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In March the cryptocurrency Bitcoin saw its value rise above US$60,000 for the first time2 continuing a record breaking - and at times controversial – run, which has seen it triple in value since the end of last year.
Among more recent investors in Bitcoin is billionaire entrepreneur Elon Musk, whose pioneering electric car company Tesla bought US$1.5bn in Bitcoin in February saying it plans to accept the cryptocurrency as payment3 for its cars in future.
With Bitcoin’s total market value now exceeding US$1trn4 - and amid increased adoption of the cryptocurrency by both investors and a growing range of mainstream financial institutions - renewed attention is now focusing on the Blockchain technology that underpins it.
In essence, Blockchain is a special type of distributed digitized ledger in which transactions are recorded chronologically and it can provide an immutable, time stamped record of transactions. While the technology is perhaps best known for its supporting role in the Bitcoin market, Blockchain is increasingly being used to support areas as diverse as healthcare, retail supply chains, mining and the food and drinks industry. Anything that requires an underlying ledger can, in theory, be supported or assisted by Blockchain technology.
Mellon portfolio manager Erik Swords has monitored the development of both Bitcoin and Blockchain since their inception and is particularly excited by the investment potential of Blockchain and the range of applications and industries it could support in the future.
“Blockchain has the power to disrupt traditional systems of exchanging, settling and servicing assets by offering unique ways to reduce costs, remove inefficiencies and lower fraudulent activities often caused by intermediation,” he says.
While moves towards a more digitized society – embracing cryptocurrencies such as Bitcoin – were in train well before Covid-19 appeared, Swords believes the pandemic has helped accelerate the development and implementation of many useful Blockchain solutions.
“While the digital transformation was well underway prior to Covid-19, the pandemic forced just about everybody that had previously worked in an office to go home and adopt new, more remote and electronic ways of working.
“Lockdowns quickly made us see how our society can function digitally. Most of the technological backbone and infrastructure for digital living and working was already there and, when the pandemic struck, we started to realize just how effective channels such as e-commerce can be,” he adds.
It is against this backdrop that Blockchain technology is finding some surprising new uses and applications, though its contribution to the financial sector remains perhaps the most obvious. In finance, early concerns about the abuse of cryptocurrencies and Blockchain technology have given way to acknowledgement that it can provide highly secure transaction channels.
According to Swords: “Today, the global financial system relies heavily on third parties to facilitate the exchange, settlement and servicing of assets. Blockchain can disrupt this established system by offering a unique way to avoid the inefficiencies and potential fraud opportunities posed by intermediation.
“The system does this by requiring individual users to reach a majority consensus in confirming asset ownership before a peer-to-peer transaction can become part of the community’s accepted ledger. It is very secure. For all the noise around Bitcoin, for example, the transaction system has never been hacked.”
Living by numbers
Beyond financial services, Swords sees huge potential for Blockchain application in areas such as healthcare, retail supply chains and the food and drinks industry.
“The number of ‘use cases’ we are seeing is increasing exponentially across business sectors as potential users learn more about the likely benefits of Blockchain,” he adds.
“In particular, supply chains have been notoriously inefficient and could really benefit from Blockchain - a system that offers end to end transparency and visibility for all the different constituents involved in supplying goods.”
Swords uses the example of fruit and vegetable supply to major supermarket chains to illustrate Blockchain’s usefulness. By documenting every step of the chain in a single system, he says the system can allow both suppliers and distributors to become more nimble and responsive to shifts in supply and demand.
“In food supply, a lot of things happens along the way. Being able to have a system that documents each and every step of that journey in the supply chain management system is remarkable because the data gleaned from that suddenly becomes much more relevant,” says Swords.
“One example could be when there is a shortage of certain vegetables on the shelves of a major supermarket. That can be immediately communicated back to the suppliers who will then know to get more vegetables on trucks that can then go on to the distribution centers that need them and ultimately to customers.”
Swords adds that data communicated via Blockchain can also give supermarkets a clearer idea of when to adjust the price of its vegetables and help them to become nimbler in adjusting to subtle changes in supply and demand.
The deep level of data Blockchain can provide on supply chains can also prove useful for a new, more discerning generation of customers who want greater information about the source of both the food and drink they consume and other products they buy.
Commenting, Swords says: “Younger people are perhaps more ethically and environmentally aware today and are always seeking more and more information about the goods they buy and where these come from. Taking a pint of milk as an example, Blockchain can allow customers to scan a label to learn how long that milk has been in transit, how long it has been sitting on it shelf and even which farm it came from.”
Whatever innovation Blockchain breeds, Swords is sure of one thing: it’s market and applications will continue to grow. Over time he believes the system may prove as influential and valuable as the Internet itself, though he believes it will take policymakers, private companies, investors and individuals some time to grasp and fully exploit its true value.
“The sky really is the limit. At the moment governments are trying to work out the true potential of Blockchain and other cryptocurrencies and also gauge what potential threats they might present to existing currencies and assets. The size and magnitude of these markets is potentially vast and digital transformation acceleration, convergence of technology and generational change are all key to its future growth and success,” he concludes.
1 The equity and multi-asset capability, including managers and analysts, of Mellon Investments Corporation (Mellon) is moving to Newton. There will be no change to either Mellon or Newton’s investment processes, approach or philosophies during the transition period as a result of this change. There are also no plans at this time to merge or rationalize any BNY Mellon Investment management-branded Mellon and Newton-managed funds. For more information please visit www.bnymellonim.com.
2 BBC. Bitcoin surges past $60,000 for first time. March 14, 2021.
3 CNBC. Tesla buys $1.5 billion in bitcoin, plans to accept it as payment. February 8, 2021.
4 CNBC. Bitcoin hits $1 trillion in market value as cryptocurrency surge continues. February 19, 2021.
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