The Big Interview

Jeff Handler: Blockchain applications are only at “the tip of the iceberg”

The Big Interview... back end blockchain is taking off in finance, but there is still much more to come, according to assurance leader who says banks are waking up to tech

PWC’s blockchain assurance leader Jeff Handler has achieved an impressive amount in his 26 years. Handler first became involved with blockchain six years ago as a college senior in the US, when he and some friends were part of the company that created the first Apple Bitcoin wallet.

Blockchain has evolved and matured extensively since, he says. “With any nascent technology, there are a lot of struggles and there can be uncertainty,” Handler tells Coin Rivet. “But from what I have seen, this is a very real technology and there’ve been massive developments in how it’s progressed. I think that will continue for a long time to come.”

Now UK-based, it is Handler’s job to help traditional organisations leverage blockchain to disrupt and create new businesses. He says blockchain is especially prevalent among financial institutions, adding that at least 95% of major banks across the world have done “at least some exploration” of the technology.

Indeed, some are fairly advanced: challenger bank Revolut has launched a service allowing customers to buy and sell cryptocurrencies. More solutions will come, but currently, says Handler, most banks are looking at ‘small b blockchain’: blockchain based systems to work on the backend. “There are a lot of back office, under the hood things – blockchain can create a lot of value there.”

Most financial sector blockchain projects are in their infancy, but Handler is working on multiple initiatives, for clients including a major UK high street bank. The bank’s emerging technology team had come up with a number of propositions in house to create new products and services, he explains.

“This bank had three or so blockchain focused propositions. We hammered out an iron clad business case analysis: not just what it is and how it will work – but why a bank would want to invest in a project like this from a revenue and a strategic perspective.”

The initiatives were mainly focused on payments. “In banking in the UK, there are huge wave of new challengers such as TransferWise – which specialise in things like international payments and can provide a more transparent service compared to a bank,” says Handler. He points out that “up until this point, banks haven’t been playing in this area”.

There is potential for more such offerings, but banks are naturally risk averse. Handler says the biggest risk is reputational, adding: “The other risk is the fact there is a lot of regulatory uncertainty surrounding the nature of these financial instruments; the biggest is in financial crime.”

“Within anti-money laundering law, one of the challenging things with cryptocurrencies is: even if you implement a system where the bank obviously knows who you are as a customer as you have gone through the ‘know your customer’ process – and even if you know the person sending those Bitcoins –  there is not really a viable way to ensure they will not be used for some kind of illicit purpose later downstream.”

He explains: “Let’s say I purchased Bitcoins and then withdraw them to an external wallet: I could theoretically be using that for some kind of criminal activity. But that shouldn’t be a show stopper.”

As Handler points out, there is no way for a bank to know what will become of the cash withdrawn from ATMs, either. “But they say that’s ok, because it is understood globally.”

And Handler thinks Bitcoin and cryptocurrencies should result in the same logical conclusion. “But there haven’t been any standards or regulatory guidance that would allow the banks to feel comfortable with this.”

There is also the fact that cryptocurrencies are backed by decentralised networks, which Handler says, “are easy to pick on”. He points out: “There is no central organisation that can, for example, sue someone for slander. The community will weigh in on a subject but because it’s a decentralised project, it’s more difficult.”

Issues such as these make it clear that cryptocurrency still has an image problem, but overall, it has come a long way, Handler says. “Before people would only say, ‘that’s the Silk Road thing’. Now, the recent ICO craze has been good in the sense that knowledge sharing around cryptocurrencies has grown: people have at least heard of Bitcoin and blockchain.”

But there are still many misunderstandings about blockchain that must be overcome, Handler concedes. For example, many fail to consider the difference between cryptocurrencies and blockchain itself.

Of course, at the same time, blockchain regulation is increasingly being discussed across the world. In the UK, work around the technology is predominantly being done by the financial regulator the Financial Conduct Authority (FCA). “The main area they are going after is the Regulatory Sandbox Initiative,” says Handler. This sees the organisation invite mainly start-ups to work directly with them for a set period.”

“If they have an idea about cryptocurrencies, or a new security token they can workshop it with the FCA and the organisation will give a stamp of approval or say ‘no’.”

As regulators grapple with the complexity of making rules for blockchain, there are still multiple use cases emerging, especially in the financial sector. Handler cites the example of trade finance. “You have these global networks of buyers and suppliers, where businesses are interacting with a variety of people – such as the end shipping company, and someone working in a warehouse.

“Currently, it takes a long time for payments to be processed in that setting, so suppliers will often get a loan based on their invoice: They will go to a bank such as HSBC and say, ‘we have a purchase order for X number of potatoes and they arrived in the warehouse but we aren’t due payment for 30 days and would like to get a loan from you for $800,000’.”

Right now, this process is extremely cumbersome for the end producers, says Handler, because it is difficult for them to be able to prove to banks the state of a current agreement: for example, whether it has shipped, and if the end supplier has approved the quality.

But a blockchain based network would allow every actor in the chain, from supplier to shipping company, to port authority and end supplier, to sign and broadcast the state of the goods. “You can have a system where banks have a verifiable real-time view of the goods that a company wants to be financed for,” says Handler.

He points out that this approach is a “win-win” for all parties involved. “The suppliers get access to financing at much better rates and more quickly, with less back office legwork, while the banks get a greater opportunity to issue more products to customers.”

This is just the start. Handler thinks blockchain is currently “only at the tip of the iceberg”. “People are really only looking at it now through a conceptual and macroeconomics lens. I think we will see a lot more ways for existing companies to build their own decentralised networks on top of solutions.”

In the future, he thinks there will be increasing use of blockchain behind the scenes. In a similar way to the trade finance use case, he says: “If, for users, it’s working well they won’t even know it’s blockchain; they will just know it works.”

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