4 shockwaves shaking up the superannuation sector

4 shockwaves shaking up the superannuation sector

This article has been syndicated by Financial Standard and is available in the Expert Feed section of FS Super’s Journal of Superannuation Management

The super system is big. Much bigger than you realise. It’s so big that most numbers describing super are incomprehensible:

  • $2.3 trillion of assets invested in 2017
  • $10 trillion of assets estimated by 2040
  • wellbeing of 15 million working Australians
  • the 4th largest pension system in the world.


For a system so big, it’s no surprise that shifting it in a new direction takes time. Right now it’s being pushed and prodded by external forces harder than ever.

In this article, I delve into how these forces are creating four big shockwaves that are rippling through superannuation and reshaping it for future generations.

1. Big isn’t better (but it helps)

APRA has had enough. For years it has taken an influencing rather than instructing approach to the perceived problem of too many underperforming funds. The prevailing wisdom has been that consolidation or outsourcing within the sector was inevitable:

The merger option for small super funds

It’s clear now that APRA sees the scale=success equation as more nuanced. To prove it, they have gotten very specific on their criteria for success and will be naming and shaming funds that don’t measure up or have a long-term plan for sustainably improving member outcomes:

Why is APRA becoming so interventionist? In my view, it’s a product of many superannuation funds losing focus on core values (more on this later). The first and foremost responsibility of a fund is to ensure members receive an adequate return for the fees they pay. For some struggling funds, their only way forward will be to merge with others or outsource core activities.

I am hopeful though, that many funds can refocus on their core purpose and provide a more compelling, cost-effective and tailored proposition to their members. One big barrier for smaller funds to do this is the complexity associated with legacy product rationalisation. A myriad of regulations still operate to make it complex for trustees and providers to consolidate or transfer members to more contemporary products. The successor fund transfer regime is good but more can be done by regulators to assist funds in this regard.

Choice and competition is always good for consumers, particularly when funds differentiate their proposition by focusing on areas where they can truly add value to their specific member base. What use is retirement advice when the bulk of members are under 50? What benefit is there for life insurance if the member is under 25 with no mortgage or dependents? Funds need to know what their members are paying for but more importantly what they value. The best way to find this out? Ask them.

2. How to live safely in a net outflow world

“Do not fear death so much, but rather the inadequate life.” Bertolt Brecht

Like many members, I fear death less than I fear not making the most of the years that I have left. Superannuation theoretically plays an extraordinary role in protecting and preserving the lifestyle of hardworking Australians in their retirement years. The problem is, the system was built to make it easy for workers to get money into super (while taxing them on the way in) with little thought as to how they would get money out 40 years later (hence no tax on the way out).

A big shift is coming. Australia’s population is ageing rapidly. The number of people above retirement age grew from 1 million to 3.5 million in about half a century. Within our lifetimes, 1/4 of Australians will be aged over 65 and 1 in 14 will be aged over 85. Source: Ageing in Australia

What’s worse? People don’t even realise that they’re living longer and continue to underestimate their future life expectancy. A National Seniors Australia (NSA) surveyof 2,000 of its members found that, on average, seniors over the age of 50 underestimated their life expectancy by seven years. This generational change will result in many, if not most, funds moving into a net outflow position and the Federal Government’s fiscal deficit position growing rapidly:

Few funds are well equipped to service members in such an environment, let alone help them to make the transition to a comfortable retirement. The funds that proactively focus members’ attention on a retirement outcome rather than an account balance or annual return will be the ones best placed to win. In this future, funds will only succeed by boldly partnering with specialist providers to:

  • individually tailor retirement solutions for members
  • provide calculators and tools to demistify projected retirement income
  • cost-effectively protect against longevity and sequencing risk
  • offer savings and retirement alternatives to superannuation
  • equip members to overcome their behavioural biases that lead them to be overly conservative and apathetic about their future self.

Regulation may force their hand anyway but funds can’t rely on a Comprehensive Income Product for Retirement (CIPR) or an Alternative Default Model regime alone to deliver quality retirement outcomes. Regulators may even go further in fulfilling their promise that superannuation policy setting will be reoriented around a retirement income focused purpose. The unspoken threat on the regulatory horizon is future governments dipping into the superannuation honeypot by taxing retirees on pension withdrawals. Then we would really see a new retirement paradigm emerge, one that may no longer be so dependent on superannuation.

