Think of getting blockchain up and running in banking as a journey, not a destination.
That was the message Tuesday from leading voices on distributed ledger technology. As banks begin to explore the promises of the blockchain — from reducing operational costs to verifying digital identities — much of the industry is eagerly awaiting a flashy debut.
But it’s not that simple, according to big-bank executives who spoke in New York at American Banker’s Blockchains + Digital Currencies conference. Designing new systems for trading and payments requires a long road of pilot programs, cybersecurity checks and data-privacy assurances. It also involves a nearly constant race to keep up with a rapidly evolving field.
In other words, getting the blockchain into production will not involve flipping a switch. Instead, developing systems that will protect client funds and stand the test of time involves a constant state of development and production in innovation labs across the industry.
“It’s easy to just say, 'Are we there yet?', as if there’s just some arbitrary milepost that we passed, and all of a sudden everyone is using the distributed ledger,” said Amber Baldet, the blockchain program lead at JPMorgan Chase. “If you look at it as more of this type of journey, it’s a little bit frustrating to be asked, ‘Are you in production yet?’ Because we’re certainly working on it, but the technology is changing so fast.”
Angus Champion de Crespigny, senior manager for financial services at EY, agreed. “I also get asked: ‘When is blockchain going to be ready?’ And I feel like it’s like, ‘When is the internet going to be ready?’”
As Baldet put it: “It’s bitcoin and Ethereum. We’re in production.”
The comments illustrate the complicated place that blockchain technology currently occupies in banking. While the industry has largely endorsed the technology, banks are in various states of research and development.
JPMorgan, for instance, has developed a smart-contract platform called Quorum that is based on Ethereum. Northern Trust recently went live with a blockchain for private-equity funds. Depository Trust Clearing Corp. this year completed a proof of concept on ways to improve repurchase agreement transactions.
Speakers at the conference — who also included executives from Mitsubishi UFJ Financial Group, BNP Paribas, Citigroup and DTCC — addressed the difficulty of working on a cutting-edge technology at a time when legacy systems are still the norm.
Tapodyuti Bose, Citi’s global head of channel and enterprise services, said that banks need to focus their efforts on niche areas of their businesses, such as those that are “natively digital” but currently rely on a series of manual processes.
“Given that the technology is nascent, it will have to rely for the foreseeable future on a legacy infrastructure,” Bose said.
In the months and years ahead, banks will face challenges as they get closer to putting blockchain technology to use on a large, marketwide scale.
Baldet warned that bankers should not expect a flashy rollout anytime soon.
“We also have offices of technology risk that we have to report to,” she said, noting that the company has service provider agreements to adhere to, not to mention client guarantees. “You have to meet these pre-existing benchmarks, as opposed to ‘Hey let’s try it — and if it doesn’t work, sorry, we’ll try again.’ ”
Despite the pressure in the industry to rush to production, the banking industry will ultimately benefit in the long run from taking its time, according to Baldet.
She pointed to the importance of consortia such as R3 and the Hyperledger Project in tackling vexing questions about how the blockchain should handle securities trades, payments and contracts in a faster, simpler way.
“We need to be very careful … and make sure it’s not just a rush to production for a press release’s sake,” Baldet said. “But what’s sacrosanct the entire time is the risk and fiduciary obligation that we have to the business.”