Blockchain: a question of scale
Few technologies demonstrate the technological change across the financial services industry better than distributed ledger technology (DLT). We believe that blockchain will continue to revolutionise financial services and will become the operating system which underpins the digital economy.
DLT is already proving its use in cases where a large number of partners rely on shared information, requiring immutable technology like DLT to provide an audit trail, increased transparency and efficiency. Many of these characteristics exist in trade finance, and particularly in post-trade processes in the middle and back offices, and to a lesser extent also pre-trade.
From 2019 and beyond we will begin to see an exciting phase of the first trade network solutions going live and having a tangible benefit to trade finance solutions. For the first time these networks will include businesses at every stage of the trading process from logistics companies, customs firms all the way to insurance companies, operating on DLT frameworks.
However, DLT has been at the top of the agenda for the last two to three years, and as it matures, the teething problems, challenges and pressures are magnified.
Buzzwords or just noise?
It’s easy to get caught up the novelty of buzzwords, and with the exciting possibilities of blockchain, it’s hardly surprising.
One of both the strengths and challenges of DLT, is that each platform and framework has its individual potential for different use cases and problems. It is therefore a gamble as to which framework will work effectively, requiring rigorous experimentation with different frameworks to understand their future feasibility and scalability.
However, Commerzbank has found the technology is not always the panacea that the industry expected. Since 2016, Commerzbank has worked on more than 80 proofs of concept or minimum viable products involving DLT. Much to our surprise, in many cases these experiments have shown SQL databases work just as well, if not better, than the new proposed DLT technologies. Of those 80 experiments, four proof of concepts were developed into pilot trades.
It is imperative that we identify where DLT really adds value to the bank-client relationship, and not get blinded by buzzwords.
Scalability through collaboration
The next stage growth, taking workable solutions out of the lab and deploying them at scale remains the most challenging step for the industry. The complete package of a blockchain product which lowers costs, is deployed immediately and is fully scalable doesn’t exist yet – but a breakthrough is in sight, and for us, collaboration is going to be the catalyst that drives forward scalability.
Instead of a winner-takes-all approach, as an industry we need to look at how banks, fintech and clients can work together and use these emerging technologies to resolve industry-wide issues.
One way of accomplishing this, is for large players to invest in early stage fintech start-ups, allowing the scale of the banks and the nimble and dynamic nature of their young counterparts to complement one another. Commerzbank’s main incubator invests between €250,000 and €2 million in early stage fintech start-ups, mainly in the Dach region. Since 2013 the incubator has interacted with over 3000 start-ups, evaluating 800 and, invested in 17 with a strong selection of projects in the pipeline.
We still have a long way to go before we can ensure complete interoperability between different DLT frameworks such as Corda and Hyperledger. In the meantime, we urge financial institutions to focus on an open network, as these platforms will continue to underpin future technologies. To support the democratisation of DLT for all parties in the trade finance chain, we should encourage low entrance fees and low effort for implementation and interoperability between different trade networks.
It’s our view that the financial services industry needs standards for processing digital trade data accepted globally from institutions like the International Criminal Court (ICC). We are part of the Universal Trade Network (UTN) initiative where we are working with other banks and industries to establish universal standards with for dealing with digital trade data.
It will take time for these ideas to be developed, and their implications fully evaluated. Laws will also need to be updated to ensure maximum client protection. Regulators have an important role to play – in Germany, the European Central Bank, BaFin and Bundesbank have set up dedicated teams that understand DLT.
For now, DLT systems run alongside legacy systems, and it is not yet clear which varieties of DLT are best suited to different user cases. Each platform may be better suited to different tasks, and it is unlikely there will be a winner-takes-all outcome in the competition of these platforms. Instead, financial services, banks included, will benefit most from a strong ecosystem working together to increase transparency and efficiency, making services cost effective and more secure for clients.
By Michael F. Spitz, CEO main incubator at Commerzbank