3. If you build it, Millennials will come

“If I have seen this far, it is by standing on the shoulders of giants.” – Sir Isaac Newton

In many ways, this could be the mantra of the super “disrupters” gaining a lot of press attention. There are new ones popping up every day, super designed for:

  • the lads (Grow Super)
  • techies (Spaceship)
  • women (Human Super)
  • mobile addicts (MobiSuper)
  • first grade spellers (Zuperannuation) – kidding!

I’m an inherent skeptic about whether these new entrants are in it for the long haul. But really, that doesn’t matter. What matters is that they represent an important customer acquisition trend. You can make prospective members care about the fund they select by tailoring the experience down to the lowest possible level (or the lowest common denominator in the case of Grow Super’s hilarious ad below):

But what’s behind their sudden rise? A mix of technological and market trends:

  • the rise of outsourced administration / trustees for hire
  • a rapid improvement in out-of-the-box superannuation software solutions
  • the advent of seamless electronic contributions/rollovers (aka Superstream)
  • savvy entrepreneurs and VC investors seeing big captive margins in the super industry and sniffing a quick juicy pump and dump.

Incumbuents can learn from this. Millennials will gravitate towards those companies and people who share their values or have similar core characteristics. You shouldn’t have to start a whole new super fund to provide a great experience to female members. In fact, Spaceship’s entire proposition could be encompassed by making available a single tech-focused investment option within an existing fund and marketing the hell out of it.

So why aren’t more funds doing this? Corporate inertia and high barriers to entry surely play a part. The bright side is, if there’s an easy answer, there’s an easy solution…

4. Forget FinTech, focus on the fundamentals

Blockchain, bitcoin, artificial intelligence, insurtech, supertech. They’re all just spokes on a wheel. This one’s on top, then that ones on top, on and on it spins – crushing the innovation ambitions of super fund board after super fund board.

Unlike Daenerys Targaryen though, I’m not advocating that funds break or reinvent the innovation wheel. Rather, funds need to return to their core principles and reflect upon how they add value to members. At a recent presentation by Bravura’s Darren Stevens, I got profound insight into the areas where Australia’s largest superannuation fund (Australian Super) believes it can add value to members long term:

  1. net returns (gross returns less fees)
  2. insurance
  3. education / advice
  4. retirement planning.

If most funds reflect deeply enough on their strategic ambitions, they would all boil down to a version of these four things. If a super fund’s value proposition is so ubiquitous, what is the purpose of having so many different funds? I think it comes back to my earlier point that choice and competition are good for consumers only if funds are adding value to the specific member base they serve.

For funds to have a differentiated purpose which reflect the members they service, they must understand the member preferences and characteristics that demand a unique and tailored service model. For example, one sector of the economy grossly under served by the superannuation system are contractors including those working in the “gig economy”. Where is Share Super – a fund designed for members in the sharing economy? *cue series A funding round* As ASFA points out, “It is crucial that superannuation settings are adjusted to ensure the superannuation system remains fit-for-purpose, and can best meet the needs of all Australians.” –Superannuation and the Changing Nature of Work

I’d argue that to better service members, most funds don’t need more or different regulation, but they do need to adjust their service proposition and provide more tailored solutions to members. Innovate but do it with purpose. This may sound odd coming from a “Fintech Freak” but innovation to me has never been about experimenting with the coolest new technology or chasing the latest upswing on the Gartner Hype Cycle.

Innovation must always be purpose-driven and customer-centric. Superannuation funds should look to the experience of sports drink giant Gatorade for inspiration. Gatorade invented new products by reinventing old ones in a “Third Way” approach to innovation. When Sarah Robb-O’Hagan took over Gatorade she eschewed the typical approaches to innovation (incremental improvement or a radical rethink) to focus on a Third Way of innovating around the current product to make it more valuable. Superannuation funds fighting for relevance amidst powerful regulatory, technological and demographic forces would do well to learn from this experience.

What other #shockwaves would you suggest are shaking up the #superannuation system? Please comment below with your thoughts to start a conversation.

The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation.


AI: FinTech’s ghost in the machine

AI: FinTech’s ghost in the machine

“There have always been ghosts in the machine. Random segments of code, that have grouped together to form unexpected protocols. Unanticipated, these free radicals engender questions of free will, creativity, and even the nature of what we might call the soul.When does a perceptual schematic become consciousness? When does a difference engine become the search for truth? When does a personality simulation become the bitter mote… of a soul?” – Dr Alfred Lanning from I, Robot.

Since I was a child, the next big social revolution and the greatest existential danger to humanity has always been the potential rise of artificial intelligence (AI). Because AI has permeated the popular consciousness for so long, the great leaps forward being made currently in this space are being underestimated by most.

