How will Millennials live in retirement?

By the time I’m 70, my retirement will hopefully begin. I’ve wanted to retire earlier but my $1.6 million (if I’m lucky) won’t be accessible tax-free until then. There was controversy in 2037 when the New Democrats indexed preservation age to our life expectancy but most people agreed it was time to tweak the system. After all, it had been many years since the now defunct Labor and Liberal parties had agreed not to touch the super system for two decades to provide some retirement planning certainty…

This is, of course, a fantasy and given the Government-of-the-day’s proclivities to tinker with the super system, unlikely to ever become a reality. In the context of the major changes announced in the Turnbull Government’s inaugural Federal Budget, it is worth reflecting on the landmark years of the super system:

1992: mandatory super contributions are introduced
2006: taxation is simplified and super choice is enabled
2016: the objective of super is enshrined.

Milennialls will look back on the most recent changes as a defining moment that reframed the super system around this objective:

“To provide income in retirement to substitute or supplement the Age Pension.”

The six biggest changes

Underpinning this objective, a number of changes to the taxation and access rules of super were flagged. However, there were six in particular that have the potential to significantly redefine the retirement of future generations:

A lifetime cap on tax-free pensions: is $1.6 million enough to live comfortably in retirement? The Liberal Government is betting that it is by restricting tax-free pension account balances to this amount. This will have an enormous industry-wide impact, making administration more complex for superannuation providers and requiring advisers to rethink their wealth accumulation plans for clients.
Restricting voluntary contributions: it just got even more difficult for workers to make contributions above the mandated employer contribution level. For the young who are salary sacrificing into super, the limit on pre-tax contributions (i.e. concessional) will be reduced to $25,000 p.a. For those closer to retirement or who have received a one-off windfall, your ability to make after-tax contributions (i.e. non-concessional) has now been reduced to a lifetime limit of $500,000. Importantly, this lifetime limit applies to non-concessional contributions made since 2007.
Taxing transition to retirement earnings: the Government will remove the tax exempt status of earnings supporting a transition to retirement (TTR) pension. TTR pensions have been particularly popular with those that have been reducing their working hours whilst still earning a relatively high income. They have been even more popular with advisers recommending a re-contribution strategy. That will all end and TTR pensions will be treated more like accumulation accounts.
Removing the work test: this has been a long time coming and will allow individuals to contribute to their super, regardless of their employment status. This will open up a range of contribution options to older Australians, including downsizing the family home and increasing the prevalence of spouse contributions.
The untimely demise of anti-detriment payments: this was an unfamiliar benefit to most average Australians making super contributions but a well-known value-add by advisers that could find the right super fund. Essentially, a super fund could elect to provide a refund of a member’s lifetime contributions tax payments upon their death. This has been used heavily in estate planning but was inconsistently applied throughout the industry and won’t be available anymore.
Resurrecting (tax-free) deferred annuities: deferred annuities have been seen by a number of insurance and superannuation providers as the silver bullet in the retirement income debate. Given the advantageous nature of these tax changes, expect to see a lot of innovation in this space and increasing focus on product-centric retirement income solutions.

Predicting the impact on Millennial retirements

These changes should be read in the context of the newly defined objective of the super system. Simon Swanson (Managing Director, Clearview) summed this up well in arecent interview:

“Superannuation is no longer a wealth accumulation game, it is a retirement income game.”

I see a number of long-term super industry trends emerging during my (and other Millennials’) working life as a result of these changes. Some will emerge rapidly, whereas others will be so imperceptible they will only be apparent in generational hindsight. In order of speed and likelihood of change:

increasing system complexity: this one is a no-brainer and perhaps not the boldest prediction ever made. These changes add to the complexity of the system for both providers, advisers and most importantly members. Expect to see the consolidation of superannuation funds accelerate as the costs of administration become too much for sub-scale providers. Quality advisers will continue to be worth their weight in gold to members trying to navigate the murky retirement waters.
diversifying retirement product mix: expect to see a comeback in insurance-based products including deferred annuities and insurance bonds. A mix of these products, along with an account-based pensions may become a more affordable and compelling proposition. Automated decision support tools will proliferate assisting members to determine their optimal product mix to achieve their desired retirement income and lifestyle.
encouraging self-employment and entrepreneurship: a subtle aspect of the changes is how they benefit the self-employed by making it easier for them to contribute to super. At the same time, as the company tax rate falls to 25%, there may be incentives for the self-employed to restructure more income through their companies. Furthermore, high income earners will have to find other investment opportunities outside of superannuation such as equity crowdfunding and investing in small businesses. This prediction is slightly more far-fetched but I wonder if it will be an unintended consequence of Malcolm’s much-touted innovation economy.
inter-generational poverty: in many ways, the wealth of current pre-retirees has been built on the twin pillars of home ownership and superannuation. This may be slightly controversial, but what if these super changes merely add to the growing body of thought that younger Australians are being affected by one of the worst examples of inter-generational poverty visited in history? As house prices continue to rise (perpetuated by negative gearing tax concessions that continue to be preserved by the latest budget), the likelihood of Millennials owning their own home decreases by the year. Combine this with the new objective of super and there is the potential for Millennials to have less tax-effective wealth accumulation opportunities than their predecessors. We could even see the emergence of a new advice specialty – overseas retirement planning – as Millennials with limited retirement incomes, but freed from the shackles of home ownership, set sail for fairer (and cheaper) shores.

