5 questions about blockchain technology

“Blockchain technology will simplify and accelerate processes, transform business models and create new types of business. acatech’s publication will help us gain a better understanding of this new technology so that it can be harnessed to promote progress and growth.”

Interview with Hauke Stars

Member of the Executive Board, Deutsche Börse AG
Member of the acatech HORIZONS Blockchain project group

1. How did you first come across blockchain?

I studied computer science and engineering, so I always follow the latest IT innovations. In other words, I came to blockchain through an interest in the technology rather than because of the hype surrounding Bitcoin. This technology has a unique, disruptive and transformative value proposition.

Blockchain makes it possible to make business processes more efficient, optimise existing business models and even create entirely new ones. I am particularly interested in the “technology leads business” and “blockchain as an enabler” dimensions.

2. What else do you find interesting about blockchain technology?

Blockchain technology will simplify and accelerate processes, transform business models and create new types of business. acatech’s publication will help us gain a better understanding of this new technology so that it can be harnessed to promote progress and growth.

On the blockchain, all the participants can see the data in the same way. Cryptographic algorithms ensure the data’s authenticity. Moreover, once data has been stored in the blockchain, it cannot be altered. As a result, blockchain technology enables business models in which the participants interact directly with each other without having to go through a third party. Technically, this is known as a “peer-to-peer” system.

Because the data is distributed throughout the blockchain, it can be accessed by all the users, enabling distributed processes involving different actors. Since all the actors are working with the same data, the currently indispensable requirement to synchronise data across different systems and companies automatically ceases to apply. Obviously, this increases overall efficiency.

The biggest implications for businesses and society probably derive from the fact that the data cannot be altered and that the authenticity of the stored information is guaranteed by cryptographic algorithms, enabling the Internet of Value.

Whereas until now it has only been possible to exchange data and information on the Internet, in the future it will be possible to transfer digital value from one person to another. Property, for example, could be digitally represented on the blockchain and sold directly, without needing to go through an estate agent. Other use cases include the “digital identity” and digital land registers.

It is important to remember that technological advances are not enough on their own to bring about this kind of transformation – the relevant amendments will also need to be made to the legal and regulatory framework.

3. What opportunities does blockchain have to offer for the financial sector?

The properties of blockchain that I have already described obviously have applications in the financial sector. This is best illustrated by an example from my own professional life. At Deutsche Börse, we started addressing the topic of blockchain in a structured manner in the summer of 2015. A working group including members from all our business units developed a common understanding of “blockchain as a technology”. We then drew up a list of around 20 blockchain use cases that could be of interest to the Deutsche Börse Group. This gave rise to three current projects that cover everything from simple efficiency improvements to potential new business models.

The first project is a joint research project with the Bundesbank on transaction processing and corporate actions. The aim is to improve the efficiency of post-trade processing, in other words the core processes of our central securities depository Clearstream.

The focus of the second project, “LA Ledger”, is on the cross-border transfer of collateral and involves the development of our collateral services.

The third project, called “Collateralized Coin”, aims to move commercial bank money onto a blockchain. This would allow business models involving payments to be implemented on the blockchain, for example DvP, margin management and collateral management.

While these three projects are based on our “traditional business model”, we are also seeing very interesting developments in the field of crypto tokens, i.e. cryptocurrencies and tokenised assets – despite all the obstacles and the ongoing legal and regulatory uncertainty.

In cryptocurrencies, we have effectively seen the development of a new asset class over the past two years. Last year, we saw the emergence of Initial Coin Offerings, or ICOs, in the context of public blockchains and cryptocurrencies. In an ICO, companies issue tokens on a public blockchain. While the tokens may be a cryptocurrency, they can also represent shares in the company or offer access to digital services typically provided on the blockchain. Tokens bought in an ICO may subsequently be traded.

At present, ICOs share a lot of similarities with crowdfunding, and in many ICOs there is a risk that investors could come away with nothing. Startups often only publish a white paper that sets out their business idea, without providing any collateral. In some cases they don’t even have a product yet.

However, we expect a clear legal and regulatory framework to be established in the near future.

4. What misconceptions do you typically encounter when discussing this topic?

A lot of people think blockchain technology is the same as Bitcoin. This means that the drawbacks and problems associated with Bitcoin are automatically attributed to any blockchain application. Bitcoin mining’s high power consumption is one example, even though it is not actually an issue for corporate blockchain applications.

A similar misconception is that blockchain applications are the same as cryptocurrencies. Public blockchains need incentive mechanisms in order to function without central operators. That is where cryptocurrencies come in. However, it is also possible to create applications on these blockchains that function without cyptocurrencies. Blockchains that have a “conventional” operator – and that includes most of the applications currently planned in the financial sector – don’t need a cryptocurrency at all.

Another issue is that blockchain is often seen as a panacea. This leads to it being proposed as a solution to all kinds of problems, even if it isn’t actually the best option.

5. What key points should the blockchain strategy announced by the Federal Government contain?

I believe that the Federal Government’s blockchain strategy should be embedded in its strategies for digitalisation and Industrie 4.0. After all, blockchain is just one of the innovative technologies that are expected to play a fundamental role in the digitalisation of society. Other technologies such as artificial intelligence and quantum computing also have huge transformative potential.

The blockchain strategy should clarify the legal and regulatory framework regarding both the technology’s application and the overall situation of cryptocurrencies and tokenised real assets. It will be especially important to address the regulation of tokens and ICOs. At the moment, the regulatory situation is far from clear and there are a lot of shady actors on the market. Both of these factors are holding back investment in blockchain both in Germany and elsewhere around the world. The uncertainty causes talent and start-ups to go to countries with more developed regulatory frameworks.

However, there is still time for us to rapidly introduce investor-friendly regulations that attract capital, expertise and start-ups to Germany and keep them there.

My recommendation would therefore be to create a clear regulatory framework for ICOs and all the different types of token. The aim would be to minimise the risk of fraud and tax evasion, but without removing the speculative financial risk associated with these instruments.

Moreover, rather than being geared solely towards global enterprises, the strategy should also take both SMEs and the public into account. It might be worth establishing flagship projects as part of the blockchain strategy, for example on the “digital identity”. These projects could act as seeds for the development of more advanced projects in SMEs and global enterprises.

Strengthening research and education in the field of blockchain should also be a key component of the strategy. At present, there is a significant overall shortage of people with the relevant skills. And even those people who do possess blockchain skills acquired them informally – blockchain has yet to become firmly established as an academic research discipline.

We should therefore strengthen the developer communities that exist outside of universities and encourage knowledge transfer from them to academia. This will enable the development of widely available, high-quality, interdisciplinary blockchain learning content.

In order to do this, we will need short-term funding that can be rapidly approved and easily accessed. Government funding should focus on areas that receive little attention from the private sector, such as consensus mechanisms and blockchain security.

5 questions about blockchain technology

“Blockchain technology will simplify and accelerate processes, transform business models and create new types of business. acatech’s publication will help us gain a better understanding of this new technology so that it can be harnessed to promote progress and growth.”

Interview with Hauke Stars

Interview series „5 questions about blockchain technology“

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