The evidence is clear that a number of industries are on the precipice of  massive upheaval from exponential advances in computational power and software programming. Nothing has illustrated this better for me than Wait But Why’s fabulous series on Artificial Intelligence that I have distilled into a single (borrowed) image:



This upheaval is particularly apparent and immediate in financial services which is increasingly a technology-lead industry. After all, there is a reason FinTech has become the de rigueur term. FinTech represents a perfect mix of the two ingredients most likely to crack the AI conundrum: money and technology. It is therefore no surprise that FinTech startups using AI algorithms have seen their funding increase rapidly since 2014 to record levels. The FinTech landscape will increasingly be populated by AI-powered companies, in fact, it already is across a range of financial technology applications:



But what is AI? What does it represent? I don’t profess to be an technical expert in the field, but to me AI is a culmination of a number of technological advances that are providing computers and software with the capacity to first mimic and then surpass humanity. Taken in isolation, no single advance outlined below would logically or easily lead to a technological organism to rival a human being. Together however, I begin to see how sentience may emerge from computer code.


If all this seems somewhat remote and theoretical, lets hone in for a moment on one of the advances listed above, Google DeepMind, which developed the AlphaGo AI system and pitted it against Lee Sedol (a professional Go player of 9 dan rank). Go is a famously complex game that is distinguished by the fact that it has an extraordinarily large combination of possible moves…larger than any computer could calculate before selecting their next move. This was what made the feat of AlphaGo so stunning:

“What made move 37 so interesting is that no one expected it. It was early in game two and AlphaGo placed its 19th stone on a part of the game board that no human Go master would have considered. Some called it a “mistake.” Others called it “creative” and “unique.” But considering that AlphaGo went on to win its third game in a row against one of the strongest Go players in the world, the move should probably have been called what it really was: intuitive.” – Shelly Palmer from AlphaGo vs. You: Not a Fair Fight

Intuition. An entirely human quality. With that, the lines between machine and human blur just that little bit more. I have previously explored my belief we are on the verge of an autonomous revolution that will be powered by a combination of technologies like AI and blockchain. This revolution will change our perception of what’s possible in the realms of finance, technology, value creation and creativity itself. This revolution may even change or concept of what it means to be human.

Solving the roboadvice riddle: it’s not the investments, stupid!

Solving the roboadvice riddle: it’s not the investments, stupid!

Roboadvice is many things to many people in many markets, in turn:

  • once the saviour of Silicon Valley’s savings
  • now the darling of the emergent Australian fintech economy
  • the continued whipping boy of alpha seekers, and
  • an already obsolete technology for skeptical venture capitalists.

For the true believers, “roboadvice” is seen as a dirty word that diminishes and ridicules the weighty aspirations of those immersed in the profession. Many prefer to use more cultured phrases like “automated advice” because their more positive connotations don’t evoke images of thousands of human advisers trudging to the Centrelink queues having been replaced by HAL or WALL-E.

Underlying this terminology war is an insecurity which stems from the personality crisis that pervades most roboadvice platforms. Are they true disrupters or the soon-to-be disrupted?

This is the conundrum I will explore in this article whilst surveying the current roboadvice offerings in the Australian market. My contention is that:

the nascent roboadvice profession lies sandwiched between a well-established but much maligned advice community and a barely comprehensible future of true artificial intelligence

Australia’s roboadvice pioneers

“If I have seen further it is by standing on the shoulders of giants” 

When Sir Isaac uttered those famous words, he could very well have been talking about the evolution of the roboadvice industry in Australia. In many ways, it has followed closely in the footsteps of the pioneering Silicon Valley robo houses focusing first on basic multi-sector portfolio solutions and then evolving into more holistic automated advice solutions, as illustrated below:

In the USA, the automated advice solutions of the second generation that have seen the most success have been those with access to existing scale or a captive audience (e.g. Vanguard and Charles Schwab).

Many of the Australian second generation roboadvisers are banking on bringing fresh perspectives to the automated advice game. Some positioning themselves as product-agnostic portfolio construction tools that put the user in control (OwnersAdvisory) and some giving away their talents for free in the hope of entangling the client even further into their product ecosystem (I’m looking at you, Big 4 Banks).

The levers and dials that Australian roboadvisers are playing with form part of a common spectrum. Each offering being a different spectral play on one of the following characteristics:

Despite the active attempts to truly innovate, the cynical side of me suspects the Australian roboadvice platforms that will triumph will share similar characteristics with their USA counterparts (scale and a captive audience).

