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50 shades of blockchain

I’ve written about Bitcoin and blockchain for half a decade, and now banks are all talking about it too. There is a belief that the blockchain technology that came from the Bitcoin structure could revolutionise banking.

I’ve written about Bitcoin and blockchain for half a decade, and now banks are all talking about it too. There is a belief that the blockchain technology that came from the Bitcoin structure could revolutionise banking. But there’s a problem, not with blockchain protocol, but with the hype and confusion that surrounds it. How will banks make any progress if no one understands it?

Blockchain has become like ‘cloud’ and ‘big data’, a discussion in which all the media, technology firms and conferences focus upon one word to the point that, after a few years, it has become meaningless. Mention blockchain today to most bankers and they yawn, as though they’ve been there and done that. It has even been the focus of a Dilbert cartoon. At that point, you know the hype cycle is at full spin.

The reason that there is so much discussion is that the blockchain protocol is believed to be able to revolutionise the way we transact and trade, and the hype cycle is hiding what is actually happening in the markets underneath.

For example, in banking, there is no blockchain. There are just a range of areas where we can see that this technology applied to banking processes could save billions of dollars. For example, Santander produced a white paper that estimated more than $20bn a year could be saved in clearing and settlement alone. For this reason, dozens of start-up companies are developing settlement coins that could process post-trade clearing in minutes or even seconds at almost no cost.

Santander"Our analysis suggests that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022. "
— – Santander, The Fintech 2.0 Paper: rebooting financial services

That’s the promise, anyway, but the reality is that this is not just a technology change, but a business process change across the industry. For example, when explaining blockchain protocol, most pundits talk about using it for shared, distributed ledgers; others call it a shared internet database; some talk about blockchain structures as smart contracts. Still others refer to programmed transactions.

This is where the madness starts. There are so many people discussing blockchain today that the terminology has become incredibly confusing. Some talk about permissioned ledgers versus permissionless; consensus versus distributed ledgers; public versus private blockchains; and so on and so forth. It has, in other words, become a madness of markets with everyone talking about it and few understanding it.

The only agreement is that this is a shared system, which means that more than one player has to be in the game for a blockchain development to work. Those players may be internal – you could use blockchain protocol as a shared database of employee identities and authorisations – but most start-ups are looking externally.

There is some method in the madness, however. Four of the leading lights in blockchain developments for banking are R3, Digital Asset Holdings, Life.Sreda and, maybe surprisingly, Swift. R3 is backed by 42 of the largest global banks, who are investing $600,000 a year each in membership. R3 has made some significant announcements, the most notable being last month’s release of Corda, a distributed ledger platform designed from the ground up to record, manage and synchronise financial agreements between regulated financial institutions. Corda captures the benefits of shared ledger structures, without the issues that make blockchain developments inappropriate for banking.

Digital Asset Holdings is led by Blythe Masters, a former investment bank lead at JPMorgan Chase who led the creation of the credit default swaps markets a decade ago. The company is backed by a number of large banks, as well as Accenture and the Depository Trust & Clearing Corporation.

Digital Asset Holdings200x200"Digital Asset Holdings is a technology company that provides tools that use distributed ledgers to track and settle both digital and mainstream financial assets in a cryptographically secure environment, where counterparty risk is minimized, and settlement times are drastically reduced."
— – Digital Asset Holdings

Life.Sreda is a venture capital fund in Singapore that has inspired many of the leading bank start-ups such as Fidor, Moven and Simple. Life.Sreda announced a $100m venture capital fund in April that will invest exclusively in blockchain start-up companies relevant to banking.

Finally, Swift has a key role. After all, I mentioned that blockchain is only useful if it’s shared and Swift is the largest shared network and standards organisation in banking. Swift is not shirking that responsibility and recently joined the Hyper Ledger Project with IBM, Fujitsu, JPMorgan and many more.

What’s the Hyper Ledger Project?

Formed in February, it’s “a collaborative effort created to advance blockchain technology by identifying and addressing important features for a cross-industry open standard for distributed ledgers that can transform the way business transactions are conducted globally”. In other words, we now have a standards organisation for blockchain structures, created by the Linux Foundation and supported by the largest firms in financial infrastructures.

All in all, blockchain may be confusing and appear close to madness at the highest level but, look under the hood, and the next generation of financial systems are being developed by the world’s leading infrastructures, based upon this technological change. Therefore, it is not just important, but fundamental.

Chris Skinner is Chair of the European networking forum: the Financial Services Club. He is best known as an independent commentator on Fintech through his blog, and as author of the bestselling book Digital Bank and its new sequel ValueWeb.


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