The innovation of Blockchain and Financial Innovation: Disruptor’s for the regulated future?


Almost, if not all scholars, organisations and nations are today coherent of the economic and social benefits of innovations.  Granted, innovation happens on a regular basis and thus drives the development of products and services further interdependent of the nature of the innovation. In this essay I’ve taken one innovation (Blockchain) that is very novel and one innovation (Financial Innovation) that is more of an umbrella approach to innovation – These from first sight, have the potential to be disruptive and/or fundamentally ground-breaking in its nature, thus making them fascinating for further research.

innovation prcoess


The Blockchain innovation

The internet of today is a communication exchange protocol, the Blockchain is a value exchange protocol, and that is a significant difference.
Hence, we need to divide the internet of today and tomorrow based on these protocols. Simply put, the internet we know today is the internet of information. The Blockchain technology will be the internet of value. (Evry, 2016; Cortese, 2016)

The value derives via a protocol or ledger that cryptocurrencies like bitcoin are built upon, however the innovation can further be developed to valublockchaine beyond “money”. What made the internet of communication so successful was that the technology was open and available for everyone. The same principal goes for the innovation of Blockchain. The availability of value for everyone with access of internet and a smartphone or computer is a ground-breaking new ideology that fundamentally can change the entire financial industry. (Wessel, 2016)

Value however is very broadly defined. The crypto currency like bitcoin, makes value monetised, a standalone currency, free from regulations and mediators. The value will always be based on how much people or users of it think its worth, leaving it volatile and unpredictable. Much like the internet of communication made the exchange of ideas of information available to send instantaneously to anyone, everywhere, the Blockchain will open up the availability to transmit value instantaneously to anyone, everywhere.

The notion that we now can build innovative ideas around the very essence of financial instruments, that is public, unregulated and geographically unbound is for now a bit daunting, but nothing than revolutionary.

Additionally, Blockchain technology can be utilized by institutions or government if managed right.
A protocol in form of a scannable QR-code, could essentially be used as a voting code/token, making it a very attractive form of voting. Single unique usable codes for government elections allows for a democratic, transparent and eventually incorruptible balloting, open to the public. The open public ledger has potential for users or citizens to track elections live and thus making the election progress civic. It has the potential to fundamentally change less democratic countries when it comes to corruption and how people view and trust their nations government.

In the developed world, we take our matured banking and payment system for granted. Almost all of us have a bank account, and heavily relies on those institutions to function without interruptions, ever. The plastic cards in our wallet holds all of our financial information and the use of cash trades are declining steadily. Thus, we have faith that the system will work at any time of the day and year, and that the implemented rule of law will protect us if anything would happen. The western nations also hold the favour of having currencies most people want constantly more of, making trade profitable.

Scoping out to the developing parts of the world, this picture will look very different. The banking and financial industry is less advanced and most of all less widespread. The ATM innovation or the plastic card payment availability is still underdeveloped and the current currency is not considered as valuable as actual goods. Current Q2 2016 examples are Venezuela where the Bolivar is next to useless and people seek other forms of value instead. A crypto currency perhaps could not change or automatically fix the current problems within Venezuela. However, it could help to stabilize the economy as well as bring a very open and public perspective on their nation’s economy. Ersham argues that the possible outcomes for using bitcoin in central America that in some parts struggles with hyperinflation “Since Bitcoin is decentralized, there is no risk of policyinduced hyperinflation.” (Ersham, 2015)

The issue or possibility however is the overall infrastructure of the Blockchain technology. As a consumer, we can’t utilize the service until the groundwork has been laid out. Similarly, the internet was not really useable until the browser or email client came for the ordinary internet user. Same idea applies for Blockchain, where entrepreneurs and innovators now have to embrace and develop the technology in order to further develop the framework for the user.

Furthermore, the innovation is not without its problem. The cryptocurrency, and thus Blockchain, brings with them the anonymity of the internet and opens up for shadow based and of-the-grid markets. Bitcoin, as volatile as it is, are often blamed for being one of the number one used currency’s in online drug and weapon trade being very hard to track. This puts the questions about true anonymity and regulations on the top of the Blockchain evolution. The true essence in this innovation is the un-regulated idea with no intermediate in transaction. However, this can potentially give far too much control to the buyer or seller, making the idea of buyer and seller rights (such as return or payment rights) very difficult to enforce. (Negurita, 2014; The Economist 2014; Drake, 2014). Edward Budd, chief digital officer of Deutsche Bank, argues that regulators are not yet comfortable or knowledgeable enough about the entire technology, hence having a hard time “regulating” it in a way that major institutions can take advantage. (Macknight, 2016)