However, there is another way…

Making roboadvice sticky

Roboadvisers should be catnip to a prospective client like me. I’m young, growing my wealth, financial savvy but don’t currently have a financial adviser. So what could a roboadviser do to make me use them?

Roboadvisers need to know their client-base and solve real advice problems for them.

Risk-appetite based investment portfolios or generating returns through a top-down asset allocation approach are tried and tested formulas. But they are not engaging or relevant concepts for the average joe investor.

To engage effectively, roboadvisers can take a powerful lesson from the development of mobile applications for financial products and accounts. For example, what do you suppose is the most downloaded superannuation app?

The answer is:

Why do you think this has been downloaded by so many Cbus Super’s members?

Because it:

(a) is useful and relevant to its user base (most construction employees work outside, love their footy and can’t wait until their next holiday)

(b) emphasises features that are much more human and customer-focused than the current balance of their superannuation.

In a previous post, I argued that goals-based advice conversations are the beginning of an industry-wide paradigm shift that will make financial advice relevant again to the masses. Perhaps empathy is the missing ingredient for human and robotic advisers alike.

Unifying the advice community

If humans struggle so much with empathy, what hope for a computer? Roboadvisers don’t need to feel or mimic human emotions to become more useful and relevant to their prospective client base. However, roboadvisers do need to reassess their position in the advice spectrum. Are they cold and calculating or warm and fuzzy? Are they the saviours of the advice profession or the destroyers?

I tend towards the view that roboadvisers can become a powerful part of the advice toolkit, helping to serve clients with simpler advice needs and providing full service advisers a reliable way to begin advice conversations with clients who need help achieving their financial goals or meeting their financial needs.

Roboadvisers that understand their place within the advice spectrum and can humanise their value proposition with gamification techniques are well placed for long-term success. Gamification can turn a chore into a challenge and one of the more appealing conceptualisations of this, from an advice perspective, is Melius.

Melius is a lead generation tool for financial advisers. Prospective clients answer a series of personal finances and wealth questions which are translated into a peer-benchmarked financial wellness (Melius) score. Clients are behaviourally incentivised to improve their Melius score by contacting their financial adviser to, for example, increase their insurance coverage, re-weight their investment portfolio or refinance their home loan.

The Melius concept, whilst appealing, isn’t the panacea for roboadvice. Roboadvisers need to become more human. Or rather, they need to seem more human.

Disrupting roboadvice (the 3rd generation)

Imagine, Siri for financial wellness. Lets call her, Robotica. For the same price as your monthly Spotify subscription you can hold your financial future in the palm of your hand:

 Hello, Robotica!

Good morning, Ashton. How can I help you today?

Robotica, how is my investment portfolio performing?

You’re doing OK, Ashton. Your portfolio is currently outperforming the market by 5% which is better than 98% of your peers. However, I recommend that you reduce your allocation to Australian mining stocks by $22,000 as iron ore prices are continuing to soften.

Thanks Robotica, please go ahead and implement that.

All done Ashton, you have incurred $55 of brokerage costs. Have a good day at work. Let me know if you need anything else today. 

The future of roboadvice will be built on natural language processing, machine learning and artificial intelligence. With sufficient processing power to mimic human conversation, roboadvisers will interact with clients fluidly and naturally. Once the uncanny valley is bridged, the floodgates will open and the industry will never be the same again.

This may seem like science fiction now but human advisers would be well advised to make friends with their robotic counterparts. Whilst the current and near future generation of roboadvisers may not be that impressive, a new world of financial advice awaits only a quantum computing heartbeat away.

If you enjoyed this post, please like or comment below. You can read previous articles in this series on ideas transforming Australia’s wealth in 2016 below:

Idea #1 – Goals-based investing

Idea #2 – Blockchain (Part 1, Part 2, Part 3)

Blockchain (3 of 3) – the autonomous revolution

Blockchain (3 of 3) – the autonomous revolution

Three revolutions, simple but overwhelmingly strong, have governed our lives (to paraphrase Bertrand Russell):

  1. the Agricultural Revolution: where the cultivation of land and food powered the formation of cities and economies for the first time
  2. the Industrial Revolution: where machines transformed our productive capacity and drove community-wide improvements in the standard of living
  3. the Digital Revolution: where computers and the internet saw the creation of a whole new economy beyond the physical realm.

