Blockchain is more than just a tool to enable digital currencies. At its most fundamental level, it is a new, decentralized and global computational infrastructure that could transform many existing processes in business, public administration and society in general. Blockchain has received considerable hype, ranging from « cryptomania » in the trading markets to wide- spread discussions about the breadth and depth of its potential impact across public and private sectors. We have asked Frank Roessig, Head Digital Solutions for Finance at Telindus, to help us gain a clearer understanding of the strengths of blockchain, as well as areas requiring improvement.
WHAT IS YOUR PERSONAL DEFINITION OF BLOCKCHAIN?
For me, in simple terms, blockchain would be a trusted and collaborative network for transactions and information. From a technical standpoint, it’s a combination of three components. One of them is a chain of immutable blocks. The second component is a consensus mechanism, to get from n to n + 1, and the third aspect is a set of distributed ledgers. Combination means, for instance, that you may not have all three components but only two out of three.
WHAT ARE THE POSSIBLE APPLICATION FIELDS OF BLOCKCHAIN?
One application is, for example, notarization. Telindus has built the first European notarization log chain for the Luxembourg government. It is operational since 2018 and has been announced to the public and other European governments in February 2019. If you have a trusted source, instead of having to send back full force paper, you make a hash of a notarized document. You still have the notary that authenticates the document, but once he has evidenced it, he uploads a few hashes on the document and anybody who wants to compare a copy of the document just has to compare the hashes to check that it is verified. The advantage of that chain is that it significantly reduces the notarization log costs. It’s a clear ROI.
Another application is traceability. We have built a traceability chain for any item in general but we have also built one version for IoT in particular. We are currently implementing such a chain with a company that produces very high-quality mechanical pieces. They want us to trace each piece from manufacturing via distribution to the utilization, the maintenance, and either the retirement or the breakage. That piece is used to trans- port expensive items and if it were to break, you need to know the history, for insurance purposes for example. These producers are being copied by cheap manufacturers and by using such a traceability chain, they can guarantee their clients that what they bought is actually an original, not a copy of any sort.
« Telindus has built the first European notarization log chain for the Luxembourg government. »
Other use cases are what I would call KYX applications. There is a lot of KYX requirements and procedures – Know Your Customer, Know Your Supplier, Know Your Transactions, etc. Today all these KYs are done mostly bilaterally and repeatedly and for a lot of persons, the current KYX processes are highly redundant and inefficient, resulting in little added value. The idea is to put it on a chain once and then share it among all the parties who are entitled to see it. Once uploaded, it’s verified, it’s identified, because it’s a trusted source. And then you decide if you want to share it with one or several of the counterparts, for example banks, you work with.
Telindus is working in a consortium with the Luxembourg Association of Corporate Treasurers, ATEL. Large corporates have joined us, including RTL, Koch, Aperam, Cargolux, Ferrero and Goodyear. They all have many banks they’re working with and for every bank, they need to do their KYC. They wanted to work on a POC, where we upload the KYC once and then we share it with all the banks. We have talked to the ATEF and the ATEB, the French and the Belgian associations of treasurers, and together, we are exploring a cross-border framework for this. »
Reconciliation is another application. Nowadays, reconciliation is done mostly bilaterally, especially in the fund industry, between the various members of the fund administration value chain. As a result, mismatches tend to be modified only between two entities. Blockchain-based reconciliation works among multiple parties, live, in parallel, and transparently on chain.
Blockchain may also complement AI and solve the problem of trust many people face with this technology. One of the challenges with AI is the veracity of the underlying informa- tion. If you start blockchainizing the information you feed into AI, you can enhance the source and the whole history of what the AI is using. That potentially explosive use case might permit far better and more concrete applications of AI.
“Blockchain may complement AI and solve the problem of the veracity of the underlying information.”
