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Blockchain, the underlying technology of cryptocurrencies, continues to remain something of an enigma. Perhaps it is a little less mysterious today than it was six months ago, but you can’t deny that it has the financial services industry foxed. How does it work? How will it impact the industry? What can I do to ward off the blockchain bogey? Or, better yet, what can I do to turn it into a business ally? Since blockchain and cryptocurrencies work on the basis of customer anonymity, many have natural apprehensions, since identity is central to financial services.
It may help to gain a little perspective if you look back to the 1990s, when businesses intuitively suspected that the Internet was a major shift in the way the world would be shaped. They wanted to explore possibilities, but were circumspect, which gave way to private networks (AOL being the category flagbearer) that hoped to dispel fears around identity, security and trust.
That didn’t work out; private networks died prematurely, but there was a simple reason for this. Open systems like the Internet built trust mechanisms far stronger and faster than private networks could hope to (and at lower cost). It also helped that innovators found it most rewarding to work on the open systems of the Internet. This quickly gave birth to digital goods, e-commerce, online banking, social media, the elimination of middle-men and now the Internet of Things (IoT).
No blocking the chain of transformation
Over the next three to five years, blockchain is set to bring about as vast a transformation as the Internet. The impact will not be limited to financial services alone, but some of the first and most radical changes will certainly be seen in this sector.
Financial services are particularly vulnerable, as blockchain has the ability to move value (cash, bonds, assets) between entities over the Internet, bypassing financial organisations that benefit from escrow, deposit and value transfer services. The technology can also help to respond to the increasing number of regulations that have been introduced to financial systems as they have begun to fail and public trust has been eroded. Blockchain technology is designed to address this by ensuring that transaction records cannot be tampered with, while the multiple parties involved can be reassured through a shared record of events in a distributed consensus ledger (DCL).
Additionally, the low-cost and formidable speed of peer-to-peer transactions enabled by the technology is placing banks under threat. Now, financial services organisations are not only confused about how to tame and ride the beast of blockchain, but they are also worried.
To make matters worse for financial services incumbents, the technology appears to be infiltrating other industries too. The Government of Honduras recently took steps to record land titles using blockchain. By building public records that cannot be tampered with or altered, Honduras aims to prevent widespread land title fraud.
Blockchain moving to centre stage
There are companies working towards making blockchain central to the selling (say, insurance), sharing (say, an apartment) and rental (say, a car) economy, eliminating the need for middlemen.
Just imagine a smart lock to an apartment, a vault, a vehicle, a router, a public toilet, a beer dispenser or anything else. Imagine now that it can be opened instantly by making a payment over a mobile app that is dictated by rules embedded in a smart contract using blockchain technology When the rules are met, the lock opens. Money becomes the key, and the transaction is completed, securely and in an auditable manner.
Demonstrating the diversity of the range of applications of the technology, Kim Jackson and Zach LeBeau took their marriage vows to a blockchain late last year. Since they were not certain if the contract is legally binding, they are also planning on a more traditional marriage. The evolution of the technology is relentless. Not only are use cases becoming interesting, but some developers are looking at parallel blockchains and sidechains that eliminate dependence on a single blockchain while improving scalability.
This only goes to show that the innovation around this technology is already boiling over – but banks and their employees are largely unable to comprehend how it will disrupt traditional trade technology and processes such as payments and remittances, clearing, settlements and reconciliation, regulatory reporting, assets and claims tracking and countless others that are core to their business.
Paving the way for blockchain
In such a landscape, where the technology appears to be here-there-and-everywhere, what is a financial services organisation to do? A good starting place is in engaging employees with the technology. For example, how about giving them a small portion of their salaries in a crypto currency that is accepted at the office cafeteria? We’ve seen our own employees’ interest in crypto currencies and blockchains improve significantly since launching CoinWatch, a free app that gives them up-to-the-minute exchange rates against major currencies. Such hands on understanding will go a long way in demystifying the technology and prepping organisational cultures for the change that is coming.
It’s also important to ensure senior management teams understand how blockchains work and how they can be used in their business to ensure they are fully on board and are prepared to advocate its use to others. We’ve been giving live demonstrations of blockchains in action and the way they can be applied in telematics at our innovation lab in London. This has really improved understanding of the value that it can deliver and helped many of our customers to build a solid business case for its adoption.
Many of the biggest banks are already making investments in blockchain technology, developing proof of concepts and prototypes. For example, The Bank of England has announced its own private cryptocurrency called RSCoins. RSCoins has a degree of centralisation and every unit of the currency is created by a central bank – a fact that may appeal to governments. China’s National Bank, Deutsche Bank, DBS, SCB, UBS, Barclays and Santander are all exploring public, private and hybrid blockchain. Santander has estimated it can reduce infrastructure costs by up to US$20 billion a year using the technology.
There is clearly increasing investment in blockchain – but not enough to suggest that we have reached a major inflection point in Fintech. This is alarming; financial services firms cannot afford to be slow in examining the potential of such a radical game-changer. We’ve seen in the past that those that are slow to adapt to new technology trends can quickly lose their competitive edge, so today’s market leaders simply cannot sit back and do nothing as a new generation of start-ups steal the march on their market share. There is no time like the present; it’s time for financial services to start taking blockchain seriously.