During last year’s London FinTech Week and following his appearance on the panel for the ‘Disruptive Forces in FinTech’ discussion, we were pleased to have some time to reflect on the current shape of the industry and the role of blockchain technology within it with Keith Bear from Cambridge University’s Centre for Alternative Finance (CCAF).
Previously, Keith was the Global Leader for financial markets at IBM, working with banks and market infrastructure firms worldwide. His most recent work was on blockchain deployment in financial markets and FinTech innovation. Keith is now a Fellow at Cambridge University’s Centre for Alternative Finance and is also on the advisory board of three FinTechs and mentors at the Barclays/Techstars Rise accelerator. This was of particular interest to us given our expertise in FinTech and blockchain technology.
Can you tell us about the aims of the Centre for Alternative Finance and your role there?
Keith Bear – The department sits within the University’s Business School and has three core elements:
- Research – survey-based research, we have just published our recent blockchain survey Global Crypto Assets Regulatory Landscape to favourable reviews. Our next survey examines enterprise networks, it’s a deep dive into production networks.
- Collaboration – with the likes of the World Bank, the IMF and others in the area of FinTech, blockchain and crowdfunding peer-to-peer lending.
- Client projects – working with various financial institutions to leverage our insights and research.
Thoughts on blockchain performance strategies, methods of consensus and centralisation
Keith Bear – In this area there are significant differences between the private permissioned world and the public non-permissioned world.
We recently released our tool for measuring the Bitcoin network’s energy consumption CBECI. This really illustrates the downsides of this area of the technology because of the high energy requirements involved. However, some people may see it as value for money when considering the value of Bitcoin for those who are invested in it and see the future transformative potential.
Consensus methods are less of a problem for private permissioned networks because of dealing with permissioned known actors. The direction of Ethereum is publicly stated as Proof of Stake an alternative to achieving consensus, but it’s a difficult model because of all the complexities currently involved.
With regards to centralised strategies for blockchain – it very much depends on how various technologies will evolve over time and it’s a little hard to predict at the moment what the future trends will be.
At the CCAF we are working on an enterprise blockchain analysis at the moment, where we are finding that organisations are using elements of blockchain technology but where parts of the architecture are being centralised and so not fully embracing the fully distributed state found with Bitcoin and Ethereum.
Questions over the extent of decentralisation depend upon individual use cases especially in permissioned cases where centralisation is necessary for some level of control to meet regulatory obligations etc.
Blockchain and environmental sustainability
Keith Bear – The CCAF Bitcoin power index shows the high levels of consumption which vary depending on the mining tools employed. On the one hand concerns about energy consumption can be countered by using blockchain as a force for good, i.e. where the technology can be used for environmental causes.
One example of this can be found with a FinTech that’s part of the Rise Accelerator programme Sparkchange.io who focus on a tokenised approach to carbon allowances.
Whether the [environmental] cost is justified or not justified depends on which side of the blockchain industry you are on.
Blockchain identity tracking vs secret identities
Keith Bear – Again it all depends on the type of networks which we are looking at. For private permissioned blockchains identity is important to financial institutions because of AML/KYC requirements.
Bitcoin operates at the other extreme where, although individuals cannot be directly identified, their transactions can be. Therefore, you can start mapping individuals based on transactional movements on the network. In this respect it is less opaque than cash.
For FinTechs, the choice is clear, in that you must either operate wholly within the regulatory environment or try and survive outside of it, usually where regulation isn’t yet well defined or formed. The obligations depend on the jurisdiction in which you’re operating and Libra has been a good trigger for opening up the debate over regulation.
If you’re operating outside of the regulatory environment it can only be a matter of time until the authorities intervene because, since Libra, there is a lot more regulatory debate and focus than was the case previously.
The Libra question
Keith Bear – The Libra white paper made for interesting reading, my main thought is that it’s very, very early days and the regulatory comments already made mean there are still many questions to be answered on how and where it will operate.
It is less a question about the technology but over how it will practically work. I don’t think anyone would dispute the idea of offering financial inclusion to the world’s 1.7 billion unbanked, maybe there’s some hesitancy over whether Facebook is the ideal organisation to be offering the solution.
However, the set-up of the Libra Association is a positive step to help provide a level playing field. It will be interesting to see how things evolve. The key result so far is that it has stimulated debate amongst the regulators of what needs to be done.
Interoperability of blockchain
Keith Bear – This a very important issue, especially in the enterprise permissioned world. Our survey of 60+ production networks has found that they are using many different technologies but that they may well eventually want to connect.
For example, We.Trade in Europe signing an MOU with eTrade Connect, an equivalent network based in Hong Kong. So interoperability is already a significant factor in the business application for blockchain using FinTechs and not just a technical question of how it can be done.
There are a number of projects working on interoperability such as HyperLedger Quilt with Ripple. As blockchain networks mature and offer more value to society, how they join up and work together will become increasingly important.
The best strategy for FinTech startups – disrupt or collaborate?
Keith Bear – There are examples across the board from disruptive models to partner models such as with Transfer Wise who want to work with as well as compete with banks. It’s really dependent upon particular use cases and finding a route to scale.
The future regulatory environment for FinTechs
Keith Bear – Regulation is a key focus of our research. There’s a big range of different perspectives based on jurisdiction especially when looking at what is in place now and what may be required in the future.
The use of regulatory sandboxes like GFIN (Global Financial Innovation Network) which is backed by the FCA provides safe environments for FinTechs to work through their propositions and initiatives.