There is also a key application that I call interchainability. The reason is that we’re all not going to use the same chain. It is like with operating systems: I mean we have Linux, Apple, Microsoft, etc. It’s going to be the same on blockchain. Actually, there’s going to be a whole conundrum of blockchains and it is therefore essential that chains communicate with each other in order to scale and enable more use-cases. We are also talking to a few big corporates with over 300 intra-group entities. That’s another use case. They do interco financing and interco-payments, and they have no view of what is really happening. They want to put it on a chain and see how it can improve their monitoring as well as their cash management. Another use-case is the optimization of transactions: payments, trade finance, capital market securities. All these are the biggest use cases: notarization, traceability, KYX, reconciliation, interchainability, and transactions in general.
WHERE DO WE STAND IN LUXEMBOURG? WHAT ARE THE MAIN OPPORTUNITIES FOR OUR BUSINESSES AND ORGANIZATIONS?
I would say that in Luxembourg we actually passed the hype cycle and we are entering the application world. We can clearly feel that people are now in a mindset where they would like to get things going. It is true that we have a few consortiums that have failed. But I think that most of them failed because the use cases have not been described or defined properly and also because they didn’t work in an agile manner.
I believe that to make things work with a new technology, you need two things. First, you need to have a clear ROI, a return on investment that you must be able to define with all the stakeholders. Secondly, you must be able to start in a lean manner with low budgets.
“The whole ecosystem in Luxembourg is definitely in action mode.”
As I said in my prior example, Luxembourg has the first notarization chain in Europe and that way, the Luxembourg government has also proven that they favor innovation, that the whole ecosystem in Luxembourg is definitely in action mode. The government has also announced that they wanted to create a government blockchain. The use cases are not clear yet but they have a few minis- tries involved, along with SIGI – the Syndicat Intercommunal de Gestion Informatique – and the idea is again to see what can be blockchainized in an efficient manner on the government side.
“Blockchain is clearly a source for faster, cheaper and more secure transactions.”
WHERE IS, IN YOUR OPINION, THE GREATEST POTENTIAL OF BLOCKCHAIN TECHNOLOGY?
I would say that one is a disintermediated and trusted interaction between parties. So, if I know that somebody uploaded an information on a chain and that I can trust it, I don’t need somebody centrally located to tell me again that this is a source of truth. The system has validated it. And we can for example exchange between ourselves something like a payment without having a central guarantor.
We talked about transactions earlier on. Blockchain is clearly a source of doing transactions that are faster, since there is no need to have a T+2 any more in the financial world. But it could be more than just payments. It could be transactions for assets of any sorts or even for trade finance export documents or whatever else. It should be secure because blockchain has this immutability that makes it impossible for anybody to tamper with the system. And the third thing is that it should be cheaper. Today, a SWIFT transaction costs around 50 dollars. The same type of payment using a Stellar blockchain for example costs less than 0.5 dollar. So, clearly, those transactions should become much cheaper.
The third aspect is what I call a distributed source of truth in general. Any time you want to validate something- Is this a real picture? Is this the hotel payment I made? – you don’t need to go to a central source. These are the three main potential development areas: disintermediated interaction, distributed source of truth, and faster, cheaper and more secure transactions.
HOW DIFFICULT IS IT TO GET STARTED WITH BLOCKCHAIN TRANSACTIONS? SHOULD THERE NOT BE AN INTENSIVE AND THOROUGH DIALOGUE BETWEEN THE STAKEHOLDERS, WHO DO NOT NECESSARILY HAVE THE SAME DEGREE OF MATURITY IN THIS MATTER?
I would say first that we built an interesting module at Telindus. It’s called Blockchain as a Service. It’s an interface where you don’t need to know anything about blockchain at all. You can start creating a node and create a smart contract very simply. It will not produce a full solution but if you have never heard of blockchain, you can start playing around and actually see what it can do. This kind of environment makes it much easier for people to start to experiment with blockchain and see what it does. »
If you look at a blockchain solution, blockchain itself accounts probably for between 20 and 30 percent of the solution. All the rest are interfaces, back-ends, data management that you must agglomerate around the blockchain for the solution to work.
