As investment
into distributed ledger technology, better known as “blockchain”,
ramps up across a broad array of industries, the question remains -
where will the “killer applications” be made?
Blockchain, put simply, is as an encrypted database distributed across
a digital network. By definition, a blockchain is a shared database
that is regulated by the members of the network that stores a complete
history of all transactions amongst a network.
These records require a
digital authentication key that confirms the details of each
transaction are accurate and correct. Following multiple
authentication checks, it is then successfully added to the database.
A key tenet of distributed ledger technology is the fact that each
transaction is irrevocable. As each transaction is recorded in
sequential order, it is extremely difficult to manipulate details
retrospectively without dismantling the entire blockchain.
This is why blockchain has supported cryptocurrencies such as Bitcoin with such
success, there is a high level of trust and security associated with
it despite the decentralised nature of the technology.
The fact banks are appearing with greater regularity in the blockchain
world is surprising given their mere existence drove the inception of
cryptocurrencies and the blockchain distributed ledger that supports
them in the first place. Bitcoin and blockchain emerged primarily as a
means by which to remove the ‘middle man’, in this case banks, by
disintermediating complex transactions of any good, product or
service.
As part of a recent report identifying more than 700 blockchain
start-ups, PwC said “"In our view, blockchain technology may result in
a radically different competitive future in the financial services
industry, where current profit pools are disrupted and redistributed
toward the owners of new, highly efficient blockchain platforms.”
Three of Australia’s “Big Four” banks are part of a 40 strong global
banking consortium being led by New York based technology firm R3CEV
to test and implement blockchain technology collaboratively.
Meanwhile, ANZ has joined technology firms such as IBM and Intel as
well as other financial institutions on an open-source project called
Hyperledger.
Blockchain effectively removes much of the operational back office
functions that are currently required in the banking system, but also
the need to replace much of the antiquated infrastructure that plagues
financial markets.
While it is difficult to estimate what these
savings will amount to, Santander’s ‘The FinTech 2.0 Paper’ predicts
distributed ledger technology could reduce banks’ global
infrastructure costs attributable to cross-border payments, securities
trading and regulatory compliance by between US$15 - 20 billion per
annum by 2022, given IT and operations expenditure in capital markets
is currently close to US$100 - 150 billion per annum. Accenture
believes cost savings could amount to as much as a fifth of banks’
operational and IT expenses.
Aite Group finds that global investment into blockchain technology
tipped US$180 million in 2015, with over half of that attributed to
banks. By 2019, financial institutions blockchain R&D expenditure is
forecasted to reach an astounding US$400 million. |
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Closer to home,
the Australian Securities Exchange (ASX) has not yet revealed internal
figures on what potential cost savings blockchain would provide. The
ASX has invested over A$15 million in blockchain start-up, Digital
Asset Holdings, as part of the firms US$60 million capital raising
earlier this year.
The ASX is in the process of updating its
settlement platforms, with a final decision regarding the application
of new blockchain technology expected by mid-2017.
Digital Assets founder, and former JPMorgan banker, Blythe Masters
recently said “The project has the potential to be one of the first
successful [blockchain] projects in the world." She added that "you
will have the opportunity to eliminate layers and layers of
inefficient post-trade processing".
As the ASX and by turn, Australia positions itself to become the first
blockchain case-study in the next two years, uncertainty on its global
viability persists. Between legacy technology platforms, intra-country
regulatory hurdles and the infrastructure required to scale, many
believe it will be at least a decade before wide scale implementation
takes place. Should these issues be able to be overcome, the cost of
development and maintenance would be exorbitant.
On the competitive front, the race is definitely on. While all of the
major banks are currently working within partnerships on the
development phase, Tier 2 and smaller authorised deposit taking
institutions are being left behind due to the prohibitive research and
implementation costs.
Should blockchain be widely accepted and become the new norm, smaller
players may be left sitting on the sidelines using existing technology
or alternatively entering a user pays system with those who have
developed a working blockchain platform.
Despite potentially revolutionising the financial services industry,
the potential benefits that will be seen directly by customers is
difficult to quantify.
Blockchain will undoubtedly hasten
reconciliation of transactions, but the physical settlement of
transactions will ultimately still need to be carried out as they are
now done so. There will be minimal financial upside for customers
through pricing.
Specific areas that are crippled by onerous processes and paperwork
such as syndicated loans, foreign exchange hedging and trade finance
will see significant improvements as a result of blockchain. These
areas will see improvements in settlement times, as well as improved
accuracy.
The finance and banking industry’s investment, research and
development of blockchain technology is helping uncover its wider
adoption in other fields outside cryptocurrencies. The technology can
be implemented in a range of industries including supply chain
management, retail and legal.
One example for the use of blockchain has been presented by the wine
transportation start-up ‘Hellosent’. Devices monitoring temperature
and humidity during delivery would either complete or cancel the
delivery based on a pre-determined set of criteria, executed using
blockchain technology.
Time will tell as to which blockchain enabled bank or technology
start-up can unsettle the apple cart, but until then the many benefits
are being stacked against an ever growing number of considerable costs
and hurdles. |
