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2016: all eyes on blockchain

The good news is that the situation with regulators is improving, writes Matthew Key.

Clearly there is regulation that needs to ensure that the financial system is viable and that is all for the good: identifying risks. Some of those are stringent conditions – but that's good from an economic point of view.

The big thing that changed in 2015 and is going to change this year is the regulators' stance on cloud-based solutions. There is a much more enlightened attitude towards using the cloud because it can give you better agility, more cost efficiency, and it means for instance that you could enter new markets quicker. The issue around security of data has also become easier to understand. Not all applications are going to be cloud-based but some applications that are more suited to cloud-based activity will.Regulators are also trying to encourage innovation and competition. If this can be done, it will mean that the financial system is almost by definition more sustainable, because you have fewer big players that are risks.

Blockchain is big

One of these innovations is blockchain, the technology that underpins Bitcoin.

When a new technology promises to do the job of costly back-office systems much faster and more cheaply, the question is not if the financial markets will use it, but how much and how quickly. And our Global Services (GS) customers right around the world are considering the potential impact of digital currencies and the underlying architecture.

Once famous only for its use in online currencies, it’s now looking very much like blockchain could transform how the markets record transactions of mainstream assets. Everyone, from major institutions to fintech start-ups, is experimenting seriously with it.

Blockchain can be seen as a distributed, online public ledger that proves who sold what to whom, without a central record. It is a shared transaction register in the form of a publicly available shared database, with a sequential record of transactions. Algorithms check this order using cryptographic techniques to prove its credentials.

Efficient but disruptive

The fundamental ability of enabling a contract between two parties without the need of an intermediary is its strength and its weakness at the same time. It could serve as a tool for processing and settlement of transactions – and it is this potential that banks, governments, innovators and companies are looking at.

Blockchain technology could be applied to any market
that requires an indisputable record of asset exchange and payment

In theory blockchain is a more efficient way of distributing money much more quickly, which bypasses banks and has low costs. However, blockchain does this by circumventing current systems and regulation, which will need tightening to account for the change.

Blockchain technology could be applied to any market that requires an indisputable record of asset exchange and payment. But the big interest is in how it could revolutionise traditional clearing and settlement processes in financial markets, by completely replacing some of their slow and costly back-office processs. In doing so it could save banks tens of billions of dollars.

But it could also disrupt the traditional operating model of many players in the market. They’ll need to embrace the technology and offer blockchain-based services of their own if they want to compete with new entrants.

There remains a big issue around security, and how it can sit outside the banking system and regulation. It is the anonymity implied in this system that worries authorities as it can provide a route to payments for unacceptable goods. It is also outside of government control and therefore difficult to tax.

BT and blockchain

So banks and regulators around the world are looking at blockchain technology to understand what it could do if some of these hurdles can be overcome. Still, the security of the blockchain technology remains an issue.

A number of banks that I speak to are looking at it seriously in a proof of concept and our regulators like the Bank of England are encouraging people to look at it.

There is no doubt that blockchain is happening, it’s growing and it’s going to be very big.

But more than anything, there are questions. How will blockchain affect the role of exchanges, clearing houses and registrars? What’s the legal position on the new forms of smart-contract? How should regulators control an automated process that happens on numerous anonymous computers?

One thing, though, is certain. Any application of blockchain technology will need infrastructure. And that’s where we see our role. We’re here to provide the hosting, connectivity, security and storage to make it all work.

That’s why our research area in technology, service and operations (TSO) is looking at developing a number of patents in the blockchain area. And our investment so far means a leading GS customer is considering working with BT in a hothouse environment on blockchain potential.

Creating the right cloud cover

With the threat landscape getting more dangerous by the day, you need to know what risks to prepare for in 2016, adds Phil Swindle.

In 2015 we’ve seen the cyber-threat landscape become more complex and grow more dangerous with more activity from hacktivists, nation states, organised criminals and even petty criminals who’ve bought a ‘hacking kit’ on the dark web. All of these elements are likely to continue growing in 2016 – in skill and numbers. The top three security concerns over the past twelve months were data loss prevention, mobile device security and cloud security – and that isn’t set to change in 2016.

The good news is that there's so much innovation in security at the moment and new examples are emerging every week. These new approaches to security have the potential to making the overheads perhaps less burdensome at the same time. That is only going to continue into 2016.

If anything, cloud security will become an even higher priority as more organisations adopt public cloud and virtualisation services. The cloud is growing as more businesses are putting more of their valuable information into, or through it. And to get the most of the cloud, you’ll want to use connected clouds (or what we call the Cloud of Clouds).

Shifting your security structure

But this movement to the cloud brings up its own security concerns, and one that immediately springs to mind is identity theft. The cloud allows your people to benefit from mobile working, but working from personal devices can put their identity at risk. Another key focus for 2016 will be the way in which your response to cyber threats changes. Currently, about 80 per cent of the cyber-security market deals with perimeter defence – building walls to keep your key assets and IT estate safe. The remaining 20 per cent is put towards detecting threats that have already invaded your network and responding to them.

But this is changing. Gartner says that this 80/20 split will switch to a 40/60 split over the next five years. Why? Because the average piece of malware lies dormant (and unnoticed) for more than seven months before becoming active. And organisations are starting to realise that no matter how good your perimeter security is, something will eventually get in.

This means that in 2016, you’re going to want to be able to find the threats that do get on to your network and do something about them.

In the here and now, we have plenty of ways to help you deal with any threat that 2016 throws at you. With BT Assure Cloud Identity, we can protect your identity in the cloud using two-factor authorisation (a digital password and a physical security measure). And with BT Assure Cyber, we can use Big Data analysis to find any anomalies in your network and deal with them. Our visualisation capability can even draw images of Big Data, making it easier to spot patterns in large amounts of data.

The key thing is that as the cyber-threat landscape grows, your security needs to grow alongside it. And using BT Assure Cloud Identity and BT Assure Cyber, we can help you do just that.
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Read Chris Skinner's blog for the The best free research papers on #Fintech and #Blockchain