For those of you who follow anything to do with blockchain and blockchain technology, you will know that the space has had its ups and downs in the last couple of weeks.
The exciting news is that two major players in the gold market, the Royal Mint and CME Group have announced a blockchain-backed gold project, and the surprising news is that the R3CEV consortium is apparently under threat.
Making a mint on the blockchain
The Royal Mint and CME Group have announced that they are working on a blockchain project together. The project will see the creation of Royal Mint Gold (RMG) digital tokens which will each be backed by 1g gold.
We will look at the Royal Mint’s announcement in more detail shortly, particularly at how they expect the implementation of a blockchain-backed platform to mean that they are able to remove storage fees.
But the focus of today’s research note is to look at why blockchain is grabbing everyone’s attention.
The use of blockchain technology in the gold space is nothing new, it is something we discussed recently in regard to changes in the gold market and the risks posed to the London gold market.
However, the move by the world’s oldest gold organisation is an illustration of just how complimentary the technology that was first known for backing ‘digital gold’ (bitcoin) and the longest surviving money, really are.
Goldman Sachs and Santander Drop Out of R3 Consortium
In recent weeks, both Goldman Sachs and Santander have dropped out of the R3CEV consortium, whilst a further five (including Morgan Stanley and National Australia Bank) are also rumoured to be about to leave.
R3 is a blockchain company formed of a consortium of near 70 banks and financial institutions (including those focused on insurance). It leads research and development in distributed ledger technology, and is currently raising $150m.
However the move by those mentioned above is a positive sign, and one that shows the blockchain (or distributed ledger technology) industry is maturing. Shake-outs are inevitable in new technology industries as institutions, governments and regulators negotiate their way through new developments and working out what it means for them.
Those companies that are set to leave the consortium are still committed to the ground-breaking technology. Goldman Sachs and Santander are both, for example, still shareholders in Blythe Masters’ Digital Asset Holdings. The former co-led a $60 million investment into the business alongside IBM.
Even CME Group, as mentioned earlier, are involved in multiple blockchain projects, as a member of the industry body Post Trade Distributed Ledger Group (PTDL) (fellow members include the London Stock Exchange, Euroclear and HSBC) and the Hyperledger project.
But what is it about this technology that is so groundbreaking and has the likes of Goldman Sachs investing millions and ex-senior JP Morgan banker, Blythe Masters breaking rank and joining a (well-funded) start-up?
Why are established gold-market participants deciding this is the technology they need to bring the space into the 21st century?
Uncertain about blockchain?
Bettina Warburg, presented a TED Talk over the summer in one of the best explanations we have seen for a long-time, that will help you to understand the power of blockchain technology.
Ultimately blockchain’s genius comes down to its ability to reduce uncertainty in the transfer of value – whether that value is information, a digital asset, a contract note, an agreement or a deed – you name something that is effectively information and it has value.
The exchange of value is something we have sought for millennia to reduce the uncertainty of, and it has resulted in the formal and informal institutions and systems we have today.
Ranging from regulators, to oversized banks like Goldman Sachs, to lawyers, to barter systems.
What is blockchain?
“So what is the blockchain?” Warburg explains it well:
“Blockchain technology is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. It’s basically a public registry of who owns what and who transacts what. The transactions are secured through cryptography, and over time, that transaction history gets locked in blocks of data that are then cryptographically linked together and secured. This creates an immutable, unforgettable record of all of the transactions across this network. This record is replicated on every computer that uses the network.”
Never seen before
The concept of blockchain, something that can be decentralised, can operate autonomously, is auditable and apparently immutable is something that is difficult to get our heads around. The closest description Warburg can provide is Wikipedia.
“We can see everything on Wikipedia. It’s a composite view that’s constantly changing and being updated. We can also track those changes over time on Wikipedia, and we can create our own wikis, because at their core, they’re just a data infrastructure. On Wikipedia, it’s an open platform that stores words and images and the changes to that data over time.”
