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Blockchain: what it means for telecoms operators

Podcast interview

Enrique Velasco Castillo, Senior Analyst of  Digital Economy Strategies and Tom Rebbeck, Research Director at Analysys Mason discuss what blockchain is, and what it means for telecoms operators.

Based on the reports:

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Podcast transcript

Tom: Hello my name is Tom Rebbeck I'm the research director here at Analysys Mason. I'm here with Enrique Velasco Castillo who is a senior analyst on our digital economy strategies program. And we're going to be talking today a bit about blockchain and what it means for telecoms operators. So, there's a lot out there on blockchain. I don't propose we spend too much time talking about what it is but, in a sentence, or two Enrique, what is blockchain?

Enrique: I think the best way to think about blockchain is as a decentralised database or even better than that decentralized append-only log.

Tom: Okay. Break that down.

Enrique: So, what I mean by that is decentralised, you've got many nodes and none of them controls or owns the network, none of them is the main one, in theory and you can only write to it. And the verification of what you write, happens throughout the network using fairly complex encryption and algorithmic protocols.

Tom: And the advantage of all of this is you don't have a single central body controlling everything, you could have trust-less transactions

Enrique: Correct, so no node is in control of the network, no node can tell the others 'this is the truth and this is what the real state of the log or database is', and so it's useful for applications where the nodes don't need to trust each other, where you have no control over which other entities you are transacting with or you're sharing data with.

Tom: So, this means disparate bodies could have transactions or share information without necessarily needing to know each other and needing to trust each other.

Enrique: Right, that's why it's called the trust less environment.

Tom: OK. So where are we today with blockchain?

Enrique: So, there's been a lot of activity around investments and telcos have been investing or exploring using blockchain in a number of applications. You'll remember for example that Verizon Ventures invested in a company called Filament aiming to do IOT applications using blockchain back in 2015, Orange also invested in a company that develops financial services applications using blockchain and there's been a number of other examples, Telefonica has a partnership with a company called Digital X, aiming to do international airtime top-ups using blockchain. Du has an electronic health record pilot in the UAE in partnership with Dubai's Global Blockchain Council, AT&T has been experimenting with using blockchain to bring transparency into the advertising value chain. Telstra is trialling IOT and biometrics.

Tom: So, there is a whole mix of telecoms operators doing something with blockchain, the Telefonica example you said it is about airtime so that's kind of related to the core business.

Enrique: it's related to the core business but it's not entirely clear how exactly blockchain fits within this environment because airtime transfers is not something that necessarily requires blockchain. I think that as an alternative to payments, blockchain solutions have captured the imagination of a lot of people as a way to transfer value or transfer money across borders in a way that bypasses the traditional banking system.

Tom: But the things that the operators are doing there's some internal or related to the existing business that Telefonica is doing but the other examples you had like AT&T with advertising bodies it's, related to the core business but it's adjacent to it.

Enrique: And that is something that we see a lot of the moment, the core users of blockchain do not really fit that well in their internal say, OSS/BSS, or internal systems for telcos because telcos know what kind of computers they have connected to the network. They know and already have mechanisms to authenticate any kind of entity that needs to connect to their systems. And so, the internal use cases for blockchain within telcos are not entirely clear at the moment and I don't think there is a strong case for using blockchain as part of the telcos internal operations.

Tom: Because mostly and I guess this goes back to what blockchain is, blockchain allows transactions between people who don't know each other, entities that don't know each other but anything to do with a telecoms operator, if it's a billing system then you have a single data--, you don't need those sort trust less transactions.

Enrique: You don't really need it because you should have already in place a mechanism to authenticate and to verify that you are transacting with your peers. Whereas for other external use cases like say, payments or IoT, there may be some potential there but it's still not entirely clear how using the technology that originated with Bitcoin is actually a better alternative than other types of systems, to other types of architectures.

Tom: Because again you've got this problem that blockchain solves certain problems but they're not necessarily the problems that are faced by telcos.

Enrique: They're not the problems that telcos tend to have. Even if you look at payments, the problems that telcos tend to have in that space are not really technical. The problems tend to do with regulation, the problems tend to do with customer adoption, the problems tend to do with quality of service and user experience.

Tom: So what about the other things that telcos, so there's the internal use cases where you think it's difficult to find obvious applications for blockchain but there's also these external things that telecoms operators are doing.

Enrique: Those are a little bit more interesting, but I think that at the current stage you're going to face a number of problems. One of them is integrating blockchain solutions into your legacy systems so there will have to be some kind of interoperability layer or translation layer between your systems and the blockchain layer. The problem with that is that you are entering again into a space where you centralise something.

Tom: Because you need somebody to provide that translation layer and that's a centralised body.

Enrique: Exactly, so that essentially recentralises or limits the decentralisation potential of blockchain you need some kind of entity to verify that you are you and you have access to that data essentially. The other issue is that it's not entirely clear whether blockchains as they currently stand actually are the right tool for the kind of business challenges that operators are trying to solve in this space. So, for example if you look at financial applications which is where most of the activity around blockchains happens at the moment. There is a venture capital firm that tracks investments and activity in blockchain and they have something like 293 initiatives tracked as of May 2018. 47% of those initiatives are in financial applications or financial systems, only 1% is in telcos, so that gives you an idea of the difference in scale and applicability.

