Supporters of Blockchain, the technology that underpins the Bitcoin currency, claim its impact on the world would be has big as the Internet, promising to radically reshape finance, entertainment and public policy. Smart Contracts are one of the biggest applications being explored for Blockchain, as this could revolutionize how data is stored among institutions and how asset transfers are managed. In Luxembourg, the fund sector could be particularly impacted.
A Blockchain essentially works as a global and public ledger. Information is stored on a distributed network of computers, there’s no central database that can be tampered with or hacked. Every 10 minutes, all transactions are recorded in a virtual block, and a new block is created, linked to all the previous blocks in the chain. The blocks are visible to both parties involved in the transaction. It’s like a giant interactive spreadsheet that everyone has access to and can update to confirm each digital credit is unique.
With Smart Contracts, the terms of the contract are implemented in a computer language and can execute themselves when specific conditions are met. A large number of applications can be created using Smart Contracts, Given their potential to span a wide range of industries.
What impact on the fund industry?
Deloitte Luxembourg has published in March 2016 a whitepaper entitled «Impacts of the Blockchain on fund distribution» describing the opportunities and challenges of this disruptive technology that is top of mind for all the FinTech industry’s players. According to the authors of the paper, Blockchain technology is an opportunity for the fund industry to improve distribution process speed and efficiency as well as to reduce costs.
On the other hand, by automating processes and removing the need for intermediaries to distribute funds and process transactions, Blockchain might also be a threat for the Luxembourg economy, as the fund sector could be completely disrupted and largely automated.
Blockchain comes with some challenges to overcome, such as technology understanding, cultural acceptance, data privacy and confidentiality concerns, and standardization. Not to mention the remaining regulatory issues that will need to be sorted before massive expansion of these proposed services can occur.
The implementation of Blockchain-based solutions could take some time, making it necessary for both legacy and Blockchain systems to coexist during the transitional phase, forcing businesses to come up with strategies to adapt their current models to these emerging technologies. «They will also need to consider much larger issues, including business models, target markets, product and service portfolios, reward mechanisms, intellectual property rights, legal contracts, accounting and taxation treatments, and customer relationships» wrote Gartner VP and Banking & Investment Services specialist David Furlonger in a recent research report.
A new financial ecosystem
In their study, Deloitte’s analysts consider that, because Blockchain is by essence free from intermediaries and trusts, it makes no sense to apply the technology in isolation. Rather than launching independent projects, industry stakeholders must together envision a new financial ecosystem in order to take full advantage of the technology’s benefits and not be left aside. Luxembourg must structure itself in order to move forward into the new paradigm.
«Blockchain technology still has some major challenges to resolve. But it should be a priority for the financial sector to define a new operating framework for the industry in line with the new paradigm this technology has the potential to bring», stated Thibault Chollet, Director Technology & Enterprise Application at Deloitte Luxembourg, on the occasion of the publication of the Blockchain whitepaper.