Blockchain is on a collision course with crowd finance

Blockchain is one of the most important digital innovations to have surfaced since the turn of the millennium. First put forward by Satoshi Nakamoto, it arrived not a moment too soon, with the need for trusted, decentralised means of verification never more in demand. Some say it’s nothing more than a fad, another layer of financial complexity that’s complicating the already heavily burdened transaction and recording process. But here at Crowdsurfer we strongly believe that blockchain is a fundamental, and very welcome, game changer which is here to stay. Furthermore, we believe that it’s going to grow and flourish hand-in-hand with crowd finance. And we’re not alone. Today, we take a look at the origins of blockchain, assess the current state of the blockchain market, and look forward to what lies ahead. What is blockchain? Put simply, blockchain is a method of solving the challenge of how to transfer value without a central authority. It creates a digital ledger – the blockchain – which isn’t stored in one place, but distributed across many computers throughout the world. This means that it's possible to verify by looking at the blockchain what the (likely) truth is, thus making fraud very difficult to pull off. The potential uses of the blockchain are varied and just starting to emerge. Early uses for financial services include processing financial transactions, and implementing digital currencies. Beyond this, applications could include asset trading and qualifications verification. For more details about how Blockchain works, take a look at this 2015 article by The Economist. The history of blockchain The first public blockchain was developed and pressed into active service in 2009. It was engineered to support the crypto-currency, Bitcoin, and it continues to be used as the global ledger for Bitcoin today. Each individual Bitcoin is created by computers solving computationally intensive puzzles. Blockchain is the technology underpinning this process and recording its happenings throughout the globe. If one of the many intentions of Bitcoin was to make every transaction untraceable, the sole intention of blockchain has always been to make every transaction and recorded piece of information transparent and permanent. Once people began to understand the value that blockchain was creating in the world of Bitcoin, blockchain’s uses began to extend far beyond the sole purpose of managing the world’s first crypto-currency, with the development of “blockchain 2.0” in 2014 offering users a broader range of services. Blockchain soon became an important part of a vast array of online transactions. Current state of the market Now, in 2017, the biggest technology and financial firms on the planet are producing their own blockchain technologies as they aim to improve security and reduce the friction involved in online transactions. The implications of blockchain’s integration into our everyday lives are vast. For example, the world of finance – from traditional high street banking to fintech, investment banking to stockbroking – involves the daily transfer of billions of dollars across financial markets, and every single one of those transactions has to be cleared by a middle-man or broker. In theory, and, increasingly in practice, blockchain could replace this middle man, reduce costs and dispose of excess friction, with a technology that’s faster, more secure and far cheaper to access. The effect upon businesses – large and small, all plugged into the global economy in some minor or major way – could and should be enormous, with the immediate positive implication being a saving of billions of dollars in transaction costs per year. Case study Last week, global financial giant Deloitte announced it’s to open a twenty-five person strong “EMEA blockchain lab” in Dublin, with the intention of rapidly developing new blockchain solutions for clients in Europe and the Middle East. This move by one of the world’s largest and most forward-thinking financial firms shows that the largest players in the market are keen to claim their piece of the action by being amongst the “first movers”, and are fully aware what the future of finance looks like. Indeed, with investments like this, Deloitte seem to be doing their bit to shape it. Deloitte’s global blockchain team now works across 20 countries, and has developed more than 30 blockchain-related prototypes to date. These prototypes have been used for digital banking and identity verification, loyalty and rewards solutions, as well as providing services for clients in the gargantuan sectors of investment management and insurance. Deloitte clearly believes the future of finance – both traditional and fintech – is linked to the successful integration of blockchain. Hence, their investment in this space. Key challenges Some key challenge surrounding blockchain right now include education and awareness. Despite the fact that blockchain is here, and here to stay, there is still a worrying lack of understanding across the financial world about its methods, its uses and its potential. As with any new technology – and the gradual paradigm shift that follows its adoption – the education of stakeholders trailing behind the first movers is crucial, as their successful integration and adoption of the technology will drag the entire industry into accepting the new standard. It’s clear that forward-thinking firms who are learning, educating and getting to grips with this new, revolutionary technology (e.g. Deloitte) are going to benefit most when the technology truly enters the mainstream. A further challenge involves organisations overlooking the need to collaborate and work on the same blockchains. Without this collaboration, they face the risk of developing chains that don’t work symbiotically, thus creating needless friction and cost. Therefore, collaboration will be as important as education in allowing for the smooth growth, adoption and integration of the technology. The most pressing concern – one that involves all of the challenges above – is that age-old buzzword: culture. If the major players in the fintech community decide to adopt this new technology then the entire industry needs to jump in with both feet and get behind it. Traditional finance will take some persuasion as regulation and compliance will need to be rapidly updated. Only when the entire industry buys into blockchain with full scale, industry-wide adoption of the technology, will the benefits be shared by all. This culture is slowly growing, permeating out from the first-movers to touch all of the fintech world. The speed at which this cultural change happens is important as it’s the means by which other challenges facing blockchain will be overcome. What are the implications for crowd finance? The blockchain revolution presents opportunities for stakeholders across the crowd economy. Platforms such as BTCjam, Backer and Bitbond already make use of the technology, allowing users to transact in crypto-currencies. These opportunities include:

  • For entrepreneurs raising capital via crowd finance, blockchain offers a secure, low-cost solution for the registration of stocks and shares. In addition, it provides a potentially more secure asset for individuals/ organisations when operating in countries with unstable local currencies.

  • For investors, blockchain simplifies the registration and transfer of equities and could bring more liquidity to the market over the long term.

  • For regulators, blockchain helps to address the challenges of market supervision, regulatory compliance and security.

Whilst we’re still some way away from mass adoption of blockchain in the crowd finance industry, there are early signs that the technology is taking root. As mentioned, Blockchain is already being adopted by crowdfunding platforms that use crypto-currencies as a means of crowdfunding their ventures. Like the IPOs of the traditional equity market, the 'ICO' - the Initial Coin Offering - has become an acknowledged way of raising capital. Lisk, a blockchain application platform for JavaScript developers, collected 14,000 bitcoin (c. $6 million) in its crowdfunding exercise in early 2016. It was an impressive outcome and one that’s led to slew of other ICO offerings from tech companies working on blockchain applications. The rest of the industry may not be too far behind. What the experts are saying “Initial coin offerings (ICOs) or what we call ‘network token pre-sales’ is a new way for developers to fund their projects. It isn't a replacement for venture capital or equity crowdfunding. Instead it's an alternative funding route for blockchain-based startups. Historically the only way to earn money from protocol development was to sell software that ran on top of it. This meant innovation occurred much faster at the software layer, leaving protocol development to nonprofits and foundations. Network tokens create an economic incentive for open-source development. It allows creators to ‘sell’ tokens directly to users (investors) and they both share in the value created.” - Lawrence Lundy, Outlier Ventures Using smart contracts via blockchain, the system of assigning either rewards or equity after a fundraise is becoming seamless, automated and even more secure than the current system. Given the above developments in the crowd finance space and beyond, we believe it’s safe to say that blockchain is here to stay. We’ll continue to monitor this exciting technology and keep you updated on the implications for crowd finance.

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