Institutionalizing Blockchain: From the Fringe into the Mainstream

Institutionalizing Blockchain: From the Fringe into the Mainstream

There is a general consensus that the Blockchain technology has a huge potential, akin to how the internet revolutionized information transfer. Blockc

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There is a general consensus that the Blockchain technology has a huge potential, akin to how the internet revolutionized information transfer. Blockchain is expected to overturn traditional industries by changing how financial transactions are done, altering verification mechanisms, and modifying voting procedures, as well as legal contracts. Nevertheless, there is no consensus as to where Blockchain is headed next. Even so, it is widely expected that Blockchain will be formally institutionalized into the financial system, with banks leading the way.

Blockchain offers unique advantages. To begin with, it will eliminate the middleman thereby making transactions more secure, cheaper, and faster. The financial system will benefit economically as they conduct billions of transactions daily. Secondly, Blockchain will prove useful in developing countries where corruption is rampant, and the authorities are deeply distrusted. In these nations, the Blockchain technology will allow people to achieve their civic liberties, which includes voting rights, formal registration of land ownership, and identity verification among other civil liberties. The direct, secure and decentralized nature of Blockchain, provides a safer and private alternative that will allow these people to achieve their civic liberties.

The Blockchain industry in Israel is well developed, and the nation is considered one of the leading nations to have successfully adopted the Blockchain technology. This success is due to the entrepreneurial ecosystem in Israel, which has allowed specialist firms to combine their expertise in big data and cryptography, with the knowledge gained from the security sphere of defense research and security operations. Among these firms are start-ups such as Synereo, Simplex and Colu (Colored coins). Synereo specializes in decentralized communication platforms; while the payments service, Simplex, strives to realize that people can purchase Bitcoins using their credit cards. Moreover, major financial institutions have also shown interest in using the Blockchain technology, as well as adopting other Blockchain technologies developed by start-ups.

Large Israeli banks such as Bank Hapoalim, Citi Bank, and Leumi have launched dedicated accelerators whose infrastructures are designed to aid early-stage initiatives. These accelerators provide funding and technical support, as well as create a platform that supports interaction and collaboration between the early-stage initiatives and the banking system. This creates a valuable synergy that allow entrepreneurs to develop products that can be adapted and used in a heavily regulated and highly conservative financial environment that banks operate in.

Additionally, the industry has attracted the attention of more investors, further incentivizing hopeful ventures, besides accelerating development in the field of Blockchain technology. Likewise, accountants and lawyers have also joined in, and they are working to discover, determine, and understand the challenges, and implications of using Blockchain.

The growth in the industry is projected to resemble that of the Israeli cyber industry where start-ups cyber firms evolved quickly from providing nationally-acclaimed innovative solutions to offering globally-acclaimed multi-tier services. However, even though the cyber industry benefited from a regulatory framework which provided a crucial tail-wind; the Blockchain industry has not benefited from a similar endeavor.

Two decades ago, Israel convened a meeting where defense experts, cyber experts, and the Israeli regulator met to discuss the opportunities provided by the cyber front, as well as the risks associated with cyber-attacks, especially attacks on critical infrastructure and security installations; and how such challenges could be countered. This led to the adoption of a combined approach, whose emphasis was on investment in technology, developing human talent, allocating funding, building institutions, and creating a viable regulatory environment, as well as allocating the necessary funding. This approach created the drive that allowed the cyber industry to thrive. There has been no similar endeavor with regards to Blockchain, partly due to skepticism and concern of regulators about virtual currencies such as Bitcoin, and their supporting Blockchain stratum, which allows people to circumvent government regulations and bank controls, hence endearing them to criminal exploitation.

The recent Mt.Gox, Bitfinex, and SilkRoad scandals have further deepened the mistrust the authorities have concerning virtual currencies and a decentralized Blockchain. As expected, Israeli regulators are still uncertain about the viability of Blockchain.

Nonetheless, the regulator has provided a support system, which incorporates a legal framework and supervision mechanisms; alongside backing for consumer awareness and confidence building within the industry, hence allowing Blockchain to move into the mainstream financial system. All the same, which mainstream financial enterprise will pioneer the adoption of Blockchain? Presently, some business across the globe have taken note of the utility of Blockchain, and have gained economic value from using the Blockchain technology in their various business operations. This has spurred grassroots growth as more businesses adopt Blockchain. However, big banks have not yet adopted Blockchain technology.

Blockchain is considered as a disruptive technology that will upset the present heavily regulated financial system. For this reason, big financial institutions avoid it, so as to retain the benefits that they gains from the present financial system. For authorities, they want to engage more with Blockchain so that they can understand its internal operations, as this will allow them to know how they will create an effective regulatory framework that preserves the existing economic model, as well as boosts consumer confidence in Blockchain technology and its myriad products. The financial system is well placed, owing to its knowledge in Blockchain and capacity to dialogue with the Israeli regulator, to incentivise the adoption of Blockchain technology. If this happens, institutionalization of Blockchain will benefit all parties, including the highly conservative financial industries, and in the process create a conservative infrastructure that supports a promising financial system.