Blockchain: widely discussed but what are the implications?
The fintech revolution is now firmly established, and disruptive technologies are blooming all across the sector. From securities to payments, everyone in the sector is watching to see how the next innovation will affect their business, writes Jeremy Light.
The recent Sibos saw delegates from the world’s financial sector descend on Singapore, eager to see the latest innovations that are driving the sector forward. For many this will have been an eye-opening experience, as the challenges and opportunities from the latest disruptive technologies become clearer.
One of these technologies is blockchain (or more generically the distributed consensus ledger). Blockchain is the underlying technology used by the world’s leading cryptocurrency, Bitcoin, which most have heard of. However, rather than the currency itself, many in the financial services sector are interested in the potential of blockchain to enhance trust, transparency, reach, efficiency and innovation in financial markets.
The ambitious claims about its potential benefits – not least the vast sums of money that it might save – are hypothetical at this stage. There is a lot of hype, which makes it difficult for banks to decide exactly where and how to best innovate, and ongoing regulatory uncertainty is no friend to innovation.
To better understand its potential real-world applications, Accenture is running its own blockchain, smart contract applications, and a range of cross-industry DCL initiatives in Technology Labs around the world. These span financial services, utilities, and consumer electronics. And of course we’re not alone; banks themselves have started setting up innovation laboratories and R&D programmes to explore Blockchain.
What actions does a bank need to take today?
Organise: appoint a single DCL lead for the enterprise and allocate a central budget, funded by individual business units if necessary, but avoid duplicated/siloed investments and teams
Evolve a strategy and architecture – keep it agile and high level with the strategy focused on the strengths of DCLs – avoid re-inventing Bitcoin or using DCL technology where it doesn’t add clear value over existing technologies.
Build/buy DCL capability —Educate IT and business staff (including providing hands-on experience, for example installing Bitcoin ATMs in bank buildings and accepting bitcoins in staff restaurants)…and/or acquire start-ups and their capabilities such as digital wallets and crypto-currency exchanges.
Experiment and develop experience — Mine crypto-currency to understand the dynamics of consensus processes; develop proof-of-concepts and initial products and services using a DCL and test with customers
Engage with customers, fintech and regulators — Focus on DCL companies as a distinct bank corporate customer sector to serve (alongside existing segments for money services businesses and electronic money institutions); keep close to relevant regulator – to inform, guide and educate, especially on R&D findings and incubate innovative start-ups building DCL capabilities
There is a natural tendency here to focus on how this innovation can transform technology: to drive efficiencies, to disrupt long-established business models and to reduce costs. But what makes DCL so exciting is not necessarily its ability to transform technology. Rather, it is the way DCL can transform the way value is transferred through ubiquitous, trustless and real-time transfer, all at a significantly lower cost than traditional systems.
This is especially important for payments, because payments represent the purest form of transferring value. Examples include cases where oversight by a central authority is not feasible – such as with international payments – or where a centralised control point, restriction, or intermediaries exist that create inefficiencies, costs and barriers. Good examples of the latter are correspondent banking payments, card transactions and international remittances.
Beyond payments, DCLs offer possible advantages in many other areas of the financial services sector. The completeness and transparency of the transaction register could help tackle anti-money laundering (AML) efforts. This is an area that has traditionally been hard to tackle. London-based start-up, Elliptic, has harnessed the underlying technology supporting its visualisation of the Bitcoin ecosystem to develop a suite of AML services. As AML becomes one of the hottest topics globally, all banks will need to sit up and take notice.
Blockchain’s advantages over existing technologies can enable new business models that would not otherwise be possible, or practicable. The potential benefits, if realised, will have a marked impact on the payments industry, which is why banks around the world need to act now to ensure they understand what it might mean for them.