July 22, 2016

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Blockchain: The New Kid on the Financial Services Block

What is blockhain? The underlying technology of cryptocurrencies, is less mysterious today than it was six months ago, but the question, what is blockchain, is yet to be satisfactorily answered. How does it work and what will be its impact? What can I do to turn it into a business ally? Since blockchain and cryptocurrencies work on the basis of customer anonymity, many have natural apprehensions, since identity is central to financial services.

In the 1990s, businesses intuitively suspected that the Internet was a major transformational force. They wanted to explore possibilities and private networks emerged, which dispelled fears around identity, security and trust. But private networks died prematurely and open systems built trust mechanisms faster and at a lower cost. Also, innovators found it most rewarding to work on the open systems of the Internet. This quickly gave birth to digital goods, e-commerce, online banking, social media, the elimination of middle-men and now the Internet of Things (IoT).

No blocking the chain of transformation

Over the next few years, blockchain is set to bring about as vast a transformation as the Internet. The impact will not be limited to financial services alone, but some of the first and most radical changes will certainly be seen in this sector.

Blockchain has the ability to move value between entities over the Internet, bypassing financial organisations that benefit from escrow, deposit and value transfer services. It can also help to respond to the increasing number of regulations that have been introduced to financial systems. Blockchain technology ensures that transaction records cannot be tampered with, while the multiple parties involved can be reassured through a shared record of events in a distributed consensus ledger (DCL).

There are other configurations too, like the bitcoin blockchain, which is permissionless and public, enabling anyone to participate in the ledger activity. While this applies to the bitcoin blockchain, there are permissioned blockchains that operate differently.

The low-cost and formidable speed of peer-to-peer transactions enabled by blockchain is placing banks under threat. To make matters worse for financial services incumbents, the technology appears to be infiltrating other industries too. The Government of Honduras recently took steps to record land titles using blockchain, aiming to prevent widespread land title fraud.

Blockchain moving to centre stage

There are companies working towards making blockchain central to the selling (say, insurance), sharing (say, an apartment) and rental (say, a car) economy, eliminating the need for middlemen.

Imagine a smart lock to an apartment or even a beer dispenser. What if it can be opened instantly by making a payment over a mobile app that is dictated by rules embedded in a smart contract using blockchain technology. When the rules are met, the lock opens.

The evolution of the technology is relentless. Some developers are looking at parallel blockchains and sidechains that eliminate dependence on a single blockchain while improving scalability.

This shows that the innovation around this technology is already boiling over – but banks and their employees are largely unable to comprehend how it will disrupt traditional trade technology and processes that are core to their business.

Paving the way for blockchain

In such a landscape, what is a financial services organisation to do? A good starting place is in engaging employees with the technology. For example, giving them a small portion of their salaries in a crypto currency that is accepted at the office cafeteria? We have seen our own employees’ interest in crypto currencies and blockchains improve significantly since launching CoinWatch. It will go a long way in demystifying the technology and prepping organisational cultures for the impending change.

Having blockchain explained to senior management teams will help them understand its workings, ensuring effective deployment. We have been giving live demonstrations of blockchains in action and the way they can be applied in telematics at our innovation lab in London. Having blockchain explained in this fashion has helped many of our customers to build a solid business case for its adoption.

Many of the biggest banks are already making investments in blockchain technology, developing proof of concepts and prototypes. For example, The Bank of England has announced its own private cryptocurrency called RSCoins. China's National Bank, Deutsche Bank, Barclays and Santander are all exploring public, private and hybrid blockchain. Santander has estimated it can reduce infrastructure costs by up to US$20 billion a year using the technology.

There is clearly increasing investment in blockchain – but not enough to suggest that we have reached a major inflection point in Fintech. This is alarming; financial services firms cannot afford to be slow in examining the potential of such a radical game-changer. We have seen that those who are slow to adapt to new technology trends can quickly lose their competitive edge. Today’s market leaders simply cannot sit back and do nothing as a new generation of start-ups steal the march on their market share. There is no time like the present; it’s time for financial services to start taking blockchain seriously.