In my interview yesterday with Rod Drury, CEO of global accounting software company Xero, we discussed the pros and cons of blockchain technology from a business context. According to Rod, blockchain is most useful “when you have multiple strong actors that make up the entire network.” He thinks there are opportunities to use such blockchain technology in markets “where there’s not one dominant provider”; such as banking, settlements and investments.
This is pretty much the argument for what’s called a “permissioned blockchain,” which is a blockchain where only selected actors have control. This is different to Bitcoin, which is a public blockchain – meaning anyone can participate, for example as a node or a miner.
Ripple is the prime example currently of a permissioned blockchain. On Ripple, the network owner has control over who can be a transaction validator. The reason Ripple created this structure is because it wants to be the global payment network of record for the financial industry. Offering a permissioned blockchain to banks and other financial institutions allows Ripple to provide assurances of security, stability, and speed – things which Bitcoin and other public blockchains cannot fully match.
Among other goals, Ripple wants to replace the current SWIFT banking system. SWIFT is the banking mechanism that allows you to send and receive overseas payments. I used it a lot when running my company ReadWriteWeb, since nearly all the revenue was in US dollars, and most of the payroll too. So I would use SWIFT to convert USD to NZD, and vice versa. I basically had to use SWIFT, because the only alternative at the time was Paypal – an even more expensive option. So Ripple has potential to disrupt this cozy fee-gobbling setup of the banks and Paypal.
How then can a permissioned blockchain help the accounting industry?
In our discussion, Rod Drury cited fraud as one potential use case. From his vantage point of CEO at Xero, an accounting software company that has over 1.2 million customers across the world, he’s seen “very sophisticated fraud scams where small business owners are getting phished.”
Previously the solution to that would’ve been a centralized register of all bank account numbers, so that the likes of Xero could cross-check all transactions and identify the phishing accounts. Typically that would involve setting up legal joint venture between the major banks, enabling them to share data.
But with blockchain, says Rod, “you can build an entire picture of every bank account, with each bank providing a subset of that directory, without [partners] necessarily seeing everything that’s there.”
In other words, using the distributed ledger of a blockchain, the banks could provide selected information to a company like Xero (or individual accountants, for that matter). So in the case of phishing fraud, verified partners of a bank could see a fraud risk score for each account – which would identify bad actors. But they wouldn’t necessarily see other financial information.
So in this case, a small slice of data from the banks – provided to Xero and other partners on a permissioned blockchain – would be sufficient to stamp out phishing for small businesses.
So you can see there’s a promising future for permissioned blockchains in the business and even government sectors. That’s why I’m personally bullish on Ripple (and disclosure: I currently own a very small amount of its XRP token). I’d also love to see more global financial software companies join Xero in experimenting with permissioned blockchains.
While public blockchains are more exciting, because they could potentially disrupt consumer apps like Facebook and Uber, in the short term it’ll be permissioned blockchains that make the biggest impact on real-world applications. Certainly anything that disrupts SWIFT gets a thumbs up from me.
I listened with interest to the interview and to me it really cuts to the heart of what the disruptive potential of a decentralized blockchain versus a type of “permissioned” blockchain. To a lot of the “true believers” of blockchain (myself included) the whole point is to replace these centralised control models of doing business and running society. This is usually through working in businesses (corporate and start-ups) over our careers and seeing disproportionate control of systems and gains made by small groups of people who are “central” to the organisation (usually founders, shareholders) at the expense of other actors who make massive contributions to the business (like employees) but are only cut in for a tiny fraction of the vast rewards being made. A decentralized system made have more technical overhead and have inherent difficulties in being run but for some people the trade-off where we can have completely transparent networks where the contributions and rewards are completely clear to everyone is the true reward. This is why there is often so much vitriol towards crypto currencies from people in sectors like banking – which are so reliant on central control and having the ability to keep nasty little truths from seeing the light of day.
Thanks Daniel, great points. I’m also very keen on public blockchains for their potential to disrupt the current cream of tech companies (Facebook, Uber, et al). Facebook is a great example of a centralized product that exerted its dominance to the detriment of certain important things: a healthy online media ecosystem, for one. And we saw how Twitter, which initially promised an open platform of sorts, eventually turned on external developers and pretty much ruined the product as a result.
All that said, I’m okay with central players controlling some things: e.g. I like that the NZ govt manages our healthcare system (as a type 1 diabetic, I’m much better off here than e.g. in the US where I’d have to pay the pharma companies a lot more). And I like having the banks take care of my money and basically protecting my core income. I don’t like banks telling me what to do with my money (which they are doing right now ref crypto). But I would like them to keep doing what they do, generally, only with better tech. e.g. I hope Ripple does usurp Swift. Won’t happen any time soon, but at least Ripple puts pressure on them to upgrade that terrible swift system.