There's a lot of interest in using blockchains to track goods for example, or to track supply value chains or to track digital assets or fleets but for telcos in particular and for the financial industry in general as well, it seems to be that the vendors producing these solutions tend to go for either adding functionality and adding features that make blockchains more compatible with legacy systems and legacy databases and with APIs, on top of existing blockchain implementations like Ethereum; or they completely re-engineer everything from the ground up. I think an interesting case in point is R3, you remember R3 the financial consortium that was started in 2014/2015 by a number of the leading financial institutions and banks around the world such as Goldman Sachs, JP Morgan and so on. They started this consortium to use blockchains and the code base from bitcoin and Ethereum into the banks. And the goal was to provide more security, provide more transparency and lower the costs. They actually run a number of trials using different technologies they tried Ethereum, they tried IBM solutions, they tried a solution developed by the company where Orange invested, Chain, and they tried something else called Monex and it seems that those trials have faced a number of challenges. One example is when the Bank of Canada and Payments Canada which are two of the institutions that manage the wholesale Interbank Payment System in the country, they ran a production trial with several different blockchains and they found challenges around privacy so they realise that privacy around transactions wasn't fully there as they needed it and once they solved the privacy problem they realised that they had again a single point failure of which made the architecture very brittle. And then, of course because you have a single point of failure, scalability becomes an issue.

So vendors have tried to either add different things on top of existing blockchain implementations, bigger blocks or different proof-of-work or proof-of-stake algorhythms, but at the end of the day what happens is that these solutions are not a really good fit in production for mission critical applications like banking, and so what happened is that R3, the consortium started by the banks , decided to reengineer the whole system from the ground up. So it's not a blockchain anymore, what they are developing, it's a system that actually in their own words resembles more the architecture of email, SMTP, it's a messaging protocol, it actually uses AMQP which is a messaging protocol developed by JP Morgan back in 2003 and the transactions are not broadcast to the whole network, the transactions are broadcast from one point to another on a need-to-know basis.

Tom: Right so you're essentially saying that from the sites you had earlier about half of the blockchain initiatives were in finance but you're saying even in finance, with the R3 initiative it's 'blockchain inspired' rather than actually blockchain.

Enrique: That's right and we're getting into 'blockchain inspired' territory more and more if you look at Iota which is a blockchain inspired initiative that aims to provide solutions for the IoT space, they say in their marketing materials, 'we don't use blocks, we don't use chains, we have no miners', which in my mind, I'm a bit of a purist in that sense, I'd tend to think of blockchains as having blocks and chains and having miners or some other type of transaction verification algorithm.

Tom: So just to go briefly back to the telecoms operators. Why are they doing this then, is it just because they want to blockchain in their investor presentations?

Enrique: I think that a lot of it was a genuine need to be perceived as innovative and ahead of the game. If you look at the investments and a lot of the telco-oriented activity around blockchain that happened 2015 and 2016, at a time when crypto currencies were starting to capture the public's imagination by virtue of Bitcoin's and Ether's increasing valuations. So that's one angle, it entered the public mind at that time and at the time it was, I have to say a very, very promising opportunity, a very promising set of ideas that could potentially become suitable products in production. And we wrote a report back then saying well there are a number of activities where telcos could actually have a significant role if they either implement or develop blockchain solutions.

The reality is more complicated now because you have on the one hand you have a lot of media attention around cryptocurrencies and around ICOs. And I think that has bedevilled the discourse around blockchain to a certain degree because it's more difficult right now to separate the solutions that have a solid technical proposition versus the marketing hype. I think that we're reaching a point where definitely operators and CTOs are becoming much more sophisticated in terms of understanding where it is that the real value lies, where is it that the real opportunity to see savings or the potential opportunity happens. At the same time, you've got interesting examples of operators that have decided to monetise blockchain in a completely indirect way like Swisscom, they launched essentially what is a professional services advisory around blockchain. It's a fully owned entity owned by Swisscom that is essentially a consulting and advisory around blockchain technologies. They brought the whole team that was doing crypto and blockchain from EY to this new division. So that's an interesting approach, selling consulting services, systems integration.

The other approach is trying to make it fit with your cloud-based solutions like KPN is doing and with their digital services. So, there is, I think, a strong potential for the building blocks that make these technologies and that are being redeveloped with 'blockchain inspired' solutions, to fit in a future where many of the services that operators develop, or launch are cloud-based.

Tom: But these are more enterprise professional services opportunities rather than reengineering internal systems or the way billing or payments and things work.

Enrique: Yes.

Tom: Okay great. Thank you for that Enrique. You mentioned a couple of reports that are available on our website. I think if you search for blockchain or DLT.

Enrique: We've written two reports and we've written two articles and we continue to follow this space and are very interested in getting comments or questions from the audience.

Tom: Okay great. Well we'll put the links to those articles in the notes for this podcast. Thank you.

Enrique: Thank you Tom.