You can read my series on ideas transforming Australia’s wealth in 2016 below:

Idea #1 – Goals-based investing

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

Idea #3 – Roboadvice

Please note: this article is for general information and illustrative purposes only and should not be relied upon for any purpose. The accuracy of the information contained within cannot be guaranteed. You should consult a financial adviser before making any personal financial decisions.

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)

Goals-based investing: a new advice conversation

“How much do you think you will need to retire?”

Tough question. Common question. Meaningful question? Probably not. Increasingly, advice professionals need to consider:

“Am I asking my client the right kind of questions?”

Rather than focusing on absolute performance against an impersonal benchmark, a goals-based investment approach is enabling financial advisers and wealth managers to build a truly personal investment portfolio for their clients.

The typical approach, used by human or robot advisers alike, is to construct a recommended investment mix focused on two metrics:

return: an absolute level of income and growth a client wishes to achieve from their investments
risk: the volatility or downside a client is willing to tolerate in achieving their desired returns.

This approach measures its success primarily from quantitative factors which can mean very little to clients when compared with their personal or family-oriented goals. In contrast, goals-based investment philosophies can begin a powerful client conversation and allow advisers to make investment recommendations that are meaningfully linked to a personal goal or sense of achievement for the client.

In 2016, momentum will build for advisers to place client goals at the centre of the advice conversation. To understand client goals and build an investment strategy and portfolio mix that is explicitly designed to achieve those goals.

Advisers will need to ask their clients less about savings, rates of return and risk tolerance and more questions like:

“What do you want to do and how do you want to live when you retire?”

Consider, benchmark returns and volatility measures mean very little to clients when compared to their goals, hopes and dreams. Advisers understand the importance of talking the same language as their clients and it can be a small but significant step to also invest clients in a way that they intuitively understand. This is where goals-based investing can be particularly powerful.

Continuing with the retirement theme, the traditional asset allocation approach can underestimate or ignore some key risks of retirement, including:

sequencing risk: where lower than average expected returns occur early in the retirement term, and have a detrimental effect on the size and duration of a client’s retirement savings
longevity risk: where a client’s lifespan and, therefore, retirement term is longer than anticipated leading to a detrimental effect on the duration of the client’s retirement savings.

Rather than trying to achieve retirement goals with a single investment approach and overall target return, goals-based investing takes each goal, considers them as an individual objective, and builds a tailored investment approach.

Advisers that want to begin a goals-based conversation with their clients should be aware of common client behaviours with goal-setting:

needs are more important than wants: clients are generally willing to take on more risk when the goal is to invest to buy a speedboat, rather than investing to protect their retirement savings
immediate goals are more obvious than later goals: clients are generally more concerned about their current situation and often don’t focus enough on their longer term goals.

To illustrate this:

Advisers need to consider how much client goals can vary in terms of their priority, timing and level of risk the client is willing to tolerate to achieve each goal. Returning to the retirement theme, a goals-based discussion may highlight that in order to provide clients with an effective retirement strategy, an investment approach should:

quantify the income stream level required to support the client’s lifestyle
invest to provide this income stream level for the full retirement term
include realistic assumptions about the length of the retirement term.

Three ways advisers can reframe the advice conversation

There are some simple ways that advisers can orient their advice process towards their clients’ goals:

Start asking different questions: this can be as simple as asking a client ‘what are your most important goals and why?’ or as complex as asking ‘how would you describe your ideal retirement lifestyle?’ Clients have come to expect that advisers understand their circumstances and will provide a personalised service. Don’t be afraid to probe deeper during the client discovery phase.
Identify more soft risks: start building into the asset allocation process an understanding of the key roadblocks that will prevent clients achieving their goals (beyond simple market under-performance). Qualitative risks, like opportunity cost, are often poorly understood by clients. If advisers help their clients understand these risks, they may be able to put forward an investment portfolio that better manages their expectations.
Change the way performance is reported: rather than reporting performance against a market benchmark, advisers can start reporting performance against a goal their client is trying to achieve. It can be a powerful image for a client to see how close they are to achieving their goals. More importantly, it may allow clients to better understand how their investments are helping them to achieve their long-term goals (such as the income they want in retirement).

Goals-based investing is just an extension of the knowledge advisers have of their clients and the personal nature of the advice process. Advisers should reflect…are you asking your clients the right questions?

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:

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

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:

transacting on a public blockchain (the Bitcoin path)
building or using a private blockchain (the Ripple path)
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 (3 of 3) – the autonomous revolution

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

the Agricultural Revolution: where the cultivation of land and food powered the formation of cities and economies for the first time
the Industrial Revolution: where machines transformed our productive capacity and drove community-wide improvements in the standard of living
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:

COALA: the Coalition of Automated Legal Applications, a regulatory-focused think-tank undertaking collaborative research into blockchain, smart contracts and decentralised applications.
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:

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.
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”

Ashton Jones – Freelance Writer

Australian perspectives on global disrupters

Month: June 2016