Blockchain non-crypto use cases

00:13

Alex: Welcome to the beyond The Hype podcast. I'm Alex Olivares from Invesco and today I'm speaking to our guest Amarjit Sing from EY. We're going to be having a discussion about blockchain use cases outside of crypto.

00:34

Armajit Singh is a partner at EY, leading its blockchain assurance practices across EMEA and India. He is responsible for some of the firm’s largest financial services clients and leads a handful of its diversity inclusiveness initiatives.

All right, welcome Amarjit to our podcast discussion. It's really good having you. How are you?

00:54

Amarjit: Fine, thank you Alex, and glad to be here with you.

00:58

Alex: Cool, so before we kick off into the heart of the matter and we're focusing on blockchain in non-crypto uses for this conversation, maybe we could start it off with a question that I like to pose to all of our guests here, which is ‘what is blockchain?’ How do you define blockchain?

01:14

Amarjit: That's a tough one, so I see blockchain as a way of effectively grouping transactions together in a block using cryptography, to then prove the block. And then chaining those blocks together into a long chain. The cryptography allowing very easily for each block to be validated. But very difficult in calculating the hash in the 1st place. So which comes with a lot of immutability as well as the ability to prove that something did happen.

01:58

Alex: Interesting OK cool. So you know we're talking about blockchain overall and a lot of the headlines are focused on the crypto side of the equation and we see lots of news flow there, but just how big is the opportunity size for blockchain? Especially if maybe you look at it in totality? Is it the monumentally transformative technology that lots of people are talking about? Or is it something different? How big is it relative to some of those other things that people talked about recently, such as Internet of Things and big data? AI, how do you approach the opportunity?

02:33

Amarjit: So I think Alex for me, I would look at it in 2 different ways. You know on one way is actually just comparing blockchain to the Internet and how the Internet and the curve, the Internet went through, and how it has grown from the beginning to where it is now and I think you are now starting to see a lot of firms now also put out a lot more insight and research papers, which are actually comparing the growth in Blockchain. Two at the growth of the Internet or, or more recently, the growth in cloud computing. And when you actually map it across Alex, you start to see a lot of a lot of similarities, including admittedly the trough of disillusion it went thorough as well. You know where technology is? Go ahead and then there's a little bit of a pause before you know we get the next step, right? So personally, I think there's a lot that we only get very much at the beginning of what this technology can actually do for us.

03:33

Alex: By the way, where do you see us in that cycle?

03:38

Amarjit:  I think interestingly, just more recently with regards to what's happening too. I know we're not concentrating on crypto in this conversation, but nevertheless trying to separate the crypto conversation from the blockchain conversation can be a little bit difficult, but I actually think that we are now starting to see organizations recognize and realize what crypto does for them. Sorry what blockchain does. That brings to them and actually the benefits on what they should do or what they can do in in looking at blockchain as a separate technology.

04:13

Alex: That's interesting for the explanation of kind of where you think we are right now in the cycle. It's an exciting technology and a lot of people are excited about the applications of it. Cynics could argue that people have gotten a little bit carried away. Is it a phenomenon of a new hammer in search of lots of nails? That kind of hammer down? Or how should people use blockchain technology?

04:38

Amarjit: I think that's a really, really good question, Alex, and you might find it strange that although I am a team leader for blockchain, I'm also a skeptic in terms of challenging firms as to the use cases and ensuring that actually they've thought about whether, as you say, they're not talking blockchain just because it's the latest hype, but actually that it does address their problems.

So we actually have put forward what we call five sort of indicators on where blockchain may be appropriate to address a particular need or a particular issue as opposed to, you know, as you say, a hammer in search of a nail. So the first one is block chains are generally more suitable when there are multiple parties working together. So you're sort of looking at an ecosystem party sharing data or ownership, or collaborating in a process and so having a look at how that data is shared. Across a distributed network is starting to be sensible.

The second one then we tend to look at is do you actually need a trusted platform? So you know if you are within an organization already, then you really need a trusted platform, or if your external to an organization you know, do you actually need a? Do you need trust between participants? Do you need multiple points of verification? Because if you do, then again block chains are helpful because they could reduce the need of reconciliation. A version of the truth which everybody shares and everybody understands, and it's maintained across all the parties involved.

