Colin Platt, again, and we’re back with our regular blog programming, exploring some of the topics that Zeth, Shaun and I found interesting and worth exploring further.

A lot of people have been talking about securities tokens, in this post we’re going to look at what they are, how they are different, and a bit about why people are excited.

Securities obviously exist today, and usually in a digital form, so what’s the reason for tokenising this?

Efficiency and cost of moving a token versus the perceived cost of doing the same process through traditional means (i.e. with a broker-deal, and at an exchange then through your custodian bank and perhaps central securities depository), is generally cited as the main reason. However there are other potential benefits. Pointing towards the relatively strong buy-in, high trading volume seen in cryptocurrency markets and relatively low cost of issuance,  proponents see the potential to create markets and trading opportunities for assets which currently are illiquid (like real estate) or all-together untradable.

So what brought us to here? We know that initial coin offerings (ICOs) have kind of been a big deal, and the most popular implementation of an ICO token was done via the Ethereum ERC20 token standard.

Broadly speaking, the projects raising funds with ERC20 tokens can be split into two camps.  Firstly, those using the ERC20 token as a stand-in for an allocation of tokens in a future service, which will eventually have a greater range of functionality onchain. And, those using ERC20 tokens to raise funds with no firm intention to develop the smart contract on a blockchain. For the latter, many lawyers, and regulators have suggested that the mechanism (ERC20) and the approach to fundraising (usually light on Know-Your-Customer “KYC” and Anti-Money-Laundering “AML” processes) may not be appropriate.

Enter the STO.

STOs don’t start with the pretense that their token will be used in any way for a function other than representing ownership and rights in a common enterprise, though some may also potentially give legal rights to convert into another form of token (utility token).  Though lots of rules depend on the legal jurisdiction in question, at a minimum it is commonly understood that a security token should allow for tokens to be blacklisted from a party who is not legally allowed to own them. There may also need to be a function that allows for a pre-approval (whitelist) before initiating a transfer.  These rules clearly fall under KYC and AML regulations, as well as other potential rules. As the functionality of ERC20 token are pretty basic, transfer and approve, members of the Ethereum ecosystem saw an opportunity to improve and have made a few competing standards proposals (ERC777, ERC1462, ERC1410, ERC1411 and the Harbor supported R-Token, amongst others). Nothing has yet achieved the adoption that ERC20 current enjoy in the ICO space.

Beyond the technical functionality of the tokens themselves, other activities including the initial sale of securities tokens, the trading of securities tokens, and custody of securities tokens may also incur greater regulatory scrutiny, requiring issuers, investors, brokers, and exchanges to retool and reinvest to support these activities. Some of the interesting companies at the forefront of this include, Harbor, SharesPost, TokenSoft, and tZero.  Despite the apparent bear-market in cryptocurrency-land, many large mainstream financial institutions, like the Swiss Exchange (SIX), or NASDAQ have begun stating their intentions to support these activities in the near future. While many others have said, behind closed doors, that they are closely watching the developments in the space.

Perhaps opportunity abounds?

While, personally, I remain unsure of many of the promises of efficiency and new liquidity which many security token-supporters claim will come as a result of tokenisation, particularly when the cost of regulatory compliance is added on at the service provider level, it would be wrong to entirely discount this phenomenon. Should issuers and investors truly find benefits from tokenisation, service providers who have started to make inroads could benefit in scales which dwarf the 2017 ICO phase by an order of magnitude. Whether this has a positive (or negative) impact on cryptocurrency prices, however, is currently unclear (I’m certainly not giving trading advice). It is probably good for people who understand these new markets, and/or the markets that they are attempting to disrupt.

As always we hope that you enjoy this series of fortnightly posts, and welcome your feedback.

Note: Nothing in this post should be construed as investment advice, legal advice, or a recommendation of any particular project or crypto-asset.

Hi, I’m Colin Platt, co-host of the Blockchain Insider podcast, and a cryptocurrency and distributed ledger researcher and specialist. Happy New Year 2019, may this be a prosperous year for all of you. Zeth, Shaun, their team at Plexus and I have had a lot of talks about what is happening beyond pure banking in the blockchain space, so we decided to change up our regular posts this week with an insightful interview with Areiel Wolanow, MD of Finserv Experts. Areiel has had an amazing experience around delivering new technologies at large financial institutions, including within insurance. He also served as an expert and advisor to governments on blockchain technologies.

CP: Hi Areiel, thanks for agreeing to speak with me. Could you share a bit about who you and Finserv Experts are?

