Beyond the headline grabbing stories about Bitcoin, the financial services industry needs to start considering the value of underlying technology backbone behind cryptocurrencies and why it could be valuable - the block chain. So how does a block chain work and why could it be valuable?
A block chain starts with a decentralized ledger that is shared among several groups or companies. Any and all changes in the ledger must be agreed upon by all ledger owners. The ledger is publicly shared between the owners. Any ledger changes must be agreed upon by all owners. For example, a ledger could represent an ownership registry of commonly held stocks between, say, 10 companies. Each company would hold a ledger copy showing each company's stock positions. If two companies want to trade stocks, the ledger would need to be updated to reflect their new positions. All ledger owners, including the 8 companies not involved in the stock trade, would need to agree that a permanent change has been made to the ledger. Once all companies have agreed to the permanent change, all decentralized ledgers are updated. The benefits of block chain technology to financial services can be best explained using the TOPS (Transparency-Operations-Permanency-Security) model.
- Transparency - All transactions and exchanges of asset ownership are very clear and public to ledger owners and even regulators.
- Operations - The nature of a decentralized ledger forces the ledger owners operate in a common manner, using open source technology, common frameworks, etc. to operate as quickly and efficiently as possible to clear and settle changes in the ledger.
- Permanency - It allows a ledger owner to demonstrate enforcement and clearing of asset exchanges, e.g. contracts. Once an agreed upon exchange has been made by all ledger owners, the exchange is permanently recorded.
- Security - the very nature of a decentralized ledger means that no one single entity controls it, including changes to it. If one ledger is compromised by a data breach or other disaster, the other ledger owners can verify and validate current ownership of assets. It restores the breached ledger.