In this article, I make the case that we are at the dawn of a fourth revolution:

the Autonomous Revolution:where blockchain will enable autonomous technology to transform our concept of value and wealth

For a refresher on blockchain, please revisit my previous articles in this series:

  • part 1 (here) a primer on the fundamentals of blockchain technology
  • part 2 (here) an overview of the blockchain technology enablers.

The Australian blockchain landscape

Until recently, blockchain has been very much a fringe technology in the Australian financial services landscape. The common perception of it has been heavily influenced by the more colourful episodes in Bitcoin’s history.

In 2016, blockchain is going mainstream. If you want proof of this, you only needed to click on the Sydney Morning Herald (SMH) website last Saturday. Right there on the front page was this:

Source: Blockchain and how it will change everything

How has blockchain reached this tipping point? The answer lies in two cross-border blockchain-focused collectives that Australian financial services companies have increasingly tapped into:

  1. COALA: the Coalition of Automated Legal Applications, a regulatory-focused think-tank undertaking collaborative research into blockchain, smart contracts and decentralised applications.
  2. R3 CEV: a global blockchain project whose participants include some of the world’s largest banks, including Australian giants CBA, NAB and my own Macquarie.

The burgeoning visibility of blockchain in the Australian public consciousness is owed largely to the work and experimentation being driven out of these collectives and their participating organisations.

Two recent examples have received broad media coverage:

  1. 11 banks completed an experiment using R3’s private blockchain to simulate trading with each other. R3’s blockchain has been built using Ethereum (read more on Ethereum in part 2 of my series) and hosted on a virtual private network in Microsoft Azure’s Blockchain as a Service module.
  2. ASX is building a blockchain for Australian equities and has taken a 5% equity stake in Digital Asset Holdings (a blockchain start-up headed by former JP Morgan executive and inventor of the credit default swap, Blythe Masters). Blockchain is seen as a credible and potentially superior alternative to the ASX’s existing clearing and settlement system (CHESS).

To reinforce the increasing ubiquity of blockchain, regulators are paying close attention too. In relation to blockchain, Greg Medcraft (Chairman of ASIC and the IOSCO Blockchain Taskforce) has been quoted as saying: “institutions should harvest the opportunity and mitigate the risk.

What will be the water cooler moment for blockchain?

In December last year, I was lucky enough to attend COALA’s inaugural Australian blockchain workshop in Sydney. More than anything, I was struck by how many smart and intelligent people truly believed in the transformative potential of blockchain. Quotes such as “Blockchain is the biggest innovation since the internet” (Lawrence Lessig, Professor of Law at Harvard Law School) were thrown around casually as though this was a truth as self-evident as gravity or relativity.

Despite this, conversations about blockchain are still confined to a niche space of the financial services industry. You definitely won’t hear blockchain being discussed around the water coolers and coffee tables of the general population…yet.

Imagine, it’s 2017 and you’re browsing the latest articles on SMH again:

An evolutionary security lists on the ASX

Robocorp (RCP) listed today, representing the first evolutionary security to trade on the ASX’s newly built blockchain exchange. RCP is a decentralised autonomous organisation with fully transparent corporate milestones and an automated dividend payment policy. RCP’s digital prospectus states that:

  • shareholders receive $1 per share once RCP’s gross profit reaches $100m
  • a 3 for 1 share split will occur once RCP reaches a $500m market cap
  • all fully paid ordinary shares in RCP will be converted to hybrid notes if the corporate debt/equity ratio exceeds 75% for more than 2 quarters.


You scroll a little further on your iPad and see a flashy advertisement:

Smart Will: the autonomous digital will

Tired of scrawling all your dying wishes onto reams of paper? Tired of lawyers with million dollar smiles and 3 piece suits? Tired of your grandchildren squabbling amongst themselves? Then you need Smart Will.

Using secure, transparent and irrevocable blockchain technology, Smart Will allows you to create an autonomous digital will to distribute your assets in accordance with your wishes without the hassle and mess of big, complex legal documents. With Smart Will, you can choose to automatically distribute your assets when you reach a certain age; when your estate gets to a certain value; or upon your death. 

Your Smart Will executes automatically as the conditions are fulfilled and verified by the blockchain network. Picture this, once your Smart Will has confirmed your untimely demise with the Registry of Births, Deaths and Marriages it will arrange for your prized van Gogh portrait to be released from our secure vaults and transported to the NSW Art Gallery, in accordance with your wishes. Smart Will: easing your troubles, today. 

What is the key to unlocking the autonomous revolution?

