Blockchain in financial services: Where are we now?

A lot has transpired since we last covered the topic of blockchain in financial services in May 2017. At that time, the price of bitcoin (BTC) had yet to rise above $2,000 and the concept of an ICO (initial coin offering) was just emerging in the eyes of the public. Since then, BTC topped $19,000 in December and has recently traded around $8,000, while ICOs raised $5.6 billion in 2017 and, according to PwC, more than $13 billion so far in 2018.

Clearly, there is a great deal of interest in blockchain, but what is the current rate of adoption of blockchain in financial services, and what does the immediate future hold for the use of this exciting new technology? Conveniently, the cases we explored in our previous article offer an instructive array of developments that illustrate the advancement of blockchain in financial services, as one was abandoned, a second has evolved, and a third is building slowly on the basis of early success. In the end, the lessons so far are that many ideas die on the vine, others do their best to evolve as new insights arise, and the keenest lessons come from those who address a size-appropriate challenge, receive feedback, iterate in turn, and expand and scale as they go.

A solution in search of a problem

One interesting blockchain project originated from DTCC and involved utilizing blockchain to improve capital efficiency in the market for repo, the market for short-term lending, and borrowing of U.S. Treasury securities by large financial institutions. After a promising POC with blockchain leader Digital Asset in early 2017, DTCC decided by March of this year to abandon the project. According to Murray Pozmanter, Managing Director at DTCC, banks and other potential users believed the same results could be achieved more cheaply using current technology; “Basically, it became a solution in search of a problem,” he said.

That’s not the end of the story, however, as DTCC found other ways to improve the repo market and otherwise remains committed to exploring the utility of blockchain technology. In March 2018, DTCC expanded the universe of participants in the repo market with the introduction of sponsored repo from buy-side firms, boosting the market through participation rather than technology. DTCC Chairman Michael Bodson also signaled a continued interest in blockchain, including the decision to re-platform its Trade Information Warehouse for credit derivatives on a blockchain platform later in 2018.

If at first you don’t succeed…

The market for online advertising is the target of NYIAX and it teamed with Nasdaq to create an electronic marketplace for digital advertising inventory. The offering is conceptually ideal for blockchain implementation, as it could potentially transform the way that business gets done by providing greater transparency and efficiency. However, while the addressable market is large, and the proposed solution offered a vast improvement from existing alternatives, it appears that the NYIAX solution doesn’t meet all the needs of the marketplace.

Specifically, the market for online digital advertising has been marred by the presence of scammers who trick companies into advertising on unauthorized websites. In one infamous case, scammers hijacked ads intended for the New York Times by rewriting the location URL. At the same time, these scammers typically deploy bots to visit the fake sites and thereby increase their ad payouts. Unfortunately for NYIAX, its solution doesn’t in any way address this problem. Enter Rebel AI. It counters the scammers by utilizing the public and private keys of a blockchain to ensure that sites are authorized and legitimate; NYIAX has teamed up with Rebel AI to support its offering.

While NYIAX did not meet its goal of a late 2017 launch, it has managed to secure a new round of financing and the attention of the advertising industry, so prospects are still good. The space is not without competition from the likes of MadHive, MetaX, Comcast, IBM, and Google, but that only validates the opportunity. Time will tell who the winner, or winners, will be.

Small wins lead to expansion

Often, there’s something to be said for taking an agile approach by starting small because it can lead to real learning that can then be expanded upon for further success. By making many small, iterative steps and asserting value in the intended direction, it is possible to stamp out a framework that can later be scaled for greater success. That seems to be the case with Northern Trust and its use of blockchain for a private equity fund. With a project that kicked off late in 2016, Northern focused on one fund in one jurisdiction with one administrator, one technology partner, and one regulator to prove the concept was valid. Following upon that success in 2017, Northern Trust expanded its private blockchain in March of this year to include the ability to audit equity lifecycle events in real time by partnering with PwC.

“By expanding our private equity blockchain ecosystem to the audit community, Northern Trust has enabled audit transactions to be recorded on a blockchain in real time,” said Pete Cherecwich, president of Corporate & Institutional Services at Northern Trust. “This will result in direct efficiencies to both the audit firms and Northern Trust, and provide investors with a more timely and valued assurance product.”

Northern Trust has shown a deep commitment to blockchain, including securing two patents for recording fund administration activities on a blockchain and signaling that it is entering the nascent market of cryptoasset custody. This is an area that has been crying out for serious institutional participation from participants in the burgeoning cryptocurrencies trading market. In all its efforts, Northern has shown a propensity for building on small wins rather than succumbing to the temptation of tackling big opportunities by trying to boil the ocean.

Conclusion

Taken together, the cases of DTCC, NYIAX, and Northern Trust are emblematic of a technology that is very much in the earliest stages of development and adoption. Many, if not most, cases will wind up abandoned, like the DTCC’s repo project, while another significant percentage of projects will shapeshift and evolve, as NYIAX is doing in digital advertising. Through it all, companies such as Northern Trust will have small wins and even setbacks as they employ agile methodology to take small bites at the apple to see what does or doesn’t work, quickly adapt with lessons learned, and accelerate their efforts along the way.

At the end of the day, blockchain appears to be approaching us like a tsunami, which is subtle and quiet out on the open sea, but, as it reaches the shoreline, it magnifies in force. Perhaps the key to success is to identify with the surfer who will prosper from the wave before it comes crashing down on those who are flat footed observing from the shoreline.

What is the current rate of adoption of blockchain in financial services, and what does the immediate future hold for the use of the technology? Maven Wave’s Andrew Dunmore examines the progress of some real-world projects to understand the advancement of blockchain in financial services.