In 2015 the blockchain entered a new phase of public awareness. Bitcoin, which once generated all public comment on cryptocurrencies, took a backseat to the larger subject of blockchain technology. Major magazines like The Economist featured stories on the amazing potential of the blockchain. Their comments have followed a similar narrative: while Bitcoin is an innovation, it is a product and application of the blockchain, while it is the blockchain itself that offers a genuinely new innovation with huge implications for financial institution infrastructures.
Earlier this year, Nasdaq announced it would incorporate the technology into its operations
All the comment and activity surrounding the blockchain has been more than just speculative or academic: major financial institutions, banks and stock exchanges have been investing time and money into adopting blockchain technology into their infrastructure.
Earlier this year, Nasdaq announced it would incorporate the technology into its operations. At the time of the announcement, Nasdaq CEO Bob Greifeld stated the blockchain’s benefits to the industry are immense and cannot be ignored.
That same month, Barclays announced it currently is home to over 45 bitcoin and blockchain related experiments. Similarly, Deloitte has a cryptocurrency group that numbers around 100 people across 12 countries in which the company operates.
In September, 22 major banking institutions—including Barclays, RBS and Goldman Sachs—announced they had joined an initiative led by financial innovation firm R3 to standardize the use of distributed ledger technologies. The goal of this partnership is to establish an industry-wide protocol consistency, marking the first significant commitment by the banks to collaboratively evaluate and apply this emerging technology to the global financial system.
That same month, Barclays announced it currently is home to over 45 bitcoin and blockchain related experiments. Similarly, Deloitte has a cryptocurrency group that numbers around 100 people across 12 countries in which the company operates. Other entrants into the spa ce from the traditional banking system include UBS, Citi and USAA. These projects now underway can be grouped under the heading of 2nd generation or Blockchain 2.0 initiatives.
These developments underline that the blockchain has now entered an intermediate, corporate test phase. There are many use-cases being explored by both startups and large financial institutions. This is a process that is expected to be ongoing well into 2016, with viable products in the space becoming operational within the next year. While none of these are currently deployable, we expect that to change over the coming months.
Company acceptance of blockchain integration will require vision from the top…
With all the talk of disruption in the financial sector, many companies looking to leverage blockchain technology are faced with dizzying numbers of competing claims and pie-in-the-sky predictions. The chance to pull the rug out from a competitor has dazzled many a chief innovation officer. While it is important businesses embrace the opportunity the blockchain presents, they must proceed with caution.
This is more than just boilerplate advice. Blockchain technology has gained significant attention in a relatively short period of time, leaving many financial institutions without the expertise needed to sift through competing claims. Business should approach change in the following way: Seek out people who have the expertise but are not trying to push any particular product or platform;
thoroughly vet your options before deciding who to work with, and then again when selecting products; take an agnostic attitude when considering different platforms; and look for advice from a professional who has sufficient depth of background in the space to cut through the hype.
As a general rule, while waiting to see which movers in the space are proven winners, businesses should start the process of adoption in-house with test products — remembering also that entrenched aspects of a company’s culture will have to be nurtured towards change before adoption can happen. Company acceptance of blockchain integration will require vision from the top, and this will need to be clearly communicated to staff throughout your workplace.
While it’s never easy to predict the future, and while this is by no means a complete list, what follows are some of developments we are currently seeing:
• Security Settlement - Many financial institutions and startups are currently working to improve the securities settlement process using blockchain technology. The most significant gains would be a system in which the security is embedded directly onto a blockchain (most likely, a private “contractual” blockchain managed by known participants). This would allow for near-instantaneous settlement, and eliminate much of the friction and risk associated with post-trade operations.
• Syndicated Loans - It can take up to 20 days to settle syndicated loan trades, making this a prime market for disruption using fast and efficient blockchain settlement. There are companies currently developing offerings in this space.
• KYC (Know Your Customer) - Cryptographic ID could reduce KYC friction by enabling a more efficient verification process. However, existing regulatory constraints and the fact that most ID must be government-issued could stifle development in this area.
• Derivative Trading - Blockchain 2.0 projects with advanced scripting capabilities could enable financial institutions to flexibly create derivatives matching their immediate needs and risks, with all the standard advantages of blockchain-based assets, specifically automatic execution and cryptographic security.