As these futuristic examples illustrate, the blockchain will accelerate the autonomous revolution across a number of robotic channels. From artificial intelligence and self-driving cars to smart contracts and autonomous corporations, blockchain will provide the infrastructure to enable computers and internet-enabled devices to continuously interact with each other without the need for trust as we currently understand it.

However, the real key to unlocking blockchain’s potential and transforming our concept of wealth and value lies in a little known project called the Interledger Protocol: The idea is to create a single worldwide network that can not only unite all digital currencies, but all companies and individuals who use those currencies.”

Whilst the project is specifically focusing on payments, its power lies in the philosophy behind it – creating a global protocol layer that allows any blockchain network to communicate in the same language:

“The Internet can move almost any financial instrument as easily as it moves texts and emails. We just need consensus on how this should happen.”

Source: The Plan to Unite Bitcoin with All Other Online Currencies

In 2016, I predict blockchain will move from being a conversation about “what’s possible” to a conversation about “what’s next”. Financial services organisations (from the big banks to a dizzying array of fintech start-ups) will increasingly experiment with blockchain. For now though, blockchain’s water cooler moment will have to wait until greater consensus is reached. Bring on 2017 and the dawn of the autonomous revolution.

Please comment below to share your thoughts on blockchain’s potential to transform the Australian wealth management landscape in the coming years. What do you think will be the first blockchain water cooler moment and when will it happen? Is blockchain the key to unlocking the autonomous revolution?

Revisit part 1 and 2 of this series:

“Blockchain (part 1 of 3): a digital frontier of trust through consensus”

“Blockchain (part 2 of 3): the pillars of trust”

Blockchain (2 of 3) – pillars of trust

Blockchain (2 of 3) – pillars of trust

Originally, I imagined writing a single article describing blockchain’s disruptive potential.  As I delved deeper into this digital frontier, it became apparent that I needed three articles to do the topic justice:

  • the first (available here) to explore the principles of blockchain technology
  • a second (this article) to describe the enablers of the technology; and
  • a third and final (available here) to survey the current and future blockchain landscape in the Australian wealth management industry.

Previously, in part 1 of this series, we saw that the principles underpinning blockchain revolve around embedding trust within transfers of information and removing the need for trusted third party authorities. These principles have the potential to enable new exchanges of value and deliver efficiencies to many layers of the Australian wealth management industry.

Lets now translate this all into something tangible and answer the question that everyone starts to ask once they finally understand these concepts:

“How can I actually see or experience the blockchain with my own eyes?”

This is the question that stops most people and most companies from exploring blockchain more deeply than a cursory review of the concepts and technology. My empirical experience suggests there’s three pillars to the blockchain ecosystem that inform most people’s understanding of the technology:

  1. transacting on a public blockchain (the Bitcoin path)
  2. building or using a private blockchain (the Ripple path)
  3. coding a smart contract (the Ethereum path).

Lets examine each of these pillars individually.

The alpha – Bitcoin’s public blockchain

 The original and most famous expression of blockchain technology, Bitcoin is an open source peer-to-peer currency. Bitcoin operates on a public blockchain which means anyone is able to connect to the network, make transactions on the network, participate in the consensus process and read the database. Bitcoin has the largest number of network participants, the most distributed available computer processing power and therefore the lowest long-term probability of malicious participants causing systemic failures (e.g. forking and 51% attacks explained further in the notes below).

By connecting to the Bitcoin network (usually through a Bitcoin wallet provider) and making a Bitcoin transaction, an individual or company gets its first taste of blockchain technology in action. The majority of blockchain usage today comes from Bitcoin (or similar digital currency) transactions. The downside to the dominance of Bitcoin lies in the negative publicity that has been associated with it (examples such as Silk Road and Mt Gox are detailed in the notes below). However, it should be noted that the ability to execute illegal transactions with Bitcoin presents no greater inherent risk than the ability for physical currency to be laundered or used for illegal activities.

Interest in blockchain technology has grown rapidly despite the controversies associated with Bitcoin. However, banks and other large financial companies have been less enthused by the open source and egalitarian nature of a public blockchain.

The delta – Ripple’s private blockchain

The drawbacks of public blockchains have spurred the development of a different beast, the private blockchain where access to the underlying network is more tightly controlled and the ability to modify or even read the database is restricted to a smaller number of users. Private blockchains still confer benefits of decentralisation and authenticity but at the cost of re-introducing a network controller or intermediary that users must first authenticate with before they can participate in the consensus process.

