When bank executives talk about blockchain, they tend to make broad, sweeping statements about the technology's potential to transform the industry.
Technical details are scarce. Value propositions are opaque.
But if the financial services industry hopes to truly use blockchain technology to change their business without spending years and vast amounts of money aimlessly testing prototypes, the industry is going to have to be more forthright and collaborative.
Financial institutions are naturally guarded about their use of emerging technology for competitive advantages. And currently, every little feature within the blockchain space could be used as a competitive edge since no clear winning setup has been decided upon.
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"There's a maturation happening in the blockchain industry; we're getting to the point that we need to work together even if we're competitors," said Christopher Allen, principal architect at Blockstream and a member of various blockchain standards bodies. "There are some things that aren't worth fighting over."
Standards would be a good starting point to get the industry on the same page. Not only do standards promote an equal competitive playing field but they also reduce new technologies' time to market. The industry seems to be taking that to heart. Many projects are focusing on the standardization of data flows and the language used to communicate with blockchains rather than a technology platform.
Digital Asset Holdings, an enterprise blockchain startup headed by the finance veteran Blythe Masters, is focusing on its modeling language. The language, which came out of DAH's acquisition of a firm called Elevence, promises financial institutions the ability to model and execute smart contract agreements with finality and certainty.
Similarly, Richard Brown, the chief architect at bank consortium R3 CEV, acknowledged in an April blog post that as originally designed, blockchains are "inappropriate for many banking scenarios." As an alternative, his firm has developed Corda, a distributed-ledger platform that among other features, "records an explicit link between human-language legal prose documents and smart contract code."
It seems that the real problem is more semantics (in the technical sense) than architecture.
Committing to standards would help the industry "get around some of the other hurdles while the underlying technology matures," said John Burnett, vice president of the Emerging Technologies Center at State Street Corp.
Burnett's list of hurdles is long: how to represent existing assets in a digital way on a blockchain, how existing players communicate with blockchains, what information should be stored on the blockchain, what capabilities can be enabled via smart contracts, and how to represent identities on a blockchain while still meeting know-your-customer and anti-money-laundering requirements. He could go on.
"These elements aren't specific to any particular blockchain but are just things that need to be resolved before as the industry thinks about taking initial use cases from demos and prototyping to launching live pilots," Burnett said.
Both the public blockchain and private blockchain contingents are dealing with these questions, which is the reason the World Wide Web Consortium (W3C), the web standards organization created by Tim Berners-Lee, the inventor of the World Wide Web, held its first-ever blockchain workshop in Boston at the end of June.
"Some think it's too early for standardization," said Jeff Jaffe, W3C's chief executive, who was in attendance at the workshop. But, for the most part, the energy and excitement mixed with the pace of innovation in the blockchain space show the industry will be ready for standardization in some form relatively soon, he said.
For example, the core issue of web developers accessing blockchains to build apps via standard application programming interfaces came up a lot at the workshop. And many of the talks and discussions revolved around the identity of users and the provenance (the record of ownership) of assets, two issues that greatly affect the financial services industry.
"There's a lot of folks in fintech looking at blockchains; that was loud and clear," Jaffe said.
This is a relatively new area for the W3C, which before a few years ago focused mainly on core technology for the average web user, rather than the use of the web for business. But as more businesses move online, the area of interest was broadened.
It all started with the Web Payments Workshop in Paris in March 2014.
"In the last two years we've been substantially growing our interest and contribution to the financial services area," Jaffe said.
Right now, blockchain is the financial services industry's favorite buzzword. Even Berners-Lee, who made an appearance at the workshop, has shown interest in the new technology. In June he created an account on OneName, the platform that hopes to lock digital identity to the bitcoin blockchain, verifying himself on Twitter as +timblee. Berners-Lee declined to comment for this article.
And the financial services industry has also begun giving standards bodies like W3C more time and effort.
A representative from State Street Bank (not Burnett) was in attendance at the blockchain workshop along with delegates from several other legacy financial institutions, including American Express and BBVA.
But these incumbents are still hesitant to get specific about their interest.
"American Express participates in a number of industry consortiums, trade groups and other organizations," said Andrew Johnson, a spokesman for the company. "W3C is of interest to American Express given its focus on a variety of topics that are relevant to our business, including web payments, authentication and security."
BBVA is also interested in these topics, as well as the Internet of Things.
