Innovation Hong Kong Insights

To Blockchain or Not to Blockchain: a Retailer’s Dilemma

There is likely to be an “explosion” of blockchain-related businesses in the next two years, which poses a dilemma for existing retailers that are using existing methods for commercial transaction, such as the 40-year old SWIFT system for bank electronic transfers, says Desmond Marshall, managing director in Hong Kong for The Floor, a Tel Aviv, Israel-based innovation “hub”.

Part of the dilemma is whether existing retailers join the blockchain revolution, and if they do, whether they might risk getting stuck in the middle of what Mr Marshall calls a “philosophical question”. It is a question of the financial technology world that nonetheless has practical consequences for the everyday world, he suggested.

A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. It has also been described as an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.

One of the issues raised by blockchain technology is that it potentially challenges the power and oversight that central governments and banks have built up over centuries in terms of controlling finance and commerce, suggested Mr Marshall. He made his observations in a presentation at Retail’s Cutting Edge, a conference during the StartmeupHK Festival 2018, an initiative of InvestHK.

The banks do not want to turn their backs on the potential of this technology, but can only go as quickly as their respective regulators will let them, Mr Marshall suggested. “The banks want this [new-technology] business, because it’s good business,” he stated. “The crypto world, the blockchain world, wants to get compliant; because of [policies like] ‘know your customer’ [and] anti-money laundering. They want to do legitimate business and be compliant, so that the banks won’t shut them down,” he added.

Now, he says, comes the philosophical problem. Because a transaction involving a blockchain element may not be via a traditional route – i.e., two correspondent banks sharing the same or very similar regulatory regime – there is likely to be a reluctance to share confidential information between the bank and the blockchain business, and vice versa.

“The banks are looking at how they can build a black box… a middle part area… where the banks can say ‘These [entities] are regulated’, ‘these are compliant to us’… and the retailers, or the blockchain companies outside, can say ‘I can attach to it, by not revealing information’,” said Mr Marshall.

“What we are expecting in the next two years is an explosion of blockchain-related businesses coming along. So if you are doing retail, be very careful about what is happening,” he stated.