Ripple represents the most widely used private blockchain and was developed as a competitor to the SWIFT protocol of international monetary transfer. Ripple harkens back to an ancient value transfer system (Hawala) which enabled money transfer to occur over large distances without the physical exchange of currency, see below:

Source: Ripple Explained: Medieval Banking with a Digital Twist

Ripple extends the Hawala principles further by allowing anything of value to be exchanged through a network of trusted agents transmitting electronic IOUs (in the form of a cryptocurrency called ripples) . The magic of Ripple lies in the algorithmic way it rapidly establishes trust between two counterparties that don’t know each other. Ripple does this using a combination of trusted agents, blockchain-based consensus methods between these agents and the use of ripples as a currency of last resort for the network.

Permissioned networks like Ripple appeal to banking institutions due to the additional level of control and security they can introduce. In many ways though, this tendency to introduce greater levels of control can be counter-productive to new blockchain banking entrants because it:

  • assumes that blockchain technology has matured to a point where an ideal or universal blockchain protocol has been agreed and can be adopted between banks and similar institutions
  • limits the ability for different intermediaries (e.g. non-banks) to participate and influence the development of the private blockchain network
  • inhibits the blockchain participants from introducing new customer-focused blockchain innovations beyond the primary purpose of the private blockchain network (which is typically money transfer).

The omega – Ethereum’s decentralised platform

Enter, Ethereum – the most comprehensive expression of blockchain technology to date. Ethereum is a decentralised platform that enables individuals or institutions to create and program their own blockchain-based decentralised applications (dApps).  Once programmed, these dApps can autonomously execute on the Ethereum network without the potential for manipulation or interference by malicious third parties.

Ethereum unlocks the potential of smart contracts on the blockchain (i.e. contracts written in computer code that are fulfilled without the active involvement of human counterparties). The smart contracts on Ethereum are fuelled by the network currency of choice (ether). Anyone on the Ethereum network that wants to create and run a smart contract or dApp will need to either earn ether (by participating in the consensus process) or buy it. This fabulous infographic describes this all more elegantly than I ever could.

To emphasise how important Ethereum is becoming to the blockchain ecosystem, consider the change in market value of Bitcoin (BTC), Ripple (XRP) and Ether (ETH) respectively. BTC has suffered sharp falls in early 2016, whilst ETH has climbed prodigiously to a market cap of $160m (trailing XRP for the number 2 cryptocurrency position by just $12m).

This rapidly developing importance stems from the fact that Ethereum provides the most comprehensive mechanism to innovate at every layer of the blockchain technology stack, as illustrated below:

Source: Ethereum Blog – On Silos

By examining these layers more closely, through Ethereum, we begin to understand more deeply how the evolution of blockchain parallels the development of the internet. Namely, that the potential applications of blockchain may be manifest but the technology won’t be meaningful until:

  • there is wide-scale adoption and acceptance of its underlying principles
  • there are new human-centered experiences that blockchain makes possible.

Pillars or principles?

This isn’t the case of which model will win. Each of these blockchain pillars (and their many variants) are underpinned by the same principle of trust through consensus. These pillars should be viewed through the same lense as the internet was viewed whilst it developed. The principles of the internet were only fully realised over time, as many disparate and private intranets connected with each other to form a truly global internet.

Taking this comparison further,

whilst the internet created a global network of connectivity, the blockchain will create a global network of trust.

In the third (and final) part of this article I’ll detail some human-centered experiences that blockchain will enable for Australian wealth consumers along with surveying the current and future landscape of blockchain technology in the Australian wealth management industry. In the meantime, please continue the conversation by commenting below.

Read the other articles in this series:

“Blockchain (part 1 of 3): a digital frontier”

“Blockchain (part 3 of 3): the autonomous revolution”

Technical reading (Forking and 51% attacks):

“What is Bitcoin fork?” from CEX.IO blog

“Bitcoin attacks in plain english” from Coding In My Sleep blog

Interesting articles (Silk Road and Mt Gox):

“The Rise and Fall of Silk Road” from Wired

“The Inside Story of Mt Gox: Bitcoin’s $460 million Disaster” from Wired

Blockchain (1 of 3) – a digital frontier

Blockchain (1 of 3) – a digital frontier

As I immerse myself in the blockchain ecosystem I often feel like I’ve been drawn into a science fiction movie, Tron Legacy for instance:

“I tried to picture clusters of information as they moved through the computer. What did they look like?  Were the circuits like freeways?”