The Third Point is, do you really, really need an immutable record of transactions, data or agreements, right? And you know, there might be some situations, Alex, where that is not actually helpful, for example with GDPR and the right to be forgotten. So if there is a process that requires data to be deleted, for example, then actually a blockchain may not be suitable. So we do need to consider those sort of challenges.

The 4th point which here we reflect on is looking at the blockchain as a digital twin of an asset or as a as in terms of tokenization and the need then to execute some logic between parties, right? So with smart contracts etc effectively create and with tokenization you can effectively automate some logic. Is that useful? Is that what we need among participants here, and you know? Or is it actually that all we need is to store data amongst parties in a trusted manner? At which point some other technology may be suitable, right?

And then the fifth point is do we actually need a transparent record of what happened? Yeah, do we actually you know that that immutability, that consensus of the blockchain gives participants a visibility, and while you can restrict in certain situations the visibility to certain authorized parties only and we've got for example nightfall, which is a tech, which is why I've open sourced which anybody can have a look at, you know, but if they are processes of data that should be strictly confidential to one party only, then maybe you need to consider whether again blockchain is for you or you should be looking. At other technologies.

08:13

Alex: Interesting, interesting. So you're saying that basically you and your colleagues at EY have this framework by which to decide whether blockchain is the right solution, and rather not just applying this as a blanket approach to other use cases that actually might be better served by something as simple as a proprietary electronic database. For instance.

08:32

Amarjit: Exactly, absolutely.

08:36

Alex: And it's interesting that you that it really kind of pivots around the number of people in the ecosystem, whether they're internal/external, the need for kind of verification, immutability of the records, access to that type of information, whether there's a programmable element of other transactions that you want to do. So all those are the key considerations, aren't they?

08:56

Amarjit: Yep, yeah very much so.

08:59

Alex: So having said that and this is the I think one of the more exciting parts of having you as a guest given your work as a consultant and the number of different businesses and organizations that you work with. Perhaps you could start bringing this to life a little bit more for our listeners and pointing out some examples of blockchain being used in a non-crypto sense amongst the financial services sector for instance. So what are some of those use cases?

09:27

Amarjit: So Alex, my view on this. My personal view on this. It's not an if, but I’m aware that we will be reflecting on and updating the pipes that we have in our financial markets infrastructure and the reason why I say that, Alex, is when we look at blockchain as a technology and we look at these points about, for example, different parties working here than the fact that you can actually settle across. And effectively you have immediate settlement, etc. Versus you know what we might have with DVP (trade settlement: delivery versus payment) for two days at the moment where you then have settlement risk between counterparties, you have monies tied up which are not in treasury. You have situations where big reconciliation hubs exist, all which is all of which are just, you know, different parties making sure right that actually trades did occur, that trades have settled. That you know that the counterparty is the counterparty they're dealing with.

And so when I reflect and think about how blockchain technology can really help make the financial services infrastructure better, I think personally it's a no brainer that there will be significant market infrastructure impact on things like trading settlement and custody because of the benefits that it will then derive to functions such as risk, treasury etc., settlement services organizations.

11:00

But the flipside, Alex is a little bit like and actually, I guess I should pick a maybe a more recent analogy because you know, some people might not even remember a fax machine now, but to me it's the network effect problem. Right, that you know you do need people to do come together to get this benefit, and so if you've just invented the fax machine and you only have one, well, it's not very useful really, is it? And so how do you actually get that network effect together?

And the second challenge that also then arises? With the multitudes of different. Proof of concepts going on etc. and people exploring this area etc. Which one do you go for? Right? Which bucket do you put? You know, do you put all your eggs in? Because again, it's a costly exercise. Updating your systems t into these external settlements. What do you go for? Which do you go for? How do you know you've picked the right one?

