For a long time, I wondered why it took two days for my bank to process a Visa payment. If I went into a local branch on a Saturday, the payment didn’t show up until Monday. The bank issued the credit card and they knew me at the branch, yet the transaction took longer to complete than mailing a local letter.
The mystery has long since been solved and makes sense once you understand that banks are using processes that go back to the era of hand-written ledgers. To make things seem high tech, they overlay interfaces that look new and shiny. In reality, they are grafting layers of new tech onto the old. Behind the scenes my Visa payment passes through all kinds of hands before it shows up on my statement.
Streamlining these antiquated processes is one way that blockchain technology has the power to change things. Blockchain burst onto the scene in 2018 as an electronic way that ledgers can be shared. The key element is that once entries are made via a web site or common portal, they cannot be changed. Everyone can see the transactions and that makes them tamper proof. There is enormous potential in that.
Two years ago, the buzz about Blockchain was all about Bitcoin and other digital currencies. They were an easy way to grasp a complex concept. As Tesla is synonymous with electric cars, Bitcoin was to blockchain.
Bitcoin has established itself, rising from about US$4,000 then to US$18,884 at the time of writing. Meantime, the exploration of blockchain’s potential has spread to most sectors. They include governments, insurance, financial services, healthcare, food safety, and transportation logistics.
Blockchain is being used to make existing tasks more efficient and less open to fraud. For the most part these applications are not particularly sexy or even visible, but they are important. Like all infrastructure, they serve a vital purpose that is largely unnoticed until it goes missing.
A current example of blockchain’s potential is the move by many central banks to develop what are known as central bank digital currencies (CBDCs). This is essentially money that is housed in digital form. Some 80% of central banks are working on these e-versions of cash, according to the Bank for International Settlements. China is expected to launch its version in 2022 and the U.S. in 2024.
In our case, one CBDC would equal $1 and be issued by the Bank of Canada. At a touch of a button, it could move from my account to yours. My Visa payment on Saturday instantly debits my chequing account and credits my Visa bill. Central bank digital currencies will make cash increasingly irrelevant, which has big implications for the banks. A lot of their revenue comes from fees as they move your money around. Blockchain removes the need for them.
“Suppose you have a $50 bill in your pocket,” says Paul MacDonald, chief investment officer at Harvest Portfolio Group in Oakville, Ont. Harvest launched its Blockchain Technologies ETF (TSX: HBLK) in 2018, which was Canada’s first.
“What is its real value? Is it that it is printed on pink paper? The security hologram? Or is it the serial number? If it is a serial number, a digital currency can have its own unique number making it just as valid as a bill.”
Here are a few benefits of CBDCs:
Smart contracts: These are electronic contracts that use blockchain to embed terms and conditions – who is liable for what, when things must be paid, what triggers a default and so on.
Using a home sale as an example, the contract sets out the price, whether fixtures and appliances are included, the amount of the deposit, the closing date, and balance due. The contract could have an embedded electronic payment function, which transfers funds on closing if all conditions are met. It simultaneously transfers and registers the new title. No need to run around on closing day to deliver cheques or stand in line at registry offices.
Money laundering & counterfeiting: If digital currency has a serial number it can be tracked, which includes deposits into dubious banks for illegal activities. The value of transferred money to a known illegal activity could drop to zero, the equivalent of law enforcement seizing millions in a bust. Digital cash would also be difficult to copy.
Government services: My annual car license sticker comes in the mail after I fill out a form and pay. Who needs the sticker, if the information is available online? Other information is easily added as an overall history of the vehicle – other owners, accidents, maintenance records. You could track every part in it as it was made. If it was stolen and resold with substandard replacement parts, you would know.
There are plenty of examples of blockchain’s advances.
Pharmaceutical company Merck & Co., together with IBM Inc., KPMG, and Walmart Inc., undertook a pilot project to track vaccines and prescription medicines made by Merck from manufacture to delivery. Merck follows their journey to ensure they were not tampered with or stolen. Walmart does the same thing to ensure the integrity of what it is buying. Shoppers Drug Mart is doing something similar by tracking the medical cannabis it sells from seed to final product.
Health insurance companies also have a vested interest in this, since information about how much of a drug is being prescribed and to whom is valuable feedback.
Last month, JPMorgan Chase said its digital currency, JPM Coin, is being used by a large technology client to send payments around the world. JPM Coin is being used for cross-border payments, allowing them to clear and make the payments in record time. Vietnam’s Ministry of Education and Training recently entered into a contract with Singapore-based TomoChain to archive student records on a blockchain.
“There are applications like that across every sector, “Mr. MacDonald says.
The dilemma is how to invest. New technologies take a while to mature. Many of the blockchain hopefuls of two years ago aren’t around anymore. It highlights a rule of thumb, which is that products first out of the gate aren’t necessarily the ones that win the race.
My approach is a conservative one – investing in companies that have the most to lose by not keeping up with the times. These mature players want to stay on top and have the wherewithal to invest in R&D, acquire startups, and the leeway to make mistakes. All the while they pay dividends generated from core businesses. Move into new players as they mature.
Some of today’s leaders include IBM and Microsoft (which I own) as well as Visa, Mastercard, PayPal and Accenture. Logistics companies, including FedEx and UPS are early adopters, aggressively using this technology during the pandemic to move goods faster and ensure the right package ends up at the right address.
Another option involves ETFs that blend holdings of large capitalization players with the smaller companies on the rise. As the emerging companies mature the mix changes, replacing large cap companies with emerging ones.
More on the topic tomorrow.
This is an edited version of article that appeared in the Internet Wealth Builder on Dec. 7, 2020.