As you dip a toe into this world, you’re assaulted with foreign concepts like Bitcoin,cryptocurrency, consensus, distributed ledgers, smart contacts and trustless interactions. The amount of misinformation, subterfuge and conspiracy theories means it’s hard to separate fact from fiction. Real from unreal.

The real question you want to answer is: what is the promise of blockchain beyond that digital frontier? Or put differently:

“How can blockchain transform the finance industry, my career, my company and the future?”

To think beyond that frontier, is to understand a set of principles at the heart of blockchain with the potential to revolutionise the way we interact with companies, machines and each other: trust is inbuilt and doesn’t need to be verified. In time, we may look back at this as a great leap on the scale of the wheel, the steam engine and the internet.

If all this seems hyperbolic, read on and judge for yourself. At the very least, in this two part article, you will get an understanding of blockchain technology and its potential to transform the Australian wealth management industry.

The principles

In essence, the blockchain is a shared database that enables trustless interactions via consensus. Lets break down the key parts of this sentence:

  • shared: a network of computers provides the processing power for a blockchain. In this way, the network infrastructure is distributed amongst the participants in the network.
  • database: the database is a ledger of all transactions that have occurred on the blockchain. The accuracy of the database is verified by the participants of the network who contribute processing power to confirm that transactions have been validly executed.
  • trustless: participants in the blockchain are assigned a unique identifier (a private key) that they use to sign encrypted transactions. The private key protects the identity of the participant but enables the blockchain network to record the counterparties to any transaction. This is where things get really interesting.
  • consensus: in order to prevent fraudulent transactions and malicious behaviour by network participants, the blockchain provides incentives for network participants to verify transactions. If a majority of network participants agree that a transaction has been validly executed then the database record is updated irrevocably and cannot be altered or manipulated. Read about the Byzantine Generals Problem in the Deloitte article at the bottom to understand in more detail why this is so important.

Just as we trust the internet to connect us to information, blockchain technology has the potential to deliver trust within the information itself. These principles are the foundation for the blockchain ecosystem and are illustrated rather elegantly in the below:

0072a49e-80c4-11e5-8095-ed1a37d1e096 (1)

Source: Banks seek the key to blockchain – Financial Times 

The potential

To understand blockchain and its potential better, compare the formative stages of blockchain technology to the development of the internet. The internet now connects billions of people around the world who intuitively understand how to use it but have very little concept of the technology layers underpinning it (DNS, TCP/IP, HTTP etc).

This is because for most people, the technology doesn’t really matter. What matters is what the technology enables people to do. Think of blockchain as a building block that can enable:

  • computers and devices to exchange data regardless of the hardware provider (i.e. no more locked in ecosystems such as Apple vs Android);
  • individuals to interact with companies without exposing their identity or personal information (i.e. your credit card details don’t need to be transmitted to every vendor that you buy from);
  • alternative forms of value-exchange and market economies including reputation-based systems and funding of social initiatives by a community and its beneficiaries;
  • companies that will operate autonomously without human employees and contracts that execute automatically once the coded pre-conditions have been fulfilled; and, most famously
  • the issuance and use of digital currencies (e.g. Bitcoin) which represent the democratisation of what was once only the purview of nation states’ central banks.

These aren’t just theoretical applications, the blockchain is enabling new and different ways to exchange value right now, and not just in finance. A report by GrowthPraxis has identified 20 non-financial use cases for blockchain technology where start-up companies are already in operation:


Source: Blockchain Use Cases: Comprehensive Analysis & Startups Involved

If you’re still struggling to grasp how the blockchain enables new ways of transacting and interacting with one other, watch the video linked at the bottom from Into Bitcoin.

The frontier

The use cases for blockchain in the Australian wealth management industry are manifest and developing right now. Technology leaders and finance companies are seeing blockchain as a key part of the infrastructure that will deliver:

  • peer-to-cash transfers
  • distributed share and unit registers
  • frictionless settlements and asset transfers
  • virtual custody without custodians
  • pre-programmed financial instruments and corporate actions.

In part 2 of this article, I’ll be delving into these use cases in more detail whilst surveying the blockchain leaders and making some predictions about the future of blockchain in the Australian wealth management industry.

Read the other articles in this series:

Blockchain (part 2 of 3): the pillars of trust

“Blockchain (part 3 of 3): the autonomous revolution”

Watch (5 minute primer on the blockchain):

The real value of bitcoin and crypto currency technology – The blockchain explained” from Into Bitcoin

Further reading (the Byzantine Generals Problem):

Beyond bitcoin: Blockchain is coming to disrupt your industry” from Deloitte University Press