So I think there's definitely still maturity to come, and I think these proof of concepts are absolutely key, by the way, because they flush out and draw out what the challenges might be across the end to end ecosystem, right? But I think until we get further down there as well, I understand the reticence of firms to sort of, you know, go for it, but I also think that if you don't dip your toes in the water with some sort of proof of concept, etc, I think you are going to start to struggle as and when the market moves, because you're not going to have that know how, the experience, etc on how to progress. Very much so that you know there are positive use cases in the FS (financial services) space. Very, very valuable use cases. It's getting the timing right and getting that network effect right.

12:52

Alex: With regards to kind of those points that you made about network effect and kind of maybe coalescing around a singular type of technology. How do we achieve that as a as a sector? Or you know more broadly, is it that you know government or regulatory bodies have to kind of kickstart these things? Or is it private enterprise with a couple big players? Pushing things along and then suddenly everyone coalesces around that technology?

13:27

Amarjit: I think we're seeing a mixture of that happening so far, Alex. I think what we are seeing definitely is some of the big institutions, the big institutes may be the wrong phrase to use. Some of the big cross industry organizations.

13:40 The non-for-profit type industry organizations that handle settlements that handle trading etc all starting to look at this and starting to and all of them running and looking to see you know how do we actually get either the banks or the custodians or the asset services or the asset managers etc to start to look at? What might this be and how would any of these sort of settlement infrastructures get moving? And then actually plug into those individual companies to make it happen? And so your point about what firms may want to do is to make sure that they are also hooked into a lot of these industry consortiums that are, you know that are that are already running across many of the FS sub industries.

14:30

Alex: Right, right? So that's a good overview for the financial services, use cases and maybe financial services companies, how they could keep up to speed with the developments that are happening at pace for our investor audience out there. I think it singles how monumental the change could be because it's that infrastructure, the pipes and the wires of financial services.

Beyond financial services, how are companies looking at blockchain? Technology and what are the use cases there?

14:57

Amarjit: I think, and I think that's really interesting question, because there are some really really interesting. This case is happening in the non FS space, you know we we've been involved with some governments in terms of public finance and our public finance option that has helped certain governments track, for example, budgets all the way down to where it's being used. So budgets being approved tracked down to you know which vehicle or ambulance it was used for. We've been involved in traceability, blockchains being used for traceability, be traceability of wine. Or traceability of blood, human blood supplies.

15:39

In terms of making sure that you know. Again, you know to make sure that it's again tracing where it's where it's been, where it's come from, etc. And supporting it's all about giving trust, right? The immutability of blockchain and using that to give trust to people that you know be the food or blood or etc. How do you know where it's been and where it's come from?

16:02

Donation type situation right. And we've been involved in things like also firms now using blockchain with regards to ESG or ESG type approach to show source of materials you know these kind of like supply chain applications to show you know where has a piece of clothing been or how has it got there.

And most recently I saw when I bought a shirt over Christmas that actually there was a QR code which let you scan and when you scan the QR code it linked to a blockchain which proved that that was an authentic piece of clothing as opposed to a counterfeit.

So you know there are there are lots of use cases from the traceability side. With regards to using blockchain to prove where something has been to, because you do then have that situation of multiple parties, you need a trusted platform. You want the immutability of data you want to track it, etc, and you want a transparent record. It ticks all those boxes right? And it gives you that that view of where something has been and how it's got to you. So a lot going on in the non FS world as well which is really. Really quite interesting.

17:29

Alex: Yeah, it'll be interesting to see the creativity that some companies employ to the technology, because like you said, if it's a matter of traceability or supply chain management, there's obviously lots and lots of companies that dabble in that space.

17:43

Amarjit: Yeah, I think the one I saw earlier this week was one of the car companies and I'm just being safe in not naming anybody but you can. You can go look this up. I don’t know actually, but there was a European I can’t remember now that was issuing an NFT (non-fungible token) linked to each car and the NFT would then hold the car’s records.

18:03

Alex: I saw that too.

18:05

Amarjit: Yeah, and that's again a sensible use case, right? It makes sense, it's useful, it allows you to again track and then have your service history and your mileage and all that good stuff there. And you know, if you buy that for used, you can trust where that’s come from, because of the data.

