By now, most technologists in the Financial Services space have a reasonably good understanding of what blockchain is, how it works, and what the pure technology components of it are.
There is a tangible sense of excitement, as banks realize that a technology which helps them to reduce transaction costs and create a single, incorruptible, and consensus-driven source of truth within their business could be a very powerful thing indeed.
But like a Raspberry Pi, or a radio controlled drone, or an empty Hadoop cluster, while the technology is undeniably clever and exciting - it is only when that technology is applied to solve a specific, clearly defined problem that genuine business value can be derived from it.
A POC in search of a problem
Banks are struggling to get a firm grip on the tangible impact of Blockchain in terms of concrete use cases that will actually gain consensus and momentum in wholesale financial services. Moreover, what we have seen and heard is that the opening line from many Blockchain startups sounds a little like “We have this incredible solution…now if you could just tell us how this will solve your problems and what that would mean for you….”
The truth is that, while they are experts in distributed ledgers and cryptography, most Blockchain startups just don’t understand the complexities of Financial Services, such as the industry standard messaging frameworks like SWIFT MT / MX, DTCC, FIX and FpML which underpin existing systems.
As a result, we have seen a proliferation of Blockchain POCs which are essentially solutions in search of a problem, prescribing and shoehorning in shiny Blockchain technology and risking overlooking long term commitments to other consensus-driven projects like ISO 20022.
Two-speed Blockchain adoption and vested interests
To my mind, and perhaps to state the obvious, the opportunity is much less about the actual technology (because it’s neither new nor particularly controversial) and much more about the impact on collective behaviour in the markets and how that changes over a 3-5 year horizon.
Within that, I suspect a different pace of adoption between payments and capital markets. Payments is a much simpler world with an (arguably) more direct impact on the retail consumer, whereas capital markets are much more diversified, complex and less able to react quickly in terms of adopting and implementing change.
Common to both payments and capital markets is the issue of multiple vested interests in market infrastructures and various intermediaries, all of whom are to a greater or lesser extent threatened with disintermediation in a future world where business is transacted across peer-to-peer consensus-driven networks.
Three prerequisites for Blockchain adoption
How will blockchain-based solutions appear and become established in wholesale Financial Services? I believe there are three key factors which must be in place:
1. Collaboration between participants
Consensus-driven technology by its very nature requires collaboration between a critical mass of participants. Ventures like R3 have started down this road, but feel like a mountaineering expedition without a map. We anticipate that participants will begin to form their own groups and project teams focusing around solving specific problems rather than the current phase of examining the technology generally.
2. Identification of the problem space
As mentioned above, the specific problems to be solved have not been clearly articulated, and are at risk of being lost in the general buzz surrounding blockchain. We have identified several specific problems that blockchain can solve. The key to identifying problem spaces is to look for financial processes and interactions which have not yet been automated or commoditised in the way that e.g. cash equity trading & settlement have been.
3. Reduce integration costs
The cost of running Blockchain POCs can be significant, but when the resulting prototype involves an even more significant cost to bring it into production, then the project is doomed to fail. For Blockchain adoption to happen, solutions must minimize the impact and cost of integration with existing processes and infrastructures. Cannibalising existing sunk investments and planning extensive code base rewrites in the hope of achieving small performance benefits or cost savings just doesn’t make sense.
The commoditization of blockchain
Once the key use cases and corresponding solutions have been developed, we will see the rapid commoditization of underlying blockchain technologies and infrastructures. I believe that ultimately, providing Blockchain implementations is going to become as much a service as hosted cloud storage.
Existing market infrastructures and service providers like SWIFT, the DTCC and other CSDs, clearers and depositories will all try and appropriate the space of ‘trusted blockchain network provider’ because of fear of eventual extinction. Until then, we will see many other companies attempt to build and maintain the underlying infrastructure for blockchain-based implementations. But as with the Apple App store, in the long term, the real interest will be in the applications which are built atop Blockchain technology.