There are of course further technical details to blockchain, but at its core it is a very similar concept.
“On the blockchain, you can think of it as an open infrastructure that stores many kinds of assets. It stores the history of custodianship, ownership and location for assets like the digital currency Bitcoin, other digital assets like a title of ownership of IP. It could be a certificate, a contract, real world objects, even personal identifiable information….It’s this public registry that stores transactions in a network and is replicated so that it’s very secure and hard to tamper with.”
This is where much of the attraction comes for the gold market. In itself gold is an immutable form of money, it cannot be edited, multiplied and in many ways it is an autonomous currency.
However the market that drives the prices is none of these things. By placing gold on a blockchain, we may get the first steps to a truly autonomous gold market that is about price discovery rather than price creation.
Why do we need it? It’s about value
Bettina points out that much of human behaviour comes down to how we exchange value. This has lead to a huge number of industries developing that are, at their core, about value.
They are about how we attribute value to items, how we exchange value and how we maintain value.
Blockchain will “fundamentally change how we exchange value”.
Why is this? Because the blockchain has a capability that no human-managed organisation has yet managed to master – the removal of uncertainty through technology.
Blockchain is an extension of economics
It still surprises me the number of people who haven’t heard of bitcoin, and even those who have heard of bitcoin are unaware of blockchain. Blockchain is the technology that underpins bitcoin, but it is so much more than the ledger of a cryptocurrency.
Blockchain means that we may no longer have to use the layers of bureaucracy in order to reduce uncertainty. Warburg sees the potential of blockchain as an extension of Nobel Prize winning economist Douglass North’s ‘New Institutional Economics’.
Institutions, in this context, are just the rules (and organisations, whether informal or formal) that implement them e.g. the law or just bribery.
“As Douglass North saw it, institutions are a tool to lower uncertainty so that we can connect and exchange all kinds of value in society. And I believe we are now entering a further and radical evolution of how we interact and trade, because for the first time, we can lower uncertainty not just with political and economic institutions, like our banks, our corporations, our governments, but we can do it with technology alone.”
Knowing that these organisations exist form the rail on which we operate our lives, our businesses and our economies. In the future blockchain will act as the rails that reduce uncertainty, on top of which we will exchange value through digital assets.
The uncertainties of life
“Blockchains give us the technological capability of creating a record of human exchange, of exchange of currency, of all kinds of digital and physical assets, even of our own personal attributes, in a totally new way. So in some ways, they become a technological institution that has a lot of the benefits of the traditional institutions we’re used to using in society, but it does this in a decentralized way. It does this by converting a lot of our uncertainties into certainties.”
For Warburg there are three uncertainties when it comes to transferring value:
1) Not knowing who you are dealing with
2) Degrees of transparency in complex transactions and supply chains
3) Reneging on an agreement – no recourse if it goes wrong
The uncertainty of the unknown party
Today, with many of the transactions we are able to take part in, the uncertainty is reduced thanks to verification. Whether this be by receiving a bank transfer from someone who has been verified by their own (also verified bank) or if it is booking AirBnb which you trust thanks to social verification, GoldCore customer reviews on Ekomi, personal reviews and links to Facebook profiles.
Warburg points out this is a very fragmented system. I have bank accounts in the UK, but if I want to open an additional one in the same country I have to be verified all over again. One verification does not determine the next. “Think about how many profiles you have,” says Warburg.
“Blockchains allow for us to create an open, global platform on which to store any attestation about any individual from any source. This allows us to create a user-controlled portable identity. More than a profile, it means you can selectively reveal the different attributes about you that help facilitate trade or interaction, for instance that a government issued you an ID, or that you’re over 21, by revealing the cryptographic proof that these details exist and are signed off on. Having this kind of portable identity around the physical world and the digital world means we can do all kinds of human trade in a totally new way.”
In the project announced by the Royal Mint and CME Group there is expected to be transparency over the ownership records – to those who have access to the ‘permissioned’ ledger.
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