SINGAPORE - Blockchain is likely to take centre stage in the discussions around fintech in 2017, especially as Singapore will test out the technology with the backing of the central bank.
The pilot and ensuing dialogue, could also go some way in demystifying the technology - powered by the use of a ledger distributed among trusted financial institutions - that could be as transformative as that of the Internet, experts say.
"In 1995, I was in an R&D lab for a UK telco, and our job then was to persuade people that this thing called the Internet was going to be impactful. When I tell my 16-year-old, she laughs, and rolls her eyes," said Stuart Smith, chief of service innovation and design at the National University of Singapore's Institute of Systems Science, at a recent IBM event.
"Now with some benefit of grey hair and age, blockchain feels the same to me. It feels like we're on the cusp of this genuinely transformative (change) and like the Internet, it's not just about the technology, if at all. It's about the implications."
Blockchain is so named because it is created from digital "blocks" of information of financial transactions.
These make up a ledger, that gets shared among financial institutions that need that information to complete transactions.
In Singapore's pilot, eight banks will deposit cash as collateral with the Monetary Authority of Singapore (MAS), in exchange for MAS-issued digital currency.
The banks then redeem the digital currency for cash.
"Singapore has now the leading blockchain initiative combining regulator, banks and fintech startups for interbank business-to-business payments based on blockchain," Oliver Bussmann, a blockchain consultant, and former UBS chief information officer who worked on blockchain technology at the bank, told The Business Times. "The experiment will disrupt and simplify existing business processes within the banking industry."
At its implementation, experts say, the use of blockchain will be within a private network - that is, unlike that for bitcoin, which is public. This means the information held in the blockchain will only be shared among trusted entities.
"Blockchain, at its underlying core, is consensus," Arvind Krishna, senior vice-president and director, IBM Research, told The Business Times.
"Because you need to get five, six parties to agree, to put that information on a blockchain, so that goes back to a network effect. Usually it's hard to get the network going, but once you get the network going, the benefits are tremendous."
It will still take time to get to a network effect, industry watchers pointed out. Swift is watching the technology closely, but is waiting for it to be proven and scalable, said Alain Raes, chief executive of the Asia-Pacific region.
Swift provides the global messaging system for correspondent banking. "We're seen as the Stone Age of the industry. . .(but) the jury is still out on DLT (distributed ledger technology). I can see everyone excited about all that. I do see DLT is like what the Internet was in 1995 and 1996. But it may take a few more years to see the real benefits of that."
But when those years pass, there could be clear benefits in cost savings, particularly in reconciliating global payments and documentation.
This affects something as tangible as selling avocados, noted Mr Krishna. In simplifying the documentation behind customs checks, which requires reviews of agricultural certification, certificates of origin, and tax bilateral agreements, among other things, fewer avocados spoil in that time.
"What are the chances that all that paperwork is going to arrive on time? And if it doesn't arrive on time, the container sits there, for a few more days. What happens to any produce that sits somewhere for longer than it should? It spoils. And somebody down the chain doesn't make their money," he said. "It is not so imaginary."
This also comes in part as backend systems infrastructure has "lagged very materially" against that for activities such as trading, said Blythe Masters, chief executive of distributed-ledger service startup Digital Asset, at a session of the recent Singapore Fintech Festival.
The toss-up, at a time of higher compliance costs in the post-crisis era, comes between replacing the old infrastructure with the same technology, or deploying a completely new form of service that could be cheaper in the long run.
"Cost saving has become an existential matter," she added.
As it is, regulators are also seeing that blockchain technology has nothing to do with cryptocurrencies, noted Ms Masters.
The fear around bitcoin has been around the loss of control of monetary policy, noted experts. Bitcoin had also been used for among other things, financing in the dark Web, where drugs were sold.
Regulators now understand that blockchains can run privately. In fact, blockchains can be designed such that financial institutions, even within that private blockchain, are only privy to information that is necessary for a certain transaction.
This eliminates in part some of the wariness among competitors about opening their books completely to one another.
"I can control how much I give you, in terms of the question being asked," said Mr Krishna.
As the financial industry and regulators work around the technology of blockchain, they will also have to think through more philosophical questions on how much control governments should have on the information found on this distributed ledger.
This will also be of profound importance as the technology shapes up.
"Most governments want to see the flows coming in and out of the country. They can see that. (But) the government is not supposed to see that I'm going to spend $10 to buy chewing gum - that's none of their business," said Mr Krishna.
"It's like the Internet. Who controls who joins the Internet? But it seems to be more resilient than anything any government has ever built. Maybe because of the fact. That is something fundamental, and people who come with the mindset of complete control are going to find that a philosophical hurdle to get over."
This article was first published on December 22, 2016. Get The Business Times for more stories.