However, new types of start-ups should be in the forefront of adopting the innovation. Blockchain has a potential to be a breakthrough innovation, where start-ups can build disruption ready innovations built on this technology. Journalists and music creators could essentially get paid a few cents every time someone read or listened to their songs if the technology allows them to. (Cortese, 2016) Spotify applies the same principal, but essentially acts as an intermediary between the parties, without that 3d party the artist would receive 100% revenue allocation. Something that the artists have requested when being put on streaming services.  (Price, 2015)

Australia have the potential to be on the forefront and lead the way in order to harness the full power of the new technology. However, Australia needs to embrace and adapt quickly. The ASX are talking the first steps in order to do so and currently implement ways to integrate Blockchain with its settlement of equity trades, opening up opportunities. ASX chief executive Kupper points out;

“We think if we can get this right, we can get very close to real-time settlement. You should be able to sell shares at your desk right now and walk to the nearest ATM to get your money. That is our mission. The moment we are able to do that; we remove a lot of risk from the system.” (Eyers, 2016)

While it is exciting that government and large scale IPOs are embracing the technology, it is perhaps when the Blockchain start-up companies fully embrace the market-creating innovations really ground-breaking ideas will blossom. This, of course, is the hardest to achieve (Mezue, 2015)

The financial Innovation

Talking about financial innovation leads to problematic stances. It is a very powerful subject to grasp and much research in the academic world is yet to uncover the real influence it can have on the world of economics. Since it can influence changes or be indirect linked to disasters such as the global financial crises, it is yet to have some real breakthrough scholars around? (Wyman, 2015) financial-innovation-undeniable-role-in-society

So how do we outline financial innovation and how do we measure it? Research shows that financial innovation always seem to have two sides of the coin. The ATM, the credit ratings for both businesses and private individuals and reduced agency costs are all products of financial innovation. However, taking into account that these innovations can also have a darker side. The ATMs only work when the financial system work drawing examples of Greece and Malta where credit limits where imposed in order to protect the banks stability. Credit ratings can also impose a threat to general economic stability and easily create bubbles if not to tightly controlled, as we’ve seen in the more recent GFC and the devastation of subprime loans. (Elliot, 2010; Wyman, 2015)

The GDP for emerging economies can also greatly reap from the benefits of financial innovation and thus progress faster towards. Consequently, we can argue that the nation will be more reliant external finances and R&D thus making the entire industries more volatile when relying heavy on financial innovation. As a result, an entire nations banking section can become overly exposed to currency fluctuations and political instability and punish small scale businesses and bank users.

As finance really cannot be described as a tangible product, more of a method or system in order to handle the markets around the world. Nor can you describe finance as making money. It is about supporting activities. It is hard to think about any activities that can be maintained without financing.

So what makes Financial Innovation innovative? Much of financial industry are heavily regulated by rules and regulations. Even more so by every financial crisis or crash. These are natural precautions to ensure that same mistakes do not happen again. However, one can argue if the innovation in finance is merely tools to get around the new set of rules and regulations. It seems to be a constant cat versus mouse game where regulators trying to eliminate risks that the financial industry set up in the past.  It is important to outline in order to further put more research in the implications or opportunities of it. (Elliot, 2010; Macknight, 2016)

Australia have had a carful approach to the innovation system in the financial sector. The banking and finance environment is heavily regulated, leaving it one of the most controlled in the world. It is though important to point out that regulation per se is not a bad thing. It will automatically build control, stability and confidence around the entire sector. Australia proved this by being better of many other western countries when the GFC hit the worst. Consequently, with regulations barriers for disruption in the financial sector are larger and harder to overcome (Ciolek et al. 2015). However, in order to now boost Australia out of it’s current decline in manufacturing and other export industries, maybe a de-regulation of sort needs to take place in order to aspire new innovative growth?

The benefits of the financial innovations can be easy to outline. The growth of emerging and poorer countries GDP. New ways and solution to deal with wicked 2$-a-day population (Bottom of the Pyramid) problem who still is estimated to 12% of the world population (The world bank, 2016). The constantly aging population of the west are in dire need of innovations in order to mitigate the fears that the government and organizations won’t be able to pay out retirement funds when time comes.

Developing countries have especially hard to adapt to innovations. Necessary resources are naturally lacking, in order for innovations to truly blossom, and it is not often we see financial innovations coming from these countries diffusing into the wests, and it is often the other way around. Microfinance could be an innovation that further helps developing nations. (Wyman, 2015)

This could be one of the biggest difficulties to truly make financial innovation grow in developing nations. Research show that the longer two populations are separated, the more they will begin to differ from each other. This is an issue as the population and its characteristic will act as a barrier when trying to diffuse financial knowledge across borders (Ang et. Al, 2013)

Another issue that can derive from financial innovation is the sheer Darwinistic nature of competitiveness within financial institution. Innovation might indeed strive from it, but the collaborative nature might not be the first order of importance for organisations and firms. Hence, the small players, or start-ups can have a hard time establishing before being outplayed by larger corporations as discussed by Brown and Giandidois, based on Browns earlier research in the 2000. (Brown, Giandiois, 2013; Brown, 2000)

Conclusion and Discussion

Whilst financial innovation can happen all the time, the Blockchain technology has the power to forever change how the financial innovation will develop. While being breakthrough in its shape, the Blockchain has much like the financial innovation a vague definition of value. Indeed, as previously mentioned the value does not only equal to monetary value. Both having disruptive characteristics can fundamentally drive the technology further, and it is perhaps when both of these innovation landscapes really ground-breaking things can happen.