AW: I am the managing director of Finserv Experts, a small consultancy firm that provides both delivery and advisory services for DLT solutions. I have led the delivery of working blockchain solutions for a number of global financial enterprises, such as HSBC, Bank of America, and Lloyd’s of London. On the advisory side, I have engaged with several central banks and financial regulators around the world, addressed the G20, and am currently an expert advisor for the UK Parliamentary working group on blockchain.

CP: When you speak with large companies or government and high-level groups, how do you explain that innovation that you see in blockchain technologies?

AW: Blockchain is the latest answer to what is probably the world’s very first business requirement: the need for an independently verifiable future commitment between two or more parties. This need first emerged when we evolved from hunter-gatherers and first started planting crops and living in cities and villages, and many of the world’s most important business innovations – from writing to money to accounting to enterprise software – were simply better ways of addressing this one very old requirement. What DLT offers is a way for different people or organisations to share a single version of the truth, but still physically and legally own their own data. When I present on DLT, a simplistic but very effective definition that seems to work very well in getting the main idea across is: blockchain is simply Dropbox for ledgers. You write a transaction once, and it is automatically synced to the ledgers of every party to that transaction.

CP: A lot of people equate enterprise DLT with banking. You work a lot with the insurance sector. What are some of the pain points in that market and in your mind, how are these innovations relevant to solving these problems?

AW: The insurance industry tends to be thought of as being particularly resistant to rapid change. Given that the goal of insurance is to more effectively manage risk, most people both inside and outside the industry are okay with this and see the inherent conservatism as a good thing overall. But radical innovations can and do happen in insurance. In my lifetime, for instance, retail brokers for most forms of personal insurance have gone from being ubiquitous to virtually non-existent due to the fact that aggregators have a business model that serves most people’s needs far more effectively and efficiently than retail brokers were able to. DLT offers similar transformative potential as a clearing mechanism between multiple parties, a fraud detection aide, a loss mitigation tool, and most excitingly of all, as a way of delivering insurance to billions of people who are in desperate need of risk mitigation, but have never been able to obtain insurance at a reasonable cost.

CP: Compared to banking and other financial services, would you say that the insurance market is more or less aware of these technologies and the benefits you described?

AW: Awareness of the basics of blockchain, and of DLT more broadly, has largely become mainstream; insurance executives are just as aware of its potential as leaders from most other industries. Technical expertise is likewise becoming less difficult to come by; blockchain is quite elegant as a solution and is surprisingly easy to code. But there are two main challenges in bridging the gap between a conceptual understanding of blockchain’s potential and kicking off the technical implementation of a defined solution.

1. Articulating a business case for blockchain can be extremely challenging. This is due to the fact that adopting a DLT solution effectively means embracing a completely distributed business model. Distributed business models are new, and there are very few reference cases upon which delivered business benefits can be articulated and measured. And while it might be getting easier to find programmers who can build blockchain solutions, finding someone who can help write a good DLT business case is still quite difficult.

2. Stakeholder engagement for DLT projects is even more difficult than for other projects. Inadequate stakeholder management is already the main source of failure for IT projects in general and causes far more problems than any technical issues. With DLT solutions, by definition you are dealing with multiple parties, so instead of getting commitment from a single organisation, you have to secure commitment throughout the delivery life cycle from multiple organisations to have any chance of successful solution adoption. Finding someone who is good at this is far more difficult than finding a good programmer.

Addressing these challenges was the main reason we founded Finserv Experts about 2.5 years ago and remains our primary focus.

CP: Given these challenges around moving to a distributed model, what is the insurance industry looking at doing today? Do you see the UK insurance industry as a likely leader in adopting real implementations of these technologies?

AW: Most insurance executives already understand the transformative potential of DLT; as I alluded to above, the challenge is being able to turn that understanding into a workable plan for delivering a concrete solution. But the UK is phenomenally well placed in terms of global thought leadership. A good number of the world’s most successful and innovative insurtechs are UK based, far more so than its proportional share of the global economy. This is partially due to the crucial role that London – and Lloyd’s in particular – plays in the global insurance market, and partly due to the UK’s blockchain leadership in general.

CP: You also work with other technologies, such as machine learning. How do you see blockchains and machine learning working together? What are some areas where you see potential?

AW: While the benefits delivered by blockchain and machine learning can often be complimentary, they are usually thought of as being quite discrete from one another; they might end up in a single defined solution, but the business case costs and benefits would typically be separate line items, as would the resource estimates and delivery plans. But there is one area of interest that is starting to garner significant interest: data quality. Data consistency is already a problem in most single enterprises; it becomes even harder when multiple enterprises try to share a single version of the transactions between themselves. A good blockchain solution can make much of this problem goes away, and this creates huge opportunities in the machine learning space. Organisations that agree to use a DLT solution can potentially benefit from machine learning insights driven by a far wider learning base without having to reveal confidential customer data or commercially sensitive transaction data in the process. We are starting to see this happen on a microinsurance project we have going on right now in Southeast Asia.

