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Blockchain – The Data derivative we should hedge in

Blockchain – The Data derivative we should hedge in
November 01, 2017

In a book that could become an anecdotal archive in Blockchain history, Blockchain Revolution, Don Tapscott states, “Imagine a technology that could preserve our freedom to choose for ourselves, to express these choices in the world, and to control our own destiny, no matter where we lived or were born; How should we think about these opportunities? The answers were right in front of us, compliments of Satoshi Nakamoto.”

Ever since its inception, Blockchain has created cacophonies in the financial world. From smart contracts to regulatory compliance, its use case list is growing each passing day. Banks are forming consortiums left, right and centre; Fintech start-ups are preparing proof of concepts by the hour; new avenues are being explored to avoid obsolescence in this fleet-footed technocratic world. The bottom line being - Blockchain is the next big innovation the world could witness, and according to some, “The next Internet”. As a country heavily reliant on the IT service industry, how prepared are we to absorb the change? In an industry majorly running on maintenance and migration projects, what can be brought to the table in light of this innovation? As a company, whose principle focus lies on innovation, how can HCL leverage this gargantuan technology to gain an exorbitant edge?

Blockchain is the next big innovation the world could witness, and according to some, “The next Internet”

India’s flair for frugal innovation is insurmountable but we have always been on the backfoot when it comes to inventing or adopting disruptive technologies. While Blockchain takes its nascent steps, here’s a chance to be proactive and remain dyed in the wool in this red ocean industry. Let’s delve into a three-step strategy with which we can adopt the Blockchain buzz.

Firstly, we can start making avenues in fraud reduction, KYC and R&C tracks. As part of Mode 1 & 2, we are already working with FS firms on these lines. While compliance processes are inevitable necessities, data breaches and fraud ferocity surmounts every day. The concept of distributed ledger (DL) gets rid of rugged centralized databases running on legacy IT systems. Therefore, the domain experience, the process criticality and the solution at hand makes a resounding synergy.

According to Thomson Reuters, an average bank spends up to $40m on KYC Compliance, AML checks and customer due diligence while for some other institutions it hikes up to $300m. One DL system is enough to get rid of costs emanating from customer surveys, data inaccuracy, data duplication etc. According to a Goldman Sachs report, owing to headcount reduction, decreased training costs and limited AML penalties, cost reductions amounting to roughly $2.5bn can be achieved.

In line with our Mode-3 strategy, innovative partnerships can lead to building new Trading and Payments system products. Moving Trading platforms to Blockchain would allow exchange of assets without centralized intermediaries and without the risk of double spending. The transaction history will remain transparent, thus ensuring trust. Digital tokens generated with every real-world exchange of assets would provide a certificate of authenticity, reduction in administrative costs and condensed operational risk.

Blockchain’s core use case of a Payments system enables a speedy, safe, secure, cost effective and decentralized fund transfer mechanism which would go a long way in enabling a developing economy, typically marred by red-tapism and middlemen culture. Remittance transfer would be a hassle-free process. Thus, enabling institutions to migrate to Blockchain platforms or providing in-house platforms would be the way to go.

The last step would be taking forward the products and platform idea to enable implementation of smart contracts. It’s only a matter of time before Internet-of-Things(IoT) settles in a common man’s life and having the technological knowhow of Blockchain can be the game changer. The speed of technological advancement has increased exponentially, if not more, over the last decade. Therefore, IoT enabled contracts such as unlocking rented cars with virtual crypted keys may sound science fiction, but it is now one should start or become obsolescent in 5 years.

Blockchain promises sunshine and hay days for the world but it is not without its myriad set of challenges. As an organization, developing in-house competencies would require strenuous efforts especially as the technology is in an introductory stage. Hiring of SMEs, technical personnel, setting up of R&D, building revenue models are only some of the obstacles to begin with. Owing to the sensitive nature of domain data, clients would have inertia to change, thus, presenting another set of pain points. Being an open distributed ledger system, Blockchain is prone to privacy issues. Although it is secure but the data is visible among all participants. Encryption can help but again, due to the technology being nascent, trust would become an issue. Regulatory issues are another grey area as no policies are in place yet. Scalability is also one contemptuous issue; it is only after a few years that one can venture out in other domains. Lastly, world politics and anti-globalization movements can impede growth as it threatens centralization.

Encryption can help but again, due to the technology being nascent, trust would become an issue.

Notwithstanding the few challenges, Blockchain’s innumerable use cases and benefits far outweighs the cons. Once prevalent across domains, these initial hurdles could easily be tamed. Only 19% of Nicaraguans have a formal bank account, but only 14% can borrow and only 8% have formal savings, yet 93% have a mobile subscription. One can only contemplate the wonders that a decentralized mobile payment system can do for these people. In words of Vitalik Buterin, co-founder of Ethereum, “Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi driver work with the customer directly.” As business transactions become more direct, the legacy systems will run their due course before they run into oblivion. Every disruptive change in an industry allows for a power shift and we are at such a juncture. Thus, as data becomes a modern-day asset class, Blockchain is the derivative we should hedge in.