For a lot of users, they don’t even need to know it’s a blockchain they are working with. They certainly will work with something that is much faster, much cheaper, and much more efficient. The knowledge can be limited to the people who build the chain and the interfaces, which leads me to the second point of the question, which is stakeholders. And that is really key.
‘‘That’s what we are building for people: We make blockchain as easy as a click on a button.”
You need to integrate the stakeholders from scratch because a blockchain for its own sake doesn’t help anybody. You need to get every- body around the table and present them the advantages that you want to get out of this chain. And you need to engage in this very early to reassure them saying ‘No, you do not need to learn about crypto currencies or build the wallet’, because that’s what they read in the press. Today, when you want to create an account on blockchain, you either have to go to an exchange with a simplified version or else you have to create a wallet, have your private address, your public address, to start playing around. What we actually do at Telindus is we will build the whole layers on top of this, the back-end, the chain, the smart contracts, the front-end that will make you use the chain without having to know anything about what a chain is. And that, in my mind, is the future of blockchain.
If you go on the web today, you use a browser and you do whatever you do. You don’t have to go back and type the HTML code yourself, like the first internet users did in the 90s. At that time, when you were going online, you still had to type every address by hand. Today, you just click on a button. That’s what we are building for people: they just have to click on a button and start using blockchain. My intimate conviction is that, in the future, it’s going to be as easy as talking to a machine.
ACCORDING TO THE WORLD ECONOMIC FORUM (WEF), BLOCKCHAIN COULD ACCOUNT FOR AS MUCH AS 10% OF GLOBAL GDP BY 2025. ON THE OTHER HAND, WEF EXPERTS ALSO UNDERLINE THAT REALIZING BLOCKCHAIN’S POTENTIAL WILL REQUIRE FIXING CURRENT TECHNICAL LIMITATIONS AND ADDRESSING REGULATORY AND LEGAL CHALLENGES. WHAT IS YOUR PERSPECTIVE ON THESE ISSUES?
We, at Telindus, are part of the ALCO Crypto-Asset Working Group. And as a working group, we have produced a white paper on how to do compliance on these new types of assets. We are really involved in this and we are aware that it raises a lot of interest and passion. In fact, there are two angles to this. On one side, the blockchain technology will have to adapt to the existing regulation. If I look at KYC, KYC regulation is not going to be changed because suddenly there is a blockchain. You still need to make sure that you know who the customer is. So, the techno- logy must adapt in a certain manner to the regulation. But it is true that, to a certain extent, the regulation must also adapt to the technology. Let me take the example of GDPR and the capacity to destroy your data. There is a way to destroy or make the data inaccessible on a chain. What does that actually mean if you say ‘the data is going to be destructed’? Because, even if you erase a hard disk, we all know that some police forensics experts can look at it and find something. It’s the same on blockchain: you need to ensure that the data is actually not accessible anymore. There, I think that the chain has to adapt to the regulation, there’s no question.
“The regulation and the blockchain technology need to adapt to each other.”
Now, sometimes the regulation needs to adapt to blockchain technology because there is simply no way to do otherwise. You cannot totally tweak technology. For example, if you have public and private addresses on blockchain that are being used to do transactions, when you are doing KYT – Know Your Transaction – on blockchain, you will not trace the name of a person, you start tracing addresses. And by tracing addresses, then you can trace more or less the legality of a transaction. There, the regulation should consider tracing addresses instead of people’s names because addresses are the only things available at a certain stage.
AML 5 is another interesting example. The 5th Anti-Money Laundering Directive has created a set of rules around blockchain that are especially aimed at exchanges. Exchanges must report on any transaction between fiat currencies and blockchain. They must do the same KYC, the same transactions. But at this stage, they have not included transactions between chains. Let me take another example. If Facebook Libra takes off, it’s a huge game changer in how people are going to do payments, based on a chain. But it’s also about interchainability, meaning that people do payments between chains. I will use my Libra and convert it to use Lumens for example. Here again, the regulators should address the issue and also monitor the transactions between the chains. Because the technological possibility exists and will not disappear.
“We need to work with trusted people. This is why we are part of the Infrachain initiative.”
