications of this concept?
Basically it changes the dynamics of entire industries, and can be applied to non-financial cases. For example in recording and monitoring ownership, if homes were registered on a blockchain, instead of having to go to the Land Registry and getting a certificate and clearance, if you want to look up whether I am the bona-fide owner of my house, before you buy my house, you can just verify that on the blockchain, in fact popular adoption could make lawyers redundant.
But doesn’t that require everyone to take part in the blockchain?
Yes, you need to have mass adoption before it can have a relevance. But even before everybody is on blockchain you can still have some parties who are on blockchain; of course they will be able to attract only those other parties who also believe in blockchain, but you can still use it.
The way the world has been working to date is one way – if you wanted money, you had to sit in a shop and sell goods. Now you don’t have to, you can put it on Etsy, and you get the money by PayPal, and if you have a PayPal card you can immediately take the card and buy goods, without exchanging anything at all. You’re just sitting here, you haven’t even met the customer, and already money is in your account and you can use it also, instantly. This is not the way things were done earlier, industries have to re-invent the way to do business. Not just in the financial services industry, but everywhere. Wherever there is a transfer of value, whether it is asset, cash or currency, that transaction is going to be transformed, and that industry is going to be affected.
How does that fit in with legal frameworks, and taxation?
That is one bit of a grey area, where a lot of countries have foreign exchange regulations, where some countries have acknowledged bitcoin as a digital asset, and some countries – for example Japan – have not. So it depends from country to country, but because it is not a currency – one way to completely avoid transaction costs of foreign currency exchange or payments can be completely avoided by transacting in bitcoin. So if I am here, and I want to buy a sari in India, and I pay in bitcoin, I not only can avoid the costs associated with sending a transfer, but also the person who gets the money from me can keep the bitcoin and can use the bitcoin to pay for goods, without having to worry about the movement of the currency as well.
So are there big businesses using bitcoin to avoid these costs?
Yes, yes, already.
And are governments getting angry about this?
Not really, some governments have exchange controls but some governments are okay with it. Even if they get angry about it, there is nothing they can do. Because this is a globalised world, a digital world, we are already doing e-commerce, we are just doing it without local currency so if there is PayPal money, for example, I am here [in the UK] but I can earn PayPal dollars and no-one is preventing me from using those Paypal dollars to pay anywhere in the world.
But Paypal has various fees.
So bitcoin will also have fees, but the fees are likely to be a lot less. PayPal charges fees because it was the first one to popularize the digital money concept. If there were a lot of players it would have been a competitive landscape and their fees would have been lower. PayPal was the only one, and all the incumbent banks – and Visa, MasterCard – they just let PayPal grow as they didn’t take Paypal seriously. In bitcoin world, there’s a lot of competition already.
Do you think cryptocurrency represents a democratisation of money, or does it just lead to more unregulated practices?
Unregulated practices happened before people really discovered the nature of cryptocurrency. It’s anonymous, but it’s verifiable until the last track. So let’s say you did something – your identity was anonymous to start with, but somebody wants to track down who did it, they can track it down. Whereas in cash, you can’t track down who gave you the cash and who received it; but cryptocurrencies, it’s a digital trail you leave forever. It’s not even like you delete emails and it goes away, It cannot be tampered with, forever. So if you steal or you do unregulated practices, it’s like doing it in broad daylight, only wearing a mask.