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In every facet of
business banking Blockchain prototypes have swiftly
become de rigueur. Major banks announce proof of
concepts with increasing regularity accompanied by
breathless media releases citing successful
investor, developer and market regulator
consortiums. Amid the hype and anticipation, is
distributed ledger technology (DLT) the cure-all
banks are desperately seeking to offset diminishing
customer trust?
Can Blockchain
absolve financial services providers struggling to
overcome the daunting technology challenge posed by
nimble new entrants and Fintechs? Or will
lengthening lead times on practical real-world
solutions continue to raise concerns over the
ultimate viability of Blockchain as the turnkey
solution to seemingly all financial markets product
and service ails?
Initially designated
as the supporting infrastructure behind emergent
cryptocurrencies, DLT has been warmly embraced by
the very banking institutions targeted for
disruption by disintermediated marketplaces
themselves. Blockchain has been highlighted as a fit
for purpose solution to overcoming customer pain
points including:
- Trade Finance – entering the 21st
century at last through long overdue
digitisation of paper heavy processes, HSBC
we.trade Blockchain Platform, DBS Blockchain
supply chain logistics platform, ITFA digital
bills of exchange
-
Cross border payments – reducing costs,
administrative errors and execution time
-
Instant Payments - Interbank Information Network
(IIN) consisting of 75 major banks including
JPMorgan, RBC, ANZ and recent adapter Deutsche
Bank testing faster payments to fight the threat
of new payments competitors. Banking industry’s
largest DLT application
-
Equities clearing, settlement and asset
registration – ASX CHESS replacement with DLT
specialist Digital Asset Holdings and
virtualisation and infrastructure technology
supplier VMware
-
Credit approval – automated, irrevocable processing
-
Digital currency – Facebook’s Libra, Marshall
Islands SOV Blockchain-based national currency
(Marshallese Sovereign), Eurozone public eCoin,
central bank reserve eCurrencies
Fast Blockchain
development is infamously hard to come by.
Despite growing
ubiquity
evidenced by
the release of Blockchain enabled smartphones by
Samsung and LG, half of the world’s top universities
offering dedicated Blockchain courses and Shell’s
multiple investments in a Blockchain platform with
Sinochem Energy, BP, Macquarie and Vakt Global to
facilitate crude oil trading between commodity
firms, there is no end to the number of business
banking pain points Blockchain is nominated as a
potential solution to. Successful test cases are a
long time coming and wide scale adoption beyond
traditional applications of the technology are few
and far between. The ASX’s CHESS replacement is
scheduled to go live by 2021 while project lead
times continue to stretch beyond planned release
towards 2022 and beyond, matched by softening
investor activity.
Instead, new Fintech
investment is increasingly being funnelled towards
artificial intelligence (AI) and internet-of-things
(IoT). Venture Scanner report that AI funding in H1
2019 is projected to be the highest on record at
US$11 billion while annual IoT funding almost
tripled since 2014 to US$26 billion.
East & Partners voice of the
customer
Global Insights research
reveals institutional banking customers mirror this
trend, prioritising IoT, Big Data Analytics and AI
ahead of Blockchain:
Based on direct
interviews with CFOs and corporate treasures of
large Chinese corporates conducted by
East & Partners,
two thirds see IoT offering the most upside
opportunity to improve supply chain efficiencies
(60.4 percent) by enabling easier tracking of goods
up and down their supply chain in addition to
improving inventory tracking and forecasting.
54.9 percent of large mainland
Chinese corporates also see value in self-executing
‘smart contracts’ with the terms of the agreement
between buyer and seller embedded into coding. Big
data analytics was cited by one in three corporates
as a leading factor (34.1 percent) followed by
cryptocurrency (16.5 percent) and AI (15.4 percent).
Blockchain surprisingly failed to register as a
prominent factor.
As emergent
Blockchain platforms encounter scaling issues and
pressure mounts to ‘get to market’, tension is
rising between key stakeholders. The push for faster
adoption has reportedly led to internal conflict
within R3, a leading enterprise Blockchain software
developer underpinning Voltron and Marco Polo trade
finance platforms. R3 has raised a staggering US$120
million in funding and employs over 200 staff across
New York, London, Singapore, Hong Kong and Brazil.
The antagonism is allegedly due to a ‘culture clash’
between engineers and management over the future of
the group’s leading enterprise product ‘Corda’.
Progress for
practical Blockchain solutions is gradual at best,
with a paperless trade transaction successfully
executed using the Voltron platform in recent
months. Evidence of progress is arguably long
overdue given up to one fifth of total Trade Finance
costs are estimated to be associated with cumbersome
documentation and paper heavy processing delays.
Many importers and exporters astoundingly still rely
on physical contract delivery by courier.
“We believe
Blockchain can solve a lot of problems however
they're still working on individual proofs of
concepts and a few pilot transactions. Not to
detract from the credit of having gotten to that
space, we are only concerned about the scalability.
It seems to be working between very large corporates
or within related subsidiaries on each side. The
real test of it will be when a SME can go onto that
Blockchain and actually post documents and claim
payments against that”
-
Sriram Muthukrishnan,
DBS Global Transaction Services Group Head Trade
Product
Ultimately can
Blockchain innovation keep up with rising customer
expectations? While banks and central bank governors
such as the Bank of England’s (BoE) Mark Carney are
quick to announce successful test cases and newly
launched Blockchain capability, end user clients
remain largely absent from bank’s trial processes.
Central banks are
divided on the issue of applying Blockchain to
official reserve digital currencies as a counter to
private parallel currencies such as Facebook’s
Libra. Moves to introduce virtual reserve currencies
are broadly supported by the
People’s Bank of China (PBoC),
European Central Bank (ECB), BoE and German
Bundesbank yet challenged by the Reserve Bank of
Australia (RBA).
RBA Governor Philip
Lowe considered the creation of an "eAUD" in a
speech in 2017 however ultimately found that a
convincing case for issuing Australian dollars on
distributed ledger technology (DLT) had not yet been
made. The RBA has highlighted that cryptocurrencies
face a trade-off known as the "scalability trilemma"
where they can only offer two of the three crucial
properties of decentralisation, scalability and
security. Bitcoin can process ten transactions a
second while Australia's New Payments Platform (NPP)
supporting BPAY's instant Osko payment system can
handle up to 1,000 transactions per second.
Customer driven solutions are
clearly the missing piece in the Blockchain
development puzzle with DLT commonly described as ‘a
solution trying to find a problem’. Without
dedicated customer buy-in and applications scalable
across all business sizes, Blockchain will remain an
unproven potential success story racing the clock to
prove its relevance.
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