18:28

Alex: Well you were touching upon it already on ESG. And you know, we could kind of understand in the example of the shirt, you know, that it gives insight to consumers on, you know, the origins of the shirt, the data behind the shirt, and how it was produced, and lets those consumers have trust in that data. But is there more nuance to the equation of ESG, especially related to blockchain? Or are there maybe some questions, or some points that you could put forward to us so that we could kind of chew about it a little bit more because I would imagine it's quite complicated in that space.

19:01

Amarjit: Yeah, I think I think, Alex, it's worth as you say, chewing on that a little bit more because you know, I'm sure people would have read some of the press out there. And I you've heard the Cambridge Centre for Alternative Finance on as well, on their podcast before. And you know there is a lot of challenge out there about the energy use case for blockchain, right?

And in particular in particular types of crypto and that may change as some of the chains move towards a proof of stake [mechanism], and in fact most of the blockchains that we work with, in terms of more for, you know what we've just talked about in terms of traceability etc tend to be built on Ethereum, and you know, hopefully ethereum as it's made public, is trying to move to a proof of stake [mechanism which is less electricity dependent], etc. And then you've also got some level-2 layers [middle layers] like Polygon, etc, which we've been working with.

But the reason why I think also it's a more nuanced conversation is if we look back to the point you and I were talking about earlier on about financial services companies and the value of the benefit potential of blockchain you know, and the pipes many many of financial service companies have, they have huge, you know reconciliation hubs around the world for example. And again, if you think about OK, if you move to blockchain then you don't need those hubs. Right and those hubs, you know, use a lot of energy. I think it's important for us to also think about the end to end and think about again. OK, so if we do bring blockchain in here then actually what ends up happening further down the value chain? Or you know there are savings, which is positive and easy to get excited.

20:57

Then flip it around, In the social part of the equation, what happens to all the people who work in those hubs? Right, so it's a nuanced conversation. Are they going to be deployed in more value-add activities? Well that would be a good thing. And how does that work? So to me, I think you know there is a question that it's not very straightforward, just sort of. You know it's not black and white, nothing ever is that simple.

21:41

Yeah, but then you know when you look at us again and touching on all the traceability use cases to me, there's a lot of good S (‘Social’) there. You yeah so you know how? How do we? How do we then give that benefit from a social perspective?

There's a lot happening on carbon trading now using blockchain as well and things like that so. Blockchain to validate trees in a forest and and how that then goes on to a table or etc. So there's a lot happening there which is to me again makes this much more nuanced argument.

Like if you go look at G on the governance. DAOs (decentralized autonomous organizations) those decentralized autonomous organizations are quite interesting. They're shaking up the idea of governance, right? They allowing anybody and everybody at the moment. They're sort of challenging that traditional structure point. Now, yes, again there's been some papers put out about at the moment. They're calling it the decentralized illusion. They really decentralized, are they? And I think that's some of that is because we are also in the sort of space for very much allowing back to the participation of the community, by the users.

23:00

Exactly and what we? Space again, we've been pushed by the regulators in terms of proxy voting etc. Here in terms of actually making sure that you know investors are voting and how do we get the retail investors to all these sort of good stuff? If you think about it that way, again, there's some interesting Gee. Food for thought there.

23:19

Alex: That's right, and some enablement as well as some questions. Some philosophical questions for us as well.

23:24

Amarjit: Yes, Sir.

23:25

Alex: Brilliant, brilliant. Well we packed a lot of content, a lot of questions and topics in a relative short amount of time, Amarjit. Thank you so much for joining us and you know your perspective from EY is an interesting one because you see more than just the financial side of the equation or just the crypto and the brokerages. And that part of the ecosystem. So this has been really fascinating discussion, and I'm sure investors have probably taken away a little bit more of the concrete use cases besides the crypto side. So thanks again for joining us and it's been a true pleasure.

23:59

Amarjit: Pleasure to be on, Alex. Thank you for your time.

24:02
Alex: For more information about blockchain generally or digital assets more broadly, please visit etf.invesco.com.