David Horton, Head of Innovation at Synechron
Blockchain – the contentious new digital ledger technology that was first tied to the Bitcoin bonanza but now is emerging as a truly transformative technology in finance.
Goldman Sachs recently issued a report stating that the use of blockchain technology for clearing and settlement in the cash equities market could save banks around the world $6 billion a year. This points towards growing understanding that the infrastructure that supports financial services today is not feasible – costs are too high, processes are too complex to run, they’re siloed and not secure.
The industry must come to terms with the realisation that their infrastructure is holding them back – and they must respond quickly.
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There isn’t any other technology that will have as big an impact on financial institutions than blockchain and we are already starting to find real-world uses. This, along with smart contract and digital currency, will change the way the entire system works.
Reaching new heights
Blockchain creates transparency around transactions and provides safety and security for not only people’s money but also their data. By utilising a digital, decentralised ledger, blockchain optimises accuracy, accountability, speed and transparency.
Digital ledgers and smart contracts are also quickly being revolutionised by the implementation of blockchain. Estonia has begun using it to conduct shareholder voting. The British government is considering incorporating blockchain into their student loan payments.
Blockchain’s true capabilities however, will only be completely realised when digital currencies, digital ledgers and smart contracts are used together to create interesting and practical ways for companies and industries to achieve dramatic innovation.
Getting past the stumbling blocks
Large players with lower complexity will allow for easier integration. Areas like remittances, alternative payments, mortgages and pre-paid accounts will become the first wave of transition to blockchain. Intra-company cross-border payments, commercial lending, and documentary trade will come next. With each wave, new integrations and understanding will create more possibilities for users until, ultimately, exchanges, asset trading, and clearing networks all operate on blockchain.
However, the main hurdle is in transitioning. Using and understanding is likely to begin as a frustrating process with the potential for many winners, as well as many losers. As the first integrations have started, the transparency blockchain enables is already highlighting the need for innovation and revolution of business processes. The silver bullet is for institutions to work closely with those who can advise them on how to best adopt and use the technology to drive business transformation.
Adhering to regulation and compliance
The underlying technology is not aimed at changing the rules of compliance and regulation, but will in fact allow for more efficient and less risk adverse compliance with regulations. Blockchain is optimising what financial institutions can achieve, not what rules they can circumvent. This perception is likely the result of all the early hype that surrounded the use case for Bitcoin, but what it suggests is that blockchain evangelists need to educate the markets about the realities of P2P cryptographic technologies.
Legal and regulatory teams need to be involved in the innovation process from day one, so they can see the practical application of blockchain in their business, and not treated as rubber-stamping departments late in the process. There is no hidden complexity with blockchain and so complete transparency and a focus on practical application of the technology is key.
Like any technology, banks need to assess the suitability of blockchain for their particular needs. Its potential is huge and potentially limitless, so the focus needs to be on solving real-life issues.
How important was it in 1995 for companies to start thinking about the impact of the Internet on their business? Like the Internet and cloud, blockchains are another enabler of platformification for the financial services industry. Distributed ledger principles are now well understood and industry thought leaders agree that they will fundamentally change the way in which trust-based transactions occur. It is imperative that financial institutions start implementing and experimenting with the technology, as it could prove critical to their competitive status in the future.
New technologies move power back to the people. Blockchain is the future. It streamlines business operations. It creates stronger currencies. It offers the unbanked and underbanked services they previously could not access. The decentralised world is here: it is just a matter of time to determine who the first adopters will be.
Nobody can predict exactly how blockchain will end up changing the finance industry and the fact is it’s in the early stages of its lifecycle. It needs time to mature and it will be 5-10 years before we see the full impact but there is huge change coming. People may never come to love this distributive technology but they will love the services built on top of it.