The telephone was a great invention and it took more than one user to make it useful. So it is with Blockchain technology. It is really only useful when multiple parties participate.
A lot of discussion at conferences revolve around ‘use cases’ and ‘what if’ scenarios with technologists, consultants and business people. The argument still rages that Blockchain is still very much a technology looking for a business problem to solve. In financial services executives are excited with the prospect but few are willing to commit significant resources, cash and time to making solutions a reality. Some firms have assigned limited resources to work on ‘proof of concept’ projects so that they can be the first to market with solutions or at a minimum not miss an opportunity when the technology matures. In financial services most firms have participated in these ‘proof of concept’ projects but few have moved beyond that level of participation. Who is going to actually commit part of their business to a Blockchain solution first ? Everybody is waiting for that brave pioneer to jump in so that they can take advantage of lessons learned from the first movers in Blockchain.
At this point in time there are few solutions that are using blockchain in the real world, other than bitcoin, that users can point at to illustrate the value associated with a distributed ledger. The reality within financial services is that the true value of blockchain is in the cryptographically secured records together with smart contracts but there are so many hurdles to overcome and barriers to entry that it is difficult to get a blockchain solution off the ground.
Swaps and derivatives is a great use case for blockchain, being able to automate most of the post trade functionality within smart contracts and share directly with counter parties assets, prices and contracts together with payments is compelling for financial services firms. The dilemma arises when you consider that most tier 1 banks have spent hundreds of millions of dollars integrating their systems from front, middle and back office including risk and control systems. A simple replacement of the post trade swaps and derivatives functionality has to be more compelling than simply saving money on post trade processing. Assuming that banks decided to run a Blockchain solution between themselves and each bank becomes a de facto node on the Blockchain the further dilemma of regulation and governance emerges. Who runs the Blockchain/solution ? Is it a consortium ? Is it now considered market infrastructure ? How do you govern the standards and regulatory reporting ?
The recent R3 ‘corda’ release is a good indicator of how firms are evolving their thinking in that people are realizing that an ‘immutable’ blockchain may not work for financial services solutions because in most cases the ability to edit, cancel/correct is very important with transaction processing. Accenture has also focuses on the same issue, which has raised the question regarding the underlying value of blockchains immutability, and that if the blockchain can be ‘edited’ then is it truly blockchain technology or simply a distributed database with some very good crypto technology to ensure the records are secured. Regardless of the semantics a distributed cryptographically secure database has a lot of value for global trade once standards have been adopted for how the technology is managed, interoperated and regulated.
As Gartner’s hype cycle predicts we are at the the ‘peak of inflated expectations’ and are entering the ‘trough of disillusionment’ phase of the blockchain cycle and it will take a few real world successes to eventually move to broader adoption. I also believe that most of the financial services solutions that have been heralded as game changing are still in the planning and development stages and will eventually make it into real world usage but not as soon as pundits have predicted. As I pointed out from the outset the telephone was a wonderful invention but when more that one person started using it, it quickly became critical infrastructure and heavily regulated and from the beginning standards were adopted. I think 2017 will see new solutions for financial services being introduced, albeit slowly. This is an exciting changing landscape and warrants very close attention as the year progresses.
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Best regards: Norman King
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