Banks are trialling it. The ASX is investing in it. Politicians have talked it up.

You may not have heard of it, but earlier this month representatives from the worlds of politics and finance (including a member of European Parliament and the US Justice Department's digital currency coordinator) met on Richard Branson's private island in the British Virgin Islands to discuss its revolutionary potential.

The revolutionary potential of what exactly?

Blockchain. It's the technology that bitcoin uses to facilitate transactions. Whether or not bitcoin ultimately succeeds as a currency, there's a lot of excitement that the architecture underpinning it could completely transform the way we do banking, cyber security and even democracy.

You still haven't told me what it is…

Blockchain was invented at the same time as bitcoin — in 2008 by the mysterious Satoshi Nakamoto, who may or may not be Australian.

It's basically the register of all bitcoin transactions, like a bank ledger.

Loading

When you make a transaction using traditional money, bank ledgers are updated to reflect where the money has come from and where it's gone. Similarly, when you spend a bitcoin (or a fraction of one), the blockchain is updated to reflect this.

But there are a few innovations that differentiate the blockchain.

To prevent abuse of the system, all bitcoin transactions need to be confirmed by the peer-to-peer bitcoin network before they can go ahead; and once a transaction has been verified, through a secure cryptographic process, it's added to the blockchain in a process that can't be reversed.

What's more, there's only one blockchain, and it's public — meaning every transaction ever made is visible to everyone.

So, no double-spending, no need for a bank to act as a middleman on transactions, and it's all transparent.

And this is important why?

Financial commentator John Lanchester, writing for the London Review of Books, says blockchain technology could change just about everything when it comes to money:

A decentralised, anonymous, self-verifying and completely reliable register of this sort is the biggest potential change to the money system since the Medici. It's banking without banks, and money without money.

It's this idea of "banking without banks" that has naturally got the interest of … banks.

If blockchain poses a threat to banks, why are they so excited about it?

That's the great irony. Bitcoin found a way to eliminate the role of banks in transactions. But now these same banks want to use blockchain technology to beef up security and make their processes more efficient.

The Commonwealth Bank is one of dozens around the world currently experimenting with the technology via the firm R3.

Late last year, the bank's chief information officer David Whiteing said:

Blockchain has the potential to transform banking in the way that the internet transformed how we buy music and watch movies.

Reserve Bank governor Glenn Stevens is watching the blockchain project with interest, telling the Australian Financial Review that he thinks it's "the really clever bit" of bitcoin.

The shadow minister for financial services, Jim Chalmers, is also on board, saying:

There's little doubt that blockchain will have huge implications for the way we transact in the digital economy.

The potential doesn't end with banking, either: it's been suggested that blockchain could be used for collecting taxes, issuing passports, registering land, and selling shares (the ASX is already an investor in blockchain).

What was that you said about democracy before?

Some enthusiasts think blockchain could even be a game changer when it comes to elections.

The dilemma for online voting has always been this: how do you protect the privacy of individual voters while also ensuring (and proving) that the overall outcome is correct?

Developers and entrepreneurs — including a start-up from Perth — are looking to blockchain to help find a solution.

But Dr Vanessa Teague, an expert in this field from the University of Melbourne, says we shouldn't count on them having any success.

Firstly, she points out that blockchain isn't invulnerable from attack. That's because the integrity of blockchain is contingent on the computational power behind it being distributed. So if you had enough computational power, you could alter the results.

Dr Teague says that's a big problem:

Think about the financial resources devoted to winning even an Australian election. Are you really sure that similar resources couldn't upset the blockchain ledger?

She points out that:

you can already use a cryptographic voting system without using blockchain

you can already use a cryptographic voting system without using blockchain many of the problems with online voting have nothing to do with the type of ledger used, like how to ensure there hasn't been coercion at the voter's end, and how to authenticate voters in the first place.

So while you can expect to see blockchain technology used at your bank, it looks like it's not about to replace the ballot box.