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Rebuilding trust after the Northern Rock bank run

David Craig  President of Financial & Risk, Thomson Reuters

David Craig  President of Financial & Risk, Thomson Reuters

The day that trust died.

Trust in financial services was shattered ten years ago in the UK by the run on Northern Rock, the first run on a high street bank in 150 years and a key date in the onset of the credit crunch and the subsequent global financial crisis.

While depositors didn’t lose a penny, the sight of queues round the corner turned the unthinkable into reality: could banks no longer be trusted with retail deposits? The breach of such an important bulwark of finance intensified scrutiny of wholesale financial markets. And it led everyone to question whether the regulators knew what was happening and had the power to do anything about it.

Trust is critical to the world of finance. The word credit stems from the Latin credere, to believe. Without trust, financial transactions don’t happen.

Since then new models for trust have emerged that are unlike anything seen before when it comes to financial transactions, based on distributed ledger technology like blockchain.

Customers queue to enter a branch of Northern Rock in Kingston, Surrey, southern England
Customers queue to enter a branch of Northern Rock in Kingston, Surrey, southern England, September 17, 2007.

Cryptocurrencies such as Bitcoin and Ethereum have been revolutionary because they have succeeded without the backing of a central bank to ensure the safe management of currency as a store of value. Instead users of cryptocurrencies trust in the transparent and permanent record of transactions stored by every user on the blockchain. Trust is not dependent on one central authority; it is federated between all users.

Such has been their success that the first half of 2017 saw more than $325 billion in cryptocurrency transactions, with some forecasting the total for the year to reach $1 trillion – fifteen times more than last year.

More exciting still are the opportunities that distributed ledgers promise for the future.The disruptive potential for blockchain over the next ten years for the financial services industry lies in its potential to decentralize trust, opening up the possibility of wholesale change in how markets are structured. For example, markets that currently rely on clearing houses to act as the centralized point of trust could potentially migrate to a model of distributed trust built on the transparency of the blockchain.

But this is still a relatively new technology. Real world commercial uses are growing, but most businesses are still experimenting with distributed ledgers. As part of Thomson Reuters open platform approach, we have provided two tool kits to foster co-innovation and enable our clients and partners to experiment with new approaches. There are still some very big problems to solve.

Can you trust data to be right just because it is on the blockchain?

Once bad data makes its way on, all participants have to agree unanimously to fix the record – no easy feat for complex systems with multiple parties.

To help start-ups and developers experiment with real market data they can trust, we released BlockOne IQ into the blockchain developer community earlier this year. It is a smart oracle – a data feed for distributed ledgers – enabling users to reference current and historical market data in their smart contracts, with cryptographic proof that our trusted data is the source.

How do you ensure users are who they say they are when the technology means they are anonymous?

On the blockchain, you don’t know who is who. That has been one of the driving forces behind the success of cryptocurrencies, as users concerned about maintaining their privacy have been enabled to interact behind a wall of secrecy. It has also led to fears of money laundering as criminals bypass the traditional banking system. But what if businesses want to exploit the benefits of distributed ledgers but need users to sign up to specific terms and conditions?

BlockOne ID solves this problem by mapping a known identity, such as a Facebook, Twitter or Gmail account, to a blockchain address. Developers can ensure users of their apps have agreed to their terms, while users benefit from a single login across multiple blockchain applications. Our trust principles mean we are ideally placed to act as an intermediary between blockchain based businesses and their customers.

Trust today in financial services has recovered from the shocks of ten years ago. But in a decade’s time, new models of how we transact with each other will be established and trust will be very different from what it is today.

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Read the other pieces in our 10 years since the financial crisis coverage:

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