Blockchain Innovation Beyond Bitcoin and Banking

Abstract

After the invention of bitcoin in 2008, the blockchain technology that underlies it has been shown to have a variety of applications within financial services and in digital applications beyond. While internet based currencies are feasible and sustainable, the experience of bitcoin shows that regulatory requirements are still needed. However, before regulators and other stakeholders adapt their practices, they await the outcome of what amounts to a high stakes, broad innovation race.

Our study focuses on innovation around applications of the core protocol and on how building a private and secure version of the blockchain can operate safe and secure networks. The innovation race is characterized by four features: high levels of investment, a standards race, an effort to control the directions of diffusion, and new rules of the game that will be applicable to generating business models. 1) Whereas R&D spending during the first few years was low, investments by governments, mainstream financial services firms, other large companies as well as numerous starts-ups and small firms has boomed since 2014. 2) While most efforts are presented as technical improvements or application modifications, another agenda is in setting standards and determining which kinds of applications are likely to be most lucrative. 3) This is high stakes experimentation but the winners hope to achieve platforms upon which a range of practices will be built. This explains the diversity of activities but also threatens to create a fragmentation of efforts that will in the first instance confound regulators and might threaten the longer-term viability of the core protocol. 4) Blockchain innovation beyond bitcoin is organizational and related to processes and business models. A new set of rules of the game are being devised and since bitcoin and its associated organizations such as Mt. Gox failed to seize the leadership, the challenge innovators face is to see who will set the pace as Apple did with the iPhone.

The potential for this manner of working with blockchains is great. Examples we present include:

• Nasdaq, uses blockchains for setting and clearing trades in pre-IPO trading; Visa is developing a “secure, scalable blockchain network” at a time when the payments industry is undergoing major transformation; IBM have connected blockchain to IoT and ran a “proof of concept” on their platform, Adept; In healthcare blockchain is regarded as a means to put patients in control of information while delivering a high level of trust. Similar applications are possible to voting and consultation systems within democratic organizations; Factom has reportedly partnered with the Honduras government on a program to record land ownership. Their goal is to reduce fraud and corruption associated with a government-controlled centralized registry.

Our paper assesses such new business sectors where operations models can be altered by the use of blockchain and on identifying regulatory practices that might provide stimulus for this type of innovation.

Keywords: blockchain, regulation, innovation

JEL Classification: 031, O32, O33, L56, L86, L96