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Further Reading: Bitcoin's supporting tech could change the game

Widespread adoption of blockchain technology promises to expand opportunities for investors outside of public markets
Further Reading: Bitcoin's supporting tech could change the game
  • The practical uses of blockchain technology extends beyond cryptocurrencies 
  •  Keith Bear and Michel Rauchs have investigated the potential in a report for Invesco

It is generally held that scientific progress can be measured in increments, rather than quantum leaps. But it might be more accurate to describe scientific progess as something that occurs “gradually, then suddenly”, to paraphrase Hemingway. There are innumerable examples to support this proposition; medical use of gene editing, or the recent spread of fibre-optic technology, for example.

Readers might even be well advised to take out a tandem subscription to a science journal such as Nature to keep abreast of which technologies are likely to move beyond the theoretical realm towards practical application. It is worth remembering that the modern field of artificial intelligence came into existence in 1956, but took decades of work to make significant progress towards practical application.

We may be witnessing the same staggered roll-out with blockchain technology – “gradually, then suddenly”. Synonymous with bitcoin and other variant cryptocurrencies, this digitalised ledger technology was originally conceptualised by someone – or perhaps a group of persons – known as Satoshi Nakamoto in 2008, but blockchain-like protocols had first been described in academic circles in the early 1980s.

Much of the white noise generated by bitcoin is down to its skyrocketing rate of appreciation, a staggering 9,220 per cent over the past five years. Yet it can be difficult to assess its utility as a means of exchange because it relies on a decentralised structure – we can’t always be sure who is utilising it and why.

And though cryptocurrencies themselves are theoretically secure, the exchanges and the systems that surround them are not – even in a digitalised world we need to factor in human frailty. Satoshi Nakamoto’s brainchild has its adherents, but bitcoin’s status as an investment, or a store of value, is open to question regardless of the nominal price increase, and regardless of increased institutional support.

Investors may well be better advised to get up to speed with the underlying technology instead of bitcoin itself. “Whilst hype and reality may intermingle, the medium and longer-term transformation facilitated by blockchain technology is indisputable.” That quote, pulled from An Overview of Global Blockchain Industry Trends published by Invesco, suggests that tangible investment opportunities are set to expand in line with widespread adoption.

The analysis, put together by senior researchers from the Cambridge Centre for Alternative Finance, sets out why blockchain technology “enables any object, event, or concept to be represented digitally in the form of a (potentially tradeable) digital asset”. This applies to physical assets such as real estate, as they can be brought into cyberspace via virtual representations (digital twins) which take on the same legal rights and obligations as the underlying asset.

The use of blockchain within the land registration process is a key area for development. Every real estate transaction involves a land registry paper trail, where documents can be lost, destroyed or even falsified. In 2019, HM Land Registry successfully ran a blockchain trial involving the digital transfer of property ownership. The UK boasts a relatively robust system of land registration compared with most other countries, so the immediate growth opportunities for this technology – like with mobile banking – are centred in emerging and frontier economies.

Another widespread application relates to supply chain management. The importance (perhaps 'centrality') of this issue to the global economy is now better appreciated due to the disruptions brought about by the pandemic. When goods and production inputs are recorded on a blockchain, it provides an audit trail that shows where an asset came from and every stage of its journey. Improved traceability is critical for the effective management of complex modern supply chains, and blockchain technology could even be utilised to ensure strict compliance with environmental, social and governance mandates. The authors note that “while financial services and capital markets remain the dominant focus, other sectors have caught up, with supply chain management and tracking seeing the highest growth and traction”.

Nevertheless, investors will certainly witness increased utilisation of digital ledgers as platforms for the issuance, distribution and management of financial securities – and this extends well beyond public markets. Some industry analysts believe that decentralised ledgers have the potential to unlock private markets for investors. The technology promises to provide entry to previously inaccessible assets across a digitalised, transparent and orderly market, thereby drawing in capital and boosting liquidity. Many of the growth opportunities in the knowledge economy are to be found outside public markets, so blockchain could open up vast new opportunities for investors.

The applications will range beyond “an organic, bottom-up upgrade of legacy financial market infrastructure”, as “the blockchain ecosystem will continue to create value for people through the more efficient management of digital information records and assets – most likely in ways that we cannot yet fully comprehend”.

The global blockchain analysis by Keith Bear and Michel Rauchs can be found here.