While it would be an overstatement to say that blockchain or distributed ledger technology are mainstream, it is certainly starting to feel like we’re headed that way.
Nowadays, pretty much every bank, including the big four, are doing it or at least talking about doing it.
If you’re so inclined, you can easily find use case after use case, mainly in trade finance and settlements, explaining how blockchain is starting to revolutionise finance as we know it.
Though there are many distributed ledger technologies available today, in practice most proof of concept experiments are making payments either via a form of cryptocurrency or, in reality, entirely ‘off-chain’.
By ‘off-chain’, I mean using the familiar banking payments systems that have existed for decades.
One of the reasons for this is that we do not have a digital currency, fiat-backed or otherwise, that the broader business and consumer community can trust.
Trusted digital and cryptocurrencies must evolve – and evolve quickly – for distributed ledger businesses to successfully bring solutions to market.
To be clear, from a technical feasibility perspective, the focus to date on international payments via trade finance and other settlement transactions such as foreign currency exchange has been extremely exciting.
These pilots and experiments are necessary to push the boundaries of distributed ledger technologies, as well as raise mainstream awareness of their potential.
However, this highly publicised work largely remains in the domain of incumbent financial institutions, either directly or via consortium.
These organisations have much to gain in streamlining this part of the payments system. Yet, they are extremely reluctant to experiment with their domestic payments systems.
Domestic payments-based use cases present potential large-scale disruption to the financial services sector.
Imagine if businesses and consumers could transfer money between themselves without the need for a bank or financial institution as an intermediary, or exchange an asset for dollars in a trusted currency that did not need to be cleared by a bank.
It is this exchange of an asset for money that we are currently working on at Full Profile.
We are building a means of exchanging an agricultural commodity (e.g. grain) for its monetary value, in real time, directly between buyer and seller.
In other words, with our system, grain farmers can get paid in real time at the point they deliver their grain to a buyer, rather than up to weeks later, at which point the grain may have become a loaf of bread or a cow’s breakfast.
By enabling real time settlement on title transfer, we extinguish the current risk that a farmer will deliver and not get paid by the buyer.
Our aim is to extend our solution across the agricultural supply chain, de-risking transactions for all participants, embedding supply chain assurance and making much-desired ‘paddock to plate’ provenance a reality.
Of course, this solution currently includes supply chain financiers, like banks. But, in the world we envision, participants along the supply chain should not be constrained to use banks’ current payment processes.
Digital currency can enable seamless digital payment between parties without the need for an intermediary to manage the exchange. How would this work in practice?
One way of doing this would be to develop our own digital currency. We’d need to build trust in it, ensure it has a transparent value and use it for transactions within the ecosystem.
Alternatively, we could use a recognised digital currency, a ‘digital Australia Dollar’, if you will. This concept is not so far-fetched. England, Canada and the People’s Republic of China have started down a similar path.
However, it may be a distant reality in Australia as, to date, the Reserve Bank of Australia (while acknowledging the possibility of central bank-issued digital currencies that meet the need for low-inflation, low-volatility money that serves a similar role to cash) has adopted a ‘wait and see’ approach.
To generate innovation in this area and to test new business models that leverage distributed ledger technology, what we really need is to put digital currency firmly on the agenda.
This will require extensive stakeholder engagement. We are ready and willing to be a part of these collaborative discussions. It will also require mechanisms to protect consumers.
We’ll probably need sandboxes where experiments can occur (and yes, sometimes fail). We’ll also need to broaden the discourse to include digital wallet and identity applications.
There are many challenges ahead. But making a start on resolving these challenges will create competitive advantage for those involved and drive innovation overall for Australia.
The fact that some of this innovation will come from the start-up community is to be applauded and encouraged.
Payments are fundamental to the future of distributed ledgers and the future of our financial system should not be exclusively driven by innovation from banks.
Let’s get serious about pushing the envelope in financial innovation and let’s get real about the need for digital currency.
Emma Weston is the chief executive and co-founder of Full Profile, a provider of SaaS agri-commodity management solutions which utilise distributed ledger technology