'Like Battleships': Banks Explore Blockchain's Uncharted Waters

Now that blockchain technology is winning fans inside the traditional financial services world, banks are looking for ways to incorporate it into their business operations.

It is a challenging process that requires scientific experimentation, collaboration with fintech experts, consultation with regulators and hard choices about which potential uses of the Bitcoin-related technology are most worth the effort, bankers said at the CoinDesk Consensus 2015 conference Thursday.

"The blockchain worked, generally, as advertised," said Morgan McKenney, the global head for cross-currency payments at Citi Treasury and Trade Solutions. "But it's very hard to make it live in our systems. It will be a challenge and take some time."

McKenney's team has tested several hypotheses about how the technology could be used in banks, she said. They vet its reliability, security and potential impact on everyday products and services.

Smart experimentation is about learning on the run and picking the right practical applications to pursue, McKenney said, emphasizing her quest to move things "point to point, eliminating hops and costs."

Simon Taylor, who heads Barclays' blockchain and distributed-ledger research, insisted his group is not a "blockchain team" but rather "an experimentation team" that is testing the technology. This kind of design process, he said, is about rapid-fire, thorough reviews.

"If you make that kind of [technology] investment, you want certainty it'll work," he said. "The experimentation team explores what are the hits and what are the misses — like battleships."

Much of blockchain's initial appeal has been in cross-border and fast payments. A lot of banks are tinkering with it and seeking third-party experts who can help facilitate their efforts. Cheryl Gurz, managing director and emerging technology segment manager at Bank of New York Mellon Treasury Services, said her company's technologists downloaded and modified the publicly available source code for Bitcoin so the company could use it to move its own "BK coins."

It is easy for banks to retread old ground and waste time pursuing too many things at once. Now they are more sharply questioning how best to apply the technology, which business strategy would it serve, and if it is better than what they already have.

"We are still organizations and still have budgets for experiments. When do you realize it's gone too far because someone can't let go?"Gurz said. "All organizations need to be critical and sometimes just pull the plug and start on something else."

Taylor agreed.

"What is this stuff actually good at? If you can't answer that in 30 seconds it's not a good use case," he said.

Those who know their market and the business problems that need solving will have an easier time responding to that question, but it could still take some time, he said. Learning from others is vital to the experimentation process.

"External partners will be very important to the equation. Blockchain is a network technology so you need an ecosystem to fully realize the benefits," McKenney said. "It would be very difficult for banks to do everything all the time."

Gurz said BNY Mellon embraces external relationships, especially with vendors and fintech companies who offer different viewpoints. Their new ideas, combined with the bankers' own institutional knowledge, make the company more "agile," she said.

"We've had the benefit of extremely smart people opening our eyes to different things," Gurz said.