BLOCKCHAIN HAS A REPUTATION FOR BEING FRAUD-PROOF, WHICH CONTRIBUTES CONSIDERABLY TO ITS ATTRACTIVENESS. BUT WITH NEW TECHNOLOGIES SUCH AS AI AND AUTOMATION GAINING MOMENTUM, THE POTENTIAL RISKS OF CYBER-ATTACKS ARE ON THE RISE AS WELL. WHAT ARE THE POINTS OF VULNERABILITY OF THE BLOCKCHAIN TECHNOLOGY?
Per experience, most vulnerabilities of blockchain technology actually happen off chain or chain adjacent, meaning that most money that has been robbed, information that has been stolen, were not taken directly from the chain but through smart contracts, through a wallet or through an exchange. Somebody out there spotted a weak point.
I think the biggest case is the Ethereum one, where users exploited a vulnerability in The DAO code to enable them to siphon off one-third of The DAO’s funds to a subsidiary account. They stole the Ethers from their organization but the rest of the chain remained untouched. That’s a very important point because, if we think about it, one of the oldest chain is Bitcoin. And if you actually managed to attack it, you would get over 100 billion $ in value. And I think that a lot of hackers would like that. But so far it has not happened. If it was possible to hack the chain directly, we would know by this time. That’s where the main vulnerabilities are.
It also means that you need to work with trusted people. It’s also an occasion to talk about an initiative we are part of. It’s called Infrachain and was kicked off by Telindus and other actors of Luxembourg’s blockchain industry in order to create industry-scale resilient blockchain nodes. At this scale, you need nodes that are totally secure and also that are always operational so as to ensure the continuity of transactions. Because losses may be due to the theft of information as well as the disruption of transactions. That’s a huge issue if you are in the financial industry. Initiatives like Infrachain identify and pre-emptively counter potential future threats.
CAN WE CONSIDER THAT, LIKE THE EARLY INTERNET, BLOCKCHAIN MARKS THE BEGINNING OF A NEW TRANSACTIONAL PLATFORM?
Blockchain is a game changer in terms of technologies and new business models. I strongly believe that it beholds business models for enablers. And in fact, I would describe it a bit more in terms of platform, as, in my mind, we’re entering the post-platform era. It’s more like the Internet. The new Internet of truth and the Internet of values. And actually, it’s a network of networks. So, the plat- form provider will gradually disappear to be simply substituted by trusted network providers.
I think blockchain will pressure the platform economy to evolve into what I would call the pure network economy. It means that the provider of the network will enable you and then you will lose exclusive control of it nearly immediately. It’s not going to be yours anymore and become, like the others, a participant, a founding participant.
As a network enabler, an actor like Telindus would play a key role. On one side, we will make sure that we provide the nodes but also allow people to operate on the network, we will provide the access to build the applications that will work on it. But we’re not going to control the network anymore, that’s going to be beyond our control. People would come to us and say « look that’s what I want to do in this network ». And we’ll say « OK, we’ll build that solution, that’s going to work on the network ». So, people are going to come to you, having their requirements, and you just provide them with a solution so they can operate on the network or with a technology with their nodes on the network. I think that’s it: from platform to network economy.
That’s really important. It goes back to interchainability, so being able to be a provider of interoperable solutions because the other person on the network may use a totally different protocol. But still we need to talk to each other, which is why we need to build bridges to interact with each other.
“With blockchain, we are about to shift from a platform economy to a network economy”
Blockchain will be the source of trust, truth, and fast, secure and cheap transactions for this network economy. We don’t know what the business models are going to be but we really need to be prepared like to say « OK, I’ll give you this component ». And that’s it, you take it and run with it. I mean if the corporate uploads information on that chain, you give them the chain, you can even operate the Chain as a Service, but then you’re basically done. Having said so, it’s going to obviously raise questions of governance. Being a member of the W3C, I have seen that these questions are often discussed and in continuous evolution.
But they’re going to be essential because technology is also going to require governance to enable change. That’s avery important point: We need to change our thought patterns in view to explore a new future…