The future of finance is being rewritten right now.
Three years ago, if you asked anyone in finance about blockchain, chances are they would not have known what you were talking about. Today, all the world’s biggest financial institutions are racing to work out what the technology means for their industry – before their competitors do.
Within a remarkably short timeframe, blockchain, the decentralised infrastructure that underpins the digital currency bitcoin, has risen from obscurity to being touted as something to revolutionise the financial sector. For business leaders, the challenge has not just been to get their minds around how it actually works, but to keep up with the broad range of experiments already taking place.
After some angst over whether blockchain was inextricably linked to bitcoin – and therefore tarnished by fears over money laundering and shady activity – the financial world solved the problem by rebranding it as ‘distributed ledger technology’. That term, which is commonly used interchangeably with ‘blockchain’, describes a network of computers that run a shared database where transactions can be transparently logged for all to see and where no one party holds authority over the others.
Bankers who view blockchain simply as some kind of cool new technology to cut costs are making a mistake
There is no shortage of blockchain advocates who loudly herald its transformative potential. “Blockchain is nothing less than the second generation of the internet. For decades we’ve had the internet of information and now we’re getting the internet of money and value,” says Don Tapscott, who co-wrote Blockchain Revolution with his son Alex, and who has traced the technology’s development.
“Bankers who view it simply as some kind of cool new technology to cut costs are making a mistake. This is a strategic opportunity to transform financial services for the better. We believe the industry may well be unrecognisable in a decade.”
Investors have been willing to take a bet: more than $1.5bn has poured into blockchain ventures during the past year, according to the professional services firm PwC.
The biggest financial institutions are not taking the risk of being left behind. It is not only fear of competitors eating their lunch that has spurred them into action, but the hope that in constrained times, there could be considerable savings to be made. Goldman Sachs identified the US cash equities market alone could make a $6bn cost saving by using the blockchain to streamline post-trade settlement and clearing.
More than 70 large financial organisations, including major global banks, have formed the biggest alliance of its kind with the start-up R3.
“We have done a lot of deep and collaborative thinking with our members on how distributed ledger-based infrastructure can support global transactions in the cloud in a manner that is appropriate for regulated financial institutions,” says David Rutter, the Wall Street veteran leading R3. The New York-based firm is running dozens of tests of use cases employing its own Corda blockchain, as well as using technology from rivals such as Ethereum and Ripple. Like many, it has singled out payments and settlement, and trade finance as key targets for research.
For the mushrooming numbers of blockchain start-ups, bitcoin has been a big influence, as its blockchain, running since 2009, was the first to gain widespread adoption and is the most widely used today. Innovators have pored over its workings for inspiration in their own areas of business. Its appealing feature has been its securely encrypted transactions that can take place across borders in as little as seconds.
Tradle is one start-up aiming to cut out paper processes by building a know-your-customer network on a blockchain. Identity verification is a hotbed for research, with obvious benefits for KYC and anti-money laundering compliance.
If all the blockchain experiments do lead to a streamlining of processes, the obvious casualty will be jobs, with the likelihood certain roles will become redundant.
Post-trade settlement teams of auditors, regulators and controllers were roles singled out this year as at stake in a report from Morgan Stanley, if blockchain lives up to its promise of increasing transparency and visibility over transactions. Jobs in trade finance payments, too, were highlighted as being possible contenders for redundancy.
Yet many argue that blockchain has the potential to transform more than just finance. The UK government has shown interest in seeing whether the blockchain could be used to store health records that can be accessed by parties across the health system. Sweden is looking at whether blockchain could be used to register property holdings and manage the transfer of assets. And entrepreneurs are currently turning their attentions to how it might be used for fair voting, for artists to distribute their music and for the internet of things.
Amid the frenzied phase of experimentation, there are undoubtedly many business ideas lacking substance and will fizzle out. But if the frequently made comparisons with the early days of the internet turn out to be right, among the blockchain entrepreneurs are those building the foundations of tomorrow’s financial technology.
Jane Wild is a reporter and editor at the Financial Times in London who writes about bitcoin and blockchain technology.