Blockchain: Myth, Distraction or Real Enabler?

The financial services industry (or at least the financial services media) is enamoured with the blockchain, inundating us with articles explaining how the world will be completely upended by this technology – and that it will probably happen tomorrow or while we are sleeping at the switch.

I think the reality is somewhere in between. Yes, there is excessive hype regarding the blockchain, but if applied to specific problems it could really change how business is done in financial services.

So first off, what is it? The blockchain is a fully decentralized global ledger that records digital currency transactions, originally set up as the open source database for Bitcoin trading. Anyone can access and use it. Once a transaction has been recorded on the blockchain, it can’t be edited or deleted, and everyone can see it. This inherent openness essentially makes it incorruptible.

The concept and technology behind the blockchain has financial services companies wondering if their very purpose will become redundant in a world where all transactions are made directly, with no need for intermediaries. It’s a far faster, cheaper and more secure way to trade than all methods that came before it. While on one hand this does present a huge threat to banks, it could also be their big ticket to reinvention and renewed relevance. Whether or not this happens will depend on the application or use case, and how it is deployed in a digital business network.

Those jumping on board with the blockchain early are exploring how it can help to automate and streamline their processes. Think loans, investing, cross-border transactions, loyalty programs, and you start to get an idea of the extraordinary potential of the technology in stripping out much of the administration associated with banking services. If the ‘need for trust’ is taken care of by the openness of blockchain, reconciliations, verifications, and other checking work becomes unnecessary. If for a second you think this will simply serve to eliminate the usefulness of banks, remember that in business there will always be those that take the initiative to stay in the game. The value of financial services will change, but it will very much still exist.

Blockchain adoption is still in its infancy. The technology launched in 2011, and it wasn’t until around the end of 2013 when people in financial services and other industries began noticing its real potential. However, we won’t see its full impact until it truly enters the public conscience, at which point I believe it will spark a rapid shift in the status quo and what’s expected of banks. That’s when we will start to see it being to put to use in solving real-world business problems. In 25 years’ time, we could see it heralded as the invention that changed everything. No wonder the World Economic Forum has singled out ‘the blockchain’ as one of the core technologies of the fourth industrial revolution. 

So I think what we will see here is that change will happen very slowly in the industry as a whole, but there will be pockets of speed as this technology is used to solve very specific problems between partner firms.

In banking technology, solutions get very real, very quickly when we get into the details. There is certainly lots of work to do as we move from the concept to reality. The first thing every firm should understand is the areas where this concept could change their business model. I’ve seen repeatedly the effects, both good and bad, of finance companies adopting new technologies or choosing not to. In the instance of blockchain, it seems a certainty that boardrooms will have to take notice and act. Many already are, but are they also blind to the why of it? Are they committed to understanding the blockchain’s benefits, or are they only wanting to check a box to say that they are?

Knowing where to start right now is a challenge. In my mind, large financial institutions need established technology partners to create a ‘safe innovation layer’ to connect them via the cloud to the blockchain. Hosted cloud platforms present the most logical solution to plugging in securely and safely to emerging technologies, ensuring banks can be nimble enough to keep up with the disruptive fintechs without too much risk. I’m excited to have more and more conversations on this topic with financial services execs.

I am planning to share some additional examples on how the blockchain can create new business models following this brief introduction, including why lending is a good choice for blockchain, what is most likely to win out as the established platform for blockchain, and what ‘smart contracts’ mean for the future of business.