Decision-makers need a deeper understanding of the blockchain

In this interview, Axel Apfelbacher, CEO of niiio finance group AG and internationally recognized blockchain expert, explains in which cases the use of blockchain technology makes sense, what can jeopardize its success and what disruptive changes there could be. He also debunks some myths.

Handelsblatt recently wrote in an article that "banks, management consultants and large corporations are investing billions to make all kinds of transactions faster, easier and more secure with blockchain" [1]. As an expert who has been working on the topic of blockchain for many years, can you please explain to us: How will these investments be amortized?

There are three main areas through which banks and exchanges want to amortize their investments. Firstly, there is the expectation and promise that a completely new trading and settlement infrastructure based on blockchain technology will lead to enormous cost savings compared to the current infrastructure.

The second aspect is the question of market penetration and turnover. Every market participant is afraid that such a new settlement engine could lead to a redistribution of market share. This is why practically all current market participants, as well as potential new competitors, are looking at the topic of blockchain, because they see a benefit for themselves in operating in this market or doing so in the future.

Thirdly, there is the expectation that blockchain technology will make it possible to trade cash flows that were not tradable in the past, resulting in the development of new financial instruments. This is interesting for companies that want to expand their current offering by generating new asset classes and then offering these to their end customers.

How do you explain "settlement engine" to non-bankers and non-exchange traders?

This is a machine or an application that ensures an up-to-date allocation of assets to identities and at the same time documents this transparently for all parties involved.

Everyone is literally talking about blockchain. Is blockchain technology even properly understood? To what extent do the relevant decision-makers understand the concept of blockchain?

Yes, the buzzword blockchain is really widespread. In my opinion, there is very little basic knowledge of what exactly is behind blockchain technology among those who actually decide whether to use the technology. They believe in very general concepts that attribute almost miraculous things to blockchain technology. Derived terms, such as "blockchain database", are used by everyone for their internal or external presentations to keep the interest of managers and decision-makers high. But at the moment, I still don't see any in-depth understanding of what is or isn't feasible with blockchain technology.

To what extent is the lack of expertise a threat to the success of blockchain technology?

The question is what is defined as success. If, in the end, a new infrastructure for financial services is created where blockchain was written on it, but then no blockchain is used, then we will still have brought about the desired change.

The risk with a new technology is much more that key security factors are not taken into account during implementation. The danger is that the lack of specialist knowledge about blockchain technology only leads to findings about what should have been done differently in retrospect.

We are currently experiencing this problem with internet technology. Here, security and identity preservation issues were put on the back burner in favor of speed. We are now finding that it is difficult to incorporate these things retrospectively and a similar scenario is conceivable with blockchain infrastructures.

Why is it worth looking into blockchain technology? And what obstacles stand in the way of the success of blockchain technology?

In my view, it makes sense to engage with blockchain and to invest resources in order to gain an insight into whether and how the promise of a new infrastructure for the financial sector can be fulfilled. It is also about understanding where it does not make sense to use the new technology.

Obstacles are certainly the lack of technological know-how. The question of what the transparency of data in a blockchain will achieve has not yet been conclusively answered. In contrast to the Bitcoin blockchain, there are good reasons for not demanding complete transparency for all transactions. There are also organizational and cultural hurdles in many companies. Their functional organization also leads to corresponding data storage in data silos, which contradicts the basic concept of data storage in a blockchain. Finally, there is no widely accepted standard for blockchain, which means that many companies are still waiting to invest.

What short-term applications do you see for blockchain technology? Which blockchain application are you currently working on?

We are currently looking at the question of whether and how the transfer of securities and financial instruments can be processed via a blockchain. However, this has more of a medium to long-term perspective due to the many regulations. As the niiio finance group is a listed company with disclosure requirements, I can't go into any more detail here.

Possible short-term uses for blockchain technology include, for example, highly developed applications for the trade finance business, i.e. when it comes to financing the production of goods abroad and their transportation to the buyer country. There are consortia between banks, insurance companies and logistics providers that want to organize the "documentary business" via a blockchain. In payment transactions, which have a different level of regulation than the securities business, there are projects that are well advanced. These concern, for example, the settlement of money between banks via a blockchain.

In which areas has too much been and is too much promised by blockchain technology?

In all areas that do not involve the safekeeping and management of assets or the organization of votes. Blockchain technology can't actually do anything else. With the consensus algorithm, I have a mechanism for voting in a community. I can also use a blockchain to track who owned what type of asset at what time.

When it comes to other use cases that are being discussed in public, it is not clear to me what the benefits of blockchain technology are and why its use is being promoted so intensively.

Blockchain technology is often said to lead to "disruptive changes". To what extent is this correct in your view?

I understand disruption to mean, for example, a redistribution of market share among existing competitors or the entry of new market players and a subsequent change in market share. Blockchain technology definitely has the potential for this. Using blockchain technology, a non-bank can organize the transfer of assets globally without relying on the existing banking system.

The possibility of using a blockchain to establish the new settlement engine mentioned at the beginning could lead to disruptive changes, as market shares could shift massively and the existing infrastructure could simply no longer play a role. Disruption comes less from the technology and more from the fact that an existing market is being massively changed by new competitors using the possibilities of new technology.

Where will companies and private individuals come into contact with blockchain technology in ten years' time?

Even in 2028, companies and private individuals will hardly have any direct contact with blockchain. In my opinion, there will be little change. Even today, bank customers have no access to the transaction and database logic of the machines that process their financial transactions. Access to the systems of a service provider that is currently called a bank, in which I initiate transactions, is sufficient. It is possible that transactions will work faster and cost less in ten years' time if blockchain technology is used. But in terms of usability, little is likely to change for end users.

It was also recently reported that "the revolutionary blockchain technology [...] could boost sustainable business if its hunger for electricity can be curbed." [2] So do we need more power plants in Germany if blockchain is widely used?

In my opinion, this statement refers explicitly to the consensus algorithm, which is also known as "proof of work" and has become very well known thanks to Bitcoin. There is no need to equip a non-public blockchain with such a consensus algorithm. There are other suitable methods that are nowhere near as computationally intensive. A blockchain in the real world, away from the markets for cryptocurrencies, is guaranteed not to use a proof-of-work algorithm and therefore the question of how a huge hunger for electricity could be satisfied does not arise.

How did you actually become interested in blockchain and when was that?

It was at the beginning of 2013 over sushi with an American professor and a technology entrepreneur friend. They were talking about Bitcoin and crypto markets and blockchain technology. I was skeptical as to whether it was worthwhile for me to get involved with the topic until I understood that the application of this technology to existing assets, such as shares, cars or land, was a very fundamental innovation. I then started to build up a private network of technology experts to whom I could ask my questions and with whom I continuously discuss the use of blockchain infrastructure models.

And you still enjoy the topic?

Oh yes. That's really the case and it will stay that way.

Thank you very much for the interview.