Several ideas are emerging about the adoption of blockchain in the financial services industry that are quite different than what anyone would have predicted two or three years ago.
The choices banks are making are steering financial blockchains in a direction that is far from the mysterious Satoshi Nakamoto’s conception of it, and closer to more traditional technologies out there today — a Google Docs of sorts for banks with immutability and security built in.
1. Things are moving faster than expected; blockchain technology should be ready for broad use by banks within a year.
Only last spring, analysts were declaring that mainstream adoption of blockchain technology was 10 years away. Following the fever pitch of blockchain chatter in 2015, observers expected 2016 to be the year where expectations were tempered.
But bankers and several other financial blockchain experts at a conference hosted by the Depository Trust and Clearing Corp. Wednesday referred to 2017 as the year of the blockchain pilot, and 2018 as the year blockchain technology will be used in production in financial services.
"To use a flying analogy, we've got the landing gear out and we're preparing the final descent," said Emmanuel Aidoo, head of blockchain and distributed ledger strategy at Credit Suisse.
"All of us are focused on making this real in 2017," said Todd McDonald, co-founder and chief operating officer of R3, a bank consortium that has developed a “blockchain inspired” platform called Corda. “We all need to make this real this year into next.”
The list of financial blockchains in or close to prime time is growing.
Digital Asset Holdings, the blockchain technology company founded by former JPMorgan Chase executive Blythe Masters, plans to have a blockchain product ready for banks to use by the end of 2017, said Chris Church, its chief business development officer.
Northern Trust recently went live with a blockchain for private equity funds, based on technology from the Linux Foundation Hyperledger Project and IBM.
“I believe 2017 is the year we see live networks versus proof of concepts,” said Jerry Cuomo, fellow and vice president of blockchain technologies at IBM. “I think we’re seeing the real evidence that blockchain is not going to come, it’s here.”
Microsoft's Blockchain as a Service, a set of blockchain building blocks that runs on the Azure cloud, is also market ready. Bank of America has been using it to create a blockchain to automate trade finance.
JPMorgan Chase has developed a blockchain called Quorum that’s based on Ethereum.
In February, the DTCC completed a distributed ledger proof of concept with Digital Asset to better manage the netting process for repurchase agreement transactions. The DTCC also plans to shift its Trade Information Warehouse, which keeps records on derivatives contracts, to a distributed ledger in collaboration with IBM, R3 and other partners.
2. Bankers see blockchain technology mainly as a way to save money.
It’s not surprising that bankers would want to save money. Most have to reduce their cost and efficiency ratios to survive and stay in regulators’ good graces. But when you think about the original premise of the blockchain — a means of recording anonymous digital currency transactions that would circumvent the traditional payment system and pass under the radar of the government, this is a leap.
Credit Suisse, for one, has conducted 10 proofs of concept with blockchain startups to achieve cost reductions.
"We tend to look at projects that can give us, if I'm being honest, 50% or greater cost reductions," Aidoo said. "If I'm being more pragmatic, it's more like 35%. Anything less than that doesn't warrant execution."
Northern Trust, which has done 20 proofs of concept for blockchain technology and recently went public with its blockchain for private equity funds, also focuses on streamlining, which would lead to cost cuts.
“We decided to embark on a mission to improve efficiency,” said Justin Chapman, global head of market advocacy and innovation research at Northern Trust.
During its earlier stages, there was hope that blockchain could be a way to to offer new products and services and automate certain things, like supply chains and international remittances, that in the past couldn’t be digitized with one technology. While some are still pondering revenue opportunities on blockchain, the promise of efficiency is what is driving bankers’ interest today.
3. The idea of "permissionless" blockchains has pretty much been dropped by the industry.
Looking back at blockchain developments over the past year, Church at Digital Asset Holdings said the financial world agreed to abandon the idea of permissionless distributed ledgers. In other words, blockchains anybody could join. Banks have gravitated toward permissioned blockchains that can only be used by those who are invited — say, counterparties to derivatives contracts or trade finance partners.
"The permissioned environment is going to prevail because it meets the requirements of this marketplace," Church said. "That was a very important intellectual understanding people got to."
4. Integration/collaboration is the biggest perceived hurdle.
Asked what presents the greatest challenge to blockchain adoption — data security, privacy, scalability, business case or integration — about half of the DTCC conference audience picked integration. Last year at a similar conference, about a third of the audience chose this option. Integration in this context seems to mean the ability to work with other banks’ and partners’ blockchain technology.
“Interoperability is key: if you look at obvious challenges, privacy and scalability are solved,” Church said. “If you do get interoperability, which will require collaboration, all sorts of things become possible. If you have a single source of truth, services can be built off of that, and there's a huge market opportunity. Cross processes allow new products and services to be created.”
Aidoo noted that privacy is still tricky, because even with a permissioned, invitation-only blockchain, there can still be certain data elements not everyone on the chain should see.
“We talk about public versus private blockchains, but it's more complicated than that,” he said. For instance, the “Chinese walls” Wall Street firms have to maintain mean people in some parts of the organization should not be able to access certain information.
Aidoo also expressed anxiety about collaboration. “I worry about execution risk, meaning things like, do we have the right partners, do we have the right ecosystem, do we have the right partners from a collaboration perspective?” he said.
One thing many agree on: Blockchain technology is inevitable for this industry.
“This is not going to stop,” Aidoo said. “This technology will be as pervasive as SQL servers and databases.”
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