"The blockchain is the glue that is going to drive a productivity revolution across the globe on par with what Henry Ford did with the automobile," he says.

Brody was one of dozens of global blockchain experts in Sydney last week to participate in a series of events. The Sydney Blockchain Workshops, in the Powerhouse Museum on Thursday and Friday, which were sponsored by Commonwealth Bank of Australia, attracted 300 delegates. Meanwhile, Westpac Banking Corp hosted 200 blockchain enthusiasts for a design challenge in Stone & Chalk on Wednesday, the day after the Prime Minister's visit.

Blockchain – a distributed ledger securely held on a linked network of computers that continuously maintains the records based on rules set out in code, thereby removing the need for a "trusted third party" to monitor transactions – has become all the rage in global banking circles over the past six months. Other industries are also grasping its potential. Brody says blockchain is the perfect technology to drive the internet of things and will bring in "a service-sector productivity revolution".

"In construction, in banking, in professional services, there are productivity lags," he says. "In a factory, Ford or BWM assembles a whole car in 40 hours. Why does a bathroom renovation take four months?"

Lawrence Lessig says blockchain is "the most important innovation in fundamental architecture since the tubes of the internet were first developed". David Mariuz

Tracking with chips

As ridiculous as it sounds, Brody says we are just around the corner from toilets being manufactured with cheap computer chips attached, to allow them to be tracked through customs, onto delivery trucks and into building sites, which will enable builders to co-ordinate installation times and efficiently sequence work flow.

In banking, potential blockchain applications are numerous. CBA's chief information officer, David Whiteing,​ pointed last week to trade finance and share trading as being ripe for blockchain disruption.


Other applications include bancassurance and asset financing. A key feature of the blockchain is to provide extremely reliable records on the history of asset ownership, so it promises to make insurance more transparent. Further, once cars are connected to the internet of things, telematics will be commonplace, while the enforcement of security rights may be made much more effective, as the blockchain could be used for digital repossessions (if a payment is missed, a creditor could, for example, shut down a car electronically until the payment is made).

Not surprisingly, regulators are quickly ramping up their understanding of blockchain technology. On Wednesday, all the main Australian financial regulators discussed the issue in a meeting facilitated by CBA.

ASIC chairman Greg Medcraft told the CBA-sponsored blockchain workshop on Thursday that ASIC had "embraced" blockchain, and suggested Treasury would need to examine how Commonwealth legislation might need to be amended to provide for its use.

As deliberations begin about approving the use of blockchains by financial institutions, Harvard Law School professor and internet law guru Lawrence Lessig warned developers on Friday to "avoid the same mistakes that we made 20 years ago at the birth of the internet, with obliviousness of those in the tech community to the way in which the law would react to what they were building".

Blockchain will undoubtedly occupy a large amount of regulatory attention from central banks and prudential and market regulators in 2016.

IOSCO has established a blockchain taskforce and at its next board meeting in February will spend a whole day on the implications of blockchain on markets, clearing and settlements. The US Federal Reserve has a team studying the technology.

"It is important the regulators move quickly; let's harvest the opportunity and mitigate the risk," Medcraft said. "Clearly this is moving very fast; I really see fantastic opportunities out of this … but it is a different style of thinking."

Regulatory war games


Lessig agrees. Closing the CBA workshop on Friday afternoon, he suggested that "regulatory war games" will be necessary to map out ways that particular blockchain architecture might cause conflicts with existing regulatory systems.

Regulators are examining blockchains to understand how they might increase systemic risk, as they are threatening to replace systems whose centralised nature allows them to act as shock absorbers in a time of crisis, something that blockchains, as decentralised ledgers, cannot.

Other issues include dealing with the immutability of transactions and the lack of flexibility in code, which contrasts with the operation of contract law, where obscurity is deliberately built in to make it responsive to life's subjectivities while allowing courts to override private-party clauses that breach the public interest.

"From the coders' perspective, it is hard to understand how you create a world with that level of confusion intentionally built in," Lessig says. "That is normally an accident, like a bug. But that bug is a feature that the law has, and when you see it, you should not assume immediately it serves no purpose," he told the developers.

Even though a blockchain was designed to have no central party and can facilitate the exchange of value automatically, blockchain has to exist within existing regulated infrastructure, Lessig said, because such is the importance of the commerce it seeks to facilitate that regulators will have no choice but to become involved in its operation.

King & Wood Mallesons partner Scott Farrell, a legal expert in financial markets infrastructure who has spent a decent chunk of this year studying the blockchain, believes the technology is "totally workable" in a legal sense.

"At the moment, some of the discussions are underestimating some of the other work that needs to go on to manage all the risks the current systems manage, but that doesn't mean it can't be done," he says. "I don't think there will be a brand new system next year that changes the world. But the foundation of that system could be built in 2016. People are moving so fast because this has real potential."

Lessig says blockchain is "the most important innovation in fundamental architecture since the tubes of the internet were first developed".

"It has enormous potential – to bypass corruption, to bypass fraud, to improve efficiency, and to enhance freedom."