At the workshop, Scarlett Sieber, senior vice president of global business development and new digital businesses, said IoT poses an interesting use case for blockchain that could intersect with the bank's operations as it relates to the sharing economy and smart contracts for payments.
For example, an electricity contract could convey that every time lights are activated in a particular house, the user will pay a certain (small) amount per hour, authenticated via blockchain. A more futuristic example that could affect banks and insurance providers is self-driving taxi services that run on smart contracts where machines pay other machines for maintenance.
BBVA is excited about the potential for blockchain as a secure, more efficient and cost effective database for automated, immutable, real-time transactions, Sieber said. That being said, she admits it's still early days and the future of blockchain for banks is uncertain.
Again, this is all quite loose. As were the conversations at the W3C blockchain workshop. While there was much excitement over the hypothetical possibilities of blockchain, technicalities were typically left unexplained. And a lot of this stems from the fact there aren't standards for developing, or even more importantly, defining blockchain applications.
State Street is being a bit more candid about its blockchain work. One of the world's largest custodians with visibility into a third of the world's assets, State Street is focusing its attention on private blockchain initiatives. It's a founding member of R3 and is also part of the Linux Foundation's Hyperledger project.
Like most of the discussions at the workshop, State Street is looking at how the blockchain could improve provenance and identity management. The custody bank is working on prototypes for post-trade settlement, collateral management and asset servicing, Burnett said.
State Street has demonstrated prototypes that have taken existing processes, flows or assets and replicated them using a blockchain, he said.
"Blockchain has real potential value for our business," Burnett said.
Why the "potential" caveat?
"I use the word 'potential' because the technology is still nascent and we're focused on proving the concepts and technologies before we move on to proving the true value that will be realized after integration," Burnett said.
So these prototypes are more about proving these systems are possible and less, if at all, about measuring quantifiable value, as in: Do these systems, after the cost of building and deploying, actually lead to cost savings for the bank? Or do they provide a better, more secure solution for customers?
And the latter question is why many in the industry are working on blockchain solutions for the digital identity.
Identity on the web is currently a mess with users having to set up new username/password combinations for nearly every website they visit. Not only is this inconvenient but leads to consumers using the same easy-to-remember (but also easy-to-hack) username/password pairs for everything, which poses a large threat should those credentials be compromised.
Public/private digital signature key pairs, as used within blockchain protocols, have been touted as a solution to these digital identity problems.
But there are plenty of fears here as well.
Several participants at the workshop, mostly the incumbent institutions, voiced concerns over the concept of an immutable identity that has a master key, which could pose the same problems as the current identity system does, possibly making it even harder to get fraudsters out and reissue identity.
Plus many of the blockchain-based identity initiatives seem to merely push the liability around, making it the consumer who accepts fault for compromised credentials. For instance, in the traditional financial system there are regulated periods of time where a consumer can ask for a transaction to be reversed in case of fraud. Bitcoin's irreversibility means no consumer recourse should their account be lost or hacked.
"Blockchains are just not institutional grade and purpose-built for what we want to use them for yet," Burnett said. "At the end of the day none of these existing blockchains in their current form are scaleable for the sheer volume of transactions we have."
However, he doesn't see these tech qualms as a huge roadblock. The tech challenges, he said, will likely be sorted out quicker than many think.
But a bigger hurdle looms — abiding by legal and regulatory requirements, of which banking has mountains.
Regulation is one of the reasons that complex legacy financial services are hard to test. Unlike Bitcoin and other open source projects, banks can't throw code out to the public that isn't battle-tested (see the DAO attack). If consumers lose money as a result of vulnerabilities, the banks will be held responsible, whereas open source software developers typically aren't.
The regulatory environment also presents challenges for standardization as well, said W3C's Jaffe. But in his eyes, the benefits will make the hard work worth it.
"There's a lot of motivation and resources to make things right," he said. "E-commerce is a growing share of total commerce, so the impact of improving those things is huge and at the same time there are issues with security and fraud that we can help with … such as reducing the presence of username/password for authentication."
Bailey Reutzel is a freelance writer based in Colorado Springs who focuses on tech, finance and politics.
Corrected July 18, 2016 at 1:27PM: A passage in an earlier version of this story misparaphrased public statements by the chief architect of R3 CEV. Richard Brown said in an April blog post that blockchains as originally designed were an awkward fit for banking; he was not referring to his firm's offerings.