CP: Switching gears, we talked a lot about blockchain, but what about cryptocurrencies specifically? Are insurance companies interested in bitcoin and Ether, or is their focus restricted to blockchain technology?

AW: Some insurtechs have experimented with accepting cryptocurrency as a form of payment for their products and services, while a number of insurers – especially in the London market – have begun writing policies for coverage of cyber risks. But specific insurance coverage for crypto-denominated assets is not something I have seen significant support for yet. Adoption of digital currency – be it crypto or fiat – is inevitable but will take place over decades rather than years. As of now, most crypto assets behave more like speculative asset classes than they do like currency, and increasingly they are coming to be regulated that way as well. This consolidation of treatment is likely to make it easier for insurance companies to offer crypto-related products by providing patterns upon which they can define and price those products, but it is still early days.

CP: Crystal ball, what does 2019 look like for blockchain technologies?

AW: 2019 will be an exciting year for DLT. A number of significant, global enterprise scale DLT solutions are scheduled to go live this year. Most of these will fail, as is the case with any new IT solution. But the few that succeed will provide a pattern which both investors and implementers will use to gain increasing competence and confidence to start gaining tangible benefit from the incredible potential that DLT has to offer.

CP: Wow, I’ve been hearing that ‘go-lives’ are scheduled for “next year” for the last few years. I am pleasantly surprised to hear that we’re moving forward and brave enough to schedule them for this year now. Thank you very much for sharing your insight and expertise. I wish you all the best in 2019.

AW: Thank you very much. All the best to you and your readers too.

Please let us know what you think. Where are the benefits of DLT? Where are the opportunities? Is this the year we go live? Which other industries would you be interested in hearing more about?

Blockchain technology is potentially game-changing for not one or two industries, but the complete outlook of how we perceive the global business landscape. When 200 healthcare executives were interviewed, 16 percent expected to discover a commercial blockchain solution at scale sometime this year or next year. The key performers for blockchain adoption will be industry groups, regulators, and market makers. Securing and managing data within healthcare and supply chain management are two great examples of major concepts influencing and being impacted by conceivable blockchain adoption.

Despite initial enthusiasm, the healthcare industry has lagged behind other industries in blockchain adoption.

IBM’s HUN – Big Win for Blockchain in Healthcare

Initially, the healthcare industry, similar to other industries, focused on delivering specific blockchain use cases first, each with its own application and network. However, to get competitors to collaborate with this approach was quite difficult.

Owing to the lessons learned from early blockchain work in the healthcare industry and the industry’s unique nature, IBM established the Health Utility Network (HUN).

What is HUN?

HUN refers to a blockchain-based ecosystem for the healthcare sector that incorporates a platform + network design. Rather than building a network for one use case, the intent is to fabricate a network for a platform that can scale for several use cases. In this prototype, a collaborative entity will stand up a blockchain-based platform and an inclusive, open, ecosystem upon which everyone will concoct solutions.

Platform-based solutions will leverage the data collected by the network. The network is pre-competitive, and consequently, it can and will benefit all parties involved. At its core, the network has a set of fundamental rules: a governance practice for how data gets exchanged across the network, how participants join, and how to adhere to regulatory compliance. Then there’s the platform, on which all interested parties will both consume and develop applications. The network, as a non-profit, will have expenses that will be sustained by a percentage of revenue from the platform and its apps.

This shift from the use case first technique has made blockchain a desirable investment and enables competing solution providers to enter a network and strive together for profit. The platform expands the scope beyond blockchain to carry applications leveraging technology like robotic process automation and cognitive computing. A recent IBV study entails the importance of thinking just beyond the first use case and the steps crucial to designing successful blockchain networks.

What to Expect? blockchain and healthcare

At the moment, the HUN network is in the formation phase, focused on establishing procedures and policies. When HUN goes into production later in the phase, the plan is to make the network accessible to any organisation that wishes to benefit from participation, ideally expanding to one day include all healthcare providers and consumers worldwide.

The use cases being prioritised, currently, are efficiency and back-office based, with a focus on refining processes by streamlining and decreasing expenses. These are conventional use cases that can prove the efficacy of blockchain right out of the gate. Once HUN has established its value, the hope is to expand the platform to be more revolutionary for the industry.

For example, HUN may one day streamline the patient’s experience by transferring records between providers with their consent, removing the need for the patient to fill in the same details repeatedly. Before long, patients would be able to see the journey of their data across a network that encompasses all healthcare providers and consumers on a global scale