First published on ABC's The Drum on 24 March 2016
An emerging technology called blockchain has the potential to transform the way we do business, and it's being rapidly developed at a time when Australia is in a very good position to take advantage, writes Jim Chalmers.
The Prime Minister has, for all intents and purposes, pulled the trigger for this year's federal election. But while those of us in the political world prepare to contest a federal election, our Olympians and Paralympians are preparing for Rio.
The medals they will bring home will be treasured rewards for many years of sweat and success. It's because these medals matter that their provenance does too.
Medals issued by the International Olympic Committee have special qualities and markers befitting the awards they represent. Verifying where something comes from, who passed it on, and who received it is how we trace the value of things that matter most in our world.
This sort of chain of authenticity is the principle behind a piece of emerging digital infrastructure that is attracting close attention across the world - called blockchain.
Blockchain is a piece of settlement technology that allows financial transfers to be recorded and verified without a trusted third party like a bank. As users make transactions, new blocks are created containing not only the new transaction, but the information of the previous blocks as well.
Instead of centralising the verification power in one entity, the blockchain distributes the ledger across separate nodes with agreed rules that make transactions valid and the system work. It's this removal of the need for a third party arbiter that makes the blockchain settlement mechanism so innovative and exciting.
The blockchain technology underpins and originates from the digital currency Bitcoin. New Bitcoins are only created by performing the complex calculations required to create a new block in the Bitcoin blockchain, in a process called "mining". Late last year, Reserve Bank Governor Glenn Stevens observed that the blockchain is, "actually the bit about Bitcoin that was, I think, the really clever bit".
Think about all the transactions that require financial institutions to verify funds before they are cleared, like those taking place in third-party networks or funds held in escrow for business transactions, and you begin to get a sense of why people regard the blockchain as such a big deal.
No one can say with any certainty what the full implications of blockchain are. But here are three specific reasons why we need to pay attention to this new technology.
Firstly, as the Deputy Governor of the Bank of England noted recently, it offers an entirely new way of exchanging and holding assets, including cash. If this results in lower transaction costs and faster transaction times, then the benefits of the technology could be significant.
Ignoring blockchain today would be like still having to teach kids how many pence make up a shilling make up a pound.
Also in the last month, a collaboration of 40 global banks, including Australia's CBA, NAB and Macquarie, announced a successful trial of blockchain technology for financial transactions. The group of banks is looking at ways to substantially reduce transaction times for things which can ordinarily take days.
Secondly, blockchain technology has applications much broader than just as a financial tool. It could be used for record keeping, digital rights management and self-executing contracts. You can easily perceive how this technology could be used in public and private institutions for things like health and aged care records.
Finally, blockchain technology is being rapidly developed at a time when Australia is in a very good position to take advantage of it. Financial services is the largest and also the fastest-growing sector in the Australian economy, according to the recent UBS/FSC State of the Industry report.
The broader services sector is the key contributor to employment growth, making up for weaker figures in other sectors, according to the RBA. Think about things like international tourism, wealth management and natural energy. It is in the services industry that blockchain technology can be most transformative.
We do need to catch ourselves before we go running away with all the possibilities of the blockchain. On the one hand, the technology has the potential to reduce fraud because of the transparency among users. On the other hand, there are still open questions about how secure the system is, which has obvious implications for something described, ironically enough, by The Economist as "the trust machine".
Some, like Pat McConnell from Macquarie University, have gone so far as to argue that we should be wary of stepping aboard the blockchain train at all, suggesting that its inherent limitations mean it does not have a meaningful part to play in the transactions of real finance. But with hundreds of billions of dollars already circulating using the technology in the form of Bitcoin, it's hard to deny its significance.
Realising all the benefits of the blockchain will depend on whether the technology can be scaled up and rolled out to provide a secure platform for handling large volumes of transactions. As the US-Brookings Institute has noted, much like the internet in the 1990s, we don't know exactly how blockchain will evolve, but evolve it will.
However it evolves, there's little doubt that blockchain will have huge implications for the way we transact in the digital economy. Correspondingly, Governments will need to monitor and adapt to the challenges of blockchain both to minimise the risks and to maximise the benefits.
Ignoring blockchain today would be like still having to teach kids how many pence make up a shilling make up a pound. Australia can't afford to be left behind.