Al Berg is a Research Assistant and PhD Candidate from the RMIT Blockchain Innovation Hub, the world’s first social science research centre into the economics, politics, sociology, and law of blockchain technology.
He has received funding from the NEM Foundation to examine how start-ups are using the NEM blockchain to provides solutions to help consumers, businesses and regulators understand the nature of the people, businesses and things they interact with.
FinTech, RegTech and TradeTech. These are the applications of technology to old industries and processes. What they seek to do is reduce transaction costs, increase transparency, and more generally introduce efficiencies into financial services, regulatory compliance, and supply chain management. Since 2009 blockchain technology has been at the heart of many of the developments in these applications.
The ‘purely peer-to-peer version of electronic cash’ which Satoshi Nakamoto introduced almost 10 years ago is a FinTech application. Using some existing technologies - ledgers, timestamping, merkle trees and cryptography, some of which are very old, some not so old – the author(s) created a protocol whereby any individual on the planet could transfer value to another individual without relying on a financial institution. Imperfections and governance issues aside, even with the high fees and transaction times we saw in 2017, this first blockchain FinTech application has been a big success.
Companies large and small are now using similar technology to further improve financial services – most encouragingly for the unbanked and underbanked – and help businesses and consumers comply with often burdensome regulations, as well as track goods through the supply chain and provide provenance details on the goods they purchase. Here I will focus on two areas, RegTech and TradeTech – showing some companies using NEM technology to do so - and explain why they fall under the larger ‘IdentityTech’ umbrella.
Financial institutions have vast compliance obligations. Requirements for KYC (know your customer), AML (anti-money laundering) and CTF (counter-terrorism financing) cost a lot - up to USD500 million a year for some firms. These costs are passed on to customers in the form of higher fees. More worryingly, poorer customers are often excluded from the financial system. They either cannot pay the high transaction fees, or they lack sufficient identity documentation to open bank accounts and access capital with which to grow their small business, purchase insurance, or manage financial shocks. This is why there are 2 billion people without bank accounts, 160 million businesses without access to formal finance, and a further 160 million underbanked businesses. RegTech solutions using blockchain technology can help financial institutions reduce these costs, automate compliance practices, and ultimately allow more people and businesses access to the financial system.
Similarly, international trade of goods and commodities is an industry where stakeholders demand huge amounts of information about products shipped. However, in its current form, the movement of goods across borders requires vast amounts of documentation – often paper based – which are easy to forge, lose and prone to error. As a result, it is estimated that up to 30,000 bottles of fake imported wine are sold in China – every hour. TradeTech applications using blockchain technology seeks to help facilitate the movement of vast amounts of goods across international borders, all the while providing consumers and regulators real-time information about the provenance of the product, and even data about the treatment it received during shipment.
What about IdentityTech? IdentityTech provides technology solutions to people, businesses, and even things with which to understand who or what they are dealing with.
Identity is a crucial part of all but the most trivial economic, political and social exchange. Any time you transact with someone, depending on the nature of that transaction, you require some level of assurance over who you are dealing with, and what you are purchasing. Most transactions rely on identity. Buying goods on credit requires a substantial level of trust. If full payment does not occur instantly, the lender will take steps to understand who they are dealing with. This is why banks require government issued identification and proof of income when you enter into a credit relationship with them – they are managing credit risk by identifying you (as well as satisfying KYC requirements). Similar identity requirements are involved in international trade, regulators and consumers need to know that the products purchased are safe for consumers.
So, we can see that RegTech and TradeTech are really solving a larger issue. Who am I dealing with? What am I dealing with?
IdentityTech provides solutions to help consumers, businesses and regulators understand the nature of the people, businesses and things they interact with.
Consider the provenance of foodstuffs. Consumers are right to demand greater and greater data about where their food has come from, as well as how it was treated and handled on the way. The 30,000 bottles of fake imported wine sold in China every hour is just part of a far greater problem. Consumers may be swindled, and drink cheap plonk rather than the vintage Champagne they thought they were paying for, but food safety, and the provenance of medicines is of far greater concern.
Bad and fake medicines endanger lives – the World Health Organisation (WHO) estimates that 800,000 die each year as a result. It is thought that up to 30 per cent of medicines in developing countries are fake.
Blockchain applications have the power to help ensure regulators and consumers know exactly what is crossing their borders, and what they are buying. Data generated in the supply chain – from producer to consumer – allow all stakeholders to understand where and when it was produced, as well as its chain of custody. The use of the NEM Smart Asset System, along with other innovations in Internet of Things (IoT) technology, means that the real-time monitoring of the chain of custody may become truly possible. Products that need to be kept in highly regulated climactic conditions during shipment - medicines for example - can be monitored constantly. Any deviation from acceptable norms might be then used to notify regulators and end consumers, with insurance claims triggered in real time if necessary. This is especially important for certain medicines which can be permanently degraded if they are incorrectly stored during transit.
Companies such as BlockGrain, EcoBit, the Japan Gibier Promotion Association as well as LuxTag are all working towards providing greater transparency over grain, produce, meat and luxury goods.
What each of these companies are doing, and plan to do, is increase the value of products by creating a complete and verifiable chain of custody using the NEM blockchain. Economists have long known that when there is information asymmetry in a market between buyers and sellers, the average quality, and the average price of goods sold in that market will decrease. If consumers cannot distinguish between high quality grain and low quality grain, they will only pay an average price for grain. This then produces a feedback loop where grain producers will no longer find it worthwhile to produce high quality grain. Giving consumers a greater level of assurance over the provenance of what they buy creates value for them, and increases the incomes of producers.
3 things we can learn from this
- RegTech and TradeTech are applications of IdentityTech. These new applications provide technology solutions to people, businesses, and even things with which to understand who or what they are dealing with
- Consumers and regulators demand transparency. Using the NEM blockchain to attest to the provenance of foodstuffs and medicinal products can create value for all parties along the supply chain.
- Any use of blockchain technology in Identity Access and Management (IAM) must be context dependent. Privacy demands that sensitive personal information not be placed on an immutable and transparent distributed ledger. Not everything should be stored on chain.
IdentityTech helps reduce the frictions of exchange, allowing all stakeholders to have greater confidence over the identity and attributes of the people, businesses and things they deal with every day. It even has the power to save lives, and allow people greater access to the formal economy. FinTech and RegTech are two industries in which blockchain can make a real difference. Next time I will talk about the prospects of Self-Sovereign Identity, and how blockchain technology can allow individuals to prove who they are, without relying on trusted third parties such as governments or large institutions.