It is not without problems. As described both innovations are more or less prone to avoid regulations and thrives when are left by itself. Therefore, ironically, it might be the financial institutions who really embraces Blockchain, even though they essentially giving up being the middle man or mediator between peer to peer, and given the recent decline in trust in the banking system, the openness and transparency of Blockchain could really change that trend (Economist, 2015). Enterprise Innovation recently published a journal pointing that;
“Blockchain technology could save the financial services industry more than US$20 billion annually by 2021. […] investment in new Blockchain-enabled financial technologies will more than quintuple over the next four years, from an estimated US$75 million in 2015 to US$400 million by 2019.” (Enterprise Innovation, 2016)

Further articles from Eyeres’ and Senior executives from Bank Of England confirms these predictions to be true, making the Blockchain technology a very lucrative businesses to pair together with functions within the financial innovation umbrella. (Eyeres, 2016; Ali. Et al, 2015)

Furthermore, the Blockchain and financial innovations faces major publicity problems. The trust for the financial industry is continually declining. The latest GFC’s took a very personal role for many people, where entire city’s turned into ghost towns. The youth unemployment rate is yet to recover to sustainable levels and ongoing refugee crises are taking its toll on the financial and public sector. We see movements like occupy wall street as a direct reaction to this as part of non-capitalist movements and right extremist gaining authority in government demanding to tightening border control as a reaction to fix their nations rising unemployment and public service cost.

Media plays a great role in this and needs to portray the eventual good sides of the innovation in order to catch the larger audience.

“The most important financial innovation that I have seen the past 20 years is the automatic teller machine, that really helps people and prevents visits to the bank and it is a real convenience.” (Wall street Journal, 2009)

Paul Volcker, a former FED chairman explains the current financial innovation climate. He might be on to something, but it is ironic that one of the frontrunners in the Blockchain innovation trend now is the bitcoin ATM.

Indeed, it seems that both innovation presented are seamed in together, disrupting each other, and thus perhaps in the future will merge as a financial Blockchain innovation. Perhaps it is also then where the finical innovation will truly add more actual value to the global economy? It is then the industry will unlock scalable and transformative uses, and when real ground breaking innovation can occur. (Enterprise Innovation, 2016)

In the light of this, The World Economic forum argues that disruption is not a one-time event. Indeed, it needs to be a constant process of innovation(s) that changes and moulds business and customer behaviours, models and the long term structure of the affected industry (World Economic Forum, 2015)

The market-creating innovation are the hardest to execute, even though it will bring the most reward. The pursuit for non-consumers requires heavy investments for developing countries infrastructure and radical social change and perhaps even a new democratic system. The strategy’s involved takes years, if not decades to execute making the stakeholders vulnerable to geo political change. However, it is this type of innovation that will build nations (Mezue, 2015)

In order to further develop the developing world value needs to come from both the people and the government. The world as we know today, benchmarks this via GDP driving value from the nation’s economic growth and performance. However, issues with GDP and how well it echoes in today’s service orientated economy brings the question if another more current benchmark instrument.

This shows the importance of start-ups and early adoption in entrepreneurship that constantly shapes industries but that a collaboration between regulators and incubators is key in order how innovation further develops. The importance of the two working in the same time spectrum will harness the best outcome, as both are dependent of each other. However, policy and regulation-making often lacks the efficiency that it’s counterpart have, making this a very challenging issue. (World Economic Forum, 2015). OECD further argues that “Government policies can support innovation by continually reforming and

updating the regulatory and institutional framework within which innovative activity takes place. […] Other studies suggest that specific policy breakthroughs (by) removing anticompetitive regulations,” (OECD, 2007)

The heavy focus of de-regulation has been a centralised key factor in order to generate long term innovation and something that policy makers enforce.
It is clear that the performances of innovations are a fundamental part for competiveness and national progress, both in the developed and developing world (When applied with previous research from OECD). Globalized organisations like the OECD, UN and scholars addresses this as a key factor to further progress the world, and thus mankind, to face wicked problems such as climate and sustainable evolution and development. (OECD, 2007; Fagerberg 2010; United Nations, 2015)

Blockchain and financial innovation cannot and will not be the only resolution to these issues, but they can certainly be a part of the solution. It is then we can truly see real social and monetized value, for an open justly transparent and globalized world.

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