Blockchain & back office: a revolutionary change or not?
Blockchain has been hailed as a disruptive force capable of revolutionising the banking sector. While this may be the case to some extent, the impact may be overstated when it comes to wider back office operations, argues Paul Westgate, product manager at Linedata. In the clamour to proclaim blockchain, and those cryptocurrencies built on blockchain technology, as a bold paradigm shift, many commentators may be underestimating the robust and flexible back office systems already in place.
A clear example is the processing of cryptocurrencies. Today’s back office systems will, by and large, have little difficulty in accommodating currencies such as Bitcoin. In terms of its use as a currency, cryptocurrencies will operate in much the same way as fiat currencies. One exception is the opportunity for greater sub-division. In the case of Bitcoin, systems will need to accommodate up to eight decimal places, compared to up to three decimal places today.
Today’s crypto-currencies, such as Bitcoin, are more likely to be seen as an investment opportunity, evidenced by the existence of several bitcoin funds in the market. From a back office perspective, these would operate in a similar fashion to any other type of investment fund, and are not envisioned to require significant changes.
There will, of course, need to be some adjustments to accommodate blockchain technologies. In the case of trade settlements, the use of the blockchain may shorten settlement times further than already achieved, and could potentially serve to eliminate settlement failures. The back office would need to react to this change of pace, and it may lead to a simplification in the areas of reconciliations, and potentially transaction reporting. For example, information about trade executions will be shared by all participants to the trade, simplifying the current process of each party maintaining individual sets of records.
Although there are some formative solutions around illiquid securities and blockchain we’ve still got a long way to go. Numerous internal systems and legacy architecture need to be reengineered, and a substantial industry-wide change in operational procedures has to take place before mainstream settlement via the blockchain can become a reality.
Development costs associated with blockchain interaction are inevitable and this cost of systems reengineering should be considered. However, the common perception so far suggests that cost savings for the back office could provide a major benefit, with the expectation of lower transaction costs.
In the main, outside of clearing and settlement, back office systems are likely to remain largely unchanged. But while we are unlikely to see a switch to becoming distributed ledgers, back office systems will still need to interact with the blockchain. Fundamentally, crypto-currency transactions are still a transaction, and existing transaction processing systems will treat them like any other. Looking forward, the main challenge will be how and when to get the transaction from the blockchain.
There is also the issue of privacy, in terms of what data can be accessed, and whether it is simply looking at the data, or taking a copy of the transaction and the deciding on the most appropriate technology to use. For the latter, a key challenge is that this lies outside of today’s traditional IT development skill set; a skill gap that will have to be rectified if blockchain technology is to truly emerge as a disruptive technology in the banking industry.