Blockchain. Distributed Ledger. Fintech.
If you think this is obscure tech jargon that has nothing to do with you, think again. This month, the Swedish National Land Survey and Fintech startup ChromaWay will test launch an initiative to put their land title records on Blockchain, and thereby safeguard the rights and interests of genuine property owners. Imagine what something like that could do for hapless property buyers in this country.
For those not familiar with the term, Blockchain is simply a distributed ledger, or a record of transactions, which is shared by a network of participants. Think of it as an Excel worksheet containing all the transactions in a network where members can view and post more transactions. It is also the technology underlying a digital currency called Bitcoin. Blockchain has several advantages of which immutability is the most important: a transaction, once written, cannot be changed and is therefore tamper-proof. Secondly, the transaction is validated by the network itself and needs no central supervision. These features make Blockchain perhaps the most disruptive occurrence since the Internet.
In my view, fintech firms with a cryptocurrency play, and especially coin issuers, are headed for consolidation. The 500-odd currencies will whittle down to about a dozen of the strongest...
In recent times, almost all financial innovation has originated in fintech firms (usually young startup companies creating financial applications with emerging digital technologies). So it is no surprise that they are also at the forefront of Blockchain action.
I see fintech firms engaging with Blockchain (or other distributed ledger technologies) in three ways.
One set works with the originally intended "outcome" of this technology, which is cryptocurrency. At last count, there were 513 digital/virtual/cryptocurrencies in play globally, many of them the product of fintech firms looking to offer an affordable alternative to Bitcoin. Then there are a host of companies which don't mint their own currency, but offer support services around Bitcoin and others. Cryptopay offers a Bitcoin Wallet and Bitcoin Debit Card that can be used to buy, spend or transfer Bitcoin; itBit operates a Bitcoin exchange; Coinsplit has an innovative service that enables easy sharing of Bitcoin profits with business partners. There are also news and data providers, Bitcoin infrastructure firms, Bitcoin miners, and gaming companies.
Creating solutions for different industries
The second type of Blockchain fintech is the application provider, which leverages Blockchain or any other distributed ledger, such as Ripple, to create solutions for different industries and purposes. ChromaWay, the company putting Sweden's land registries on Blockchain, is an example of this. In fact, distributed ledger technology can establish identity and ownership with respect to any type of property. Consider UjoMusic, which has built a prototype on the Ethereum Blockchain on which musicians can release their songs and also manage identity and licensing. PledgeMusic and PeerTracks are a couple of others working in this space. Fintech firms are also working with government on digital currency projects. Software firm Monetas, which is providing its Blockchain-based smart contracting platform to Tunisia to issue a new currency that will replace the eDinar, is a case in point.
Expanding the Blockchain ecosystem
Then there are fintech companies that don't have any solutions, yet play a significant role by helping to expand the Blockchain ecosystem. The reason they are important today is because the success of distributed ledger technology is directly related to the size of the user network. In fact, DLT early movers and monopolies have no advantage whatsoever, because they can do little with it until and unless their transacting partners come aboard the same network. In fact, our research tells us that ecosystem building is currently one of the biggest challenges to adoption. Therein lies the opportunity for the third type of fintech firm, which connects Blockchain aspirants with solution owners, works as a systems integrator, provides consulting services to those in need, or brings a variety of providers into the ecosystem. Consensys is one such company. A builder of Ethereum-based applications and tools for developers and end users, it also functions as a hub to incubate and accelerate new ventures through acquisition, investment and resource sharing.
As long as Blockchain is in its early days, all three types of fintech firms will have room to grow. But a few years hence, I anticipate the dust will settle and the market will start to shake out. In my view, fintech firms with a cryptocurrency play, and especially coin issuers, are headed for consolidation. The 500-odd currencies will whittle down to about a dozen of the strongest, with the remaining either getting acquired or falling by the wayside.
The second set of companies—essentially the innovators and disruptors—will continue to evolve and be funded. I expect that new companies with new ideas will spring up, while the mature players will step up their offerings.
The third type of firm will have mixed fortunes. Once Blockchain adoption crosses a threshold, there will be little need for go-betweens. But companies with a value-adding proposition—for example, training and education services, connections to regulators and market makers, or advisory services –will live to tell the tale.