April 2016

Blockchain - The solution we deserve...but not the solution we need right now?
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.
  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.

Estimated Global Bank Blockchain Investment
US$ Million

Source: Aite Group

Sydney Office
Level 13, 2 Park St
Sydney NSW 2000
t: +61 2 9004 7848
Singapore Office
#05-05 Infinite Studios
21 Media Circle
Singapore 138562
t: +65 6579 0533
Hong Kong Office
10/F, Zung Fu Industrial Bldg
1067 King's Road
Quarry Bay, Hong Kong
t: +852 3118 1500
London Office
4 Cavendish Square
London, W1G 0PG
United Kingdom
t: +44 (747) 028 6838
Email: info@east.com.au
Web: www.east.com.au

Connect with us on
social media


Copyright © 2016 East & Partners, All rights reserved.