Blockchain in financial services
We’ve been reading about the promise of blockchain technology for several years now. Many skeptics are beginning to wonder if the “year of blockchain” will ever really arrive. Blockchain isn’t a cure-all, but there are clearly many problems for which this technology is the ideal solution. We continue to see banks, brokerages, insurers, regulators, and others actively testing ways to harness the benefits of blockchain. The journey has only just begun.
A look back
Are we there yet? We still occasionally hear clients ask, “Does blockchain really matter?” The uncertainty is understandable. In 2017, firms created plenty of functional, proof-of-concept projects using blockchain in applications such as internal payments, trade finance, and custody. Despite their potential, many of these projects aren’t yet ready for primetime. Still, leading firms are focusing their efforts in a few key areas where distributed ledger technology can solve practical issues.
Exchanges embrace blockchain and regulators warm up. We’ve seen several global securities exchanges launch blockchain-based platforms. Regulators are working with the exchanges to explore what oversight should look like. And most industry players still struggle with how to audit systems with almost-instant clearing and consensus-based verification.
Together or alone? By definition, blockchains allow multiple parties to work together effectively, even if they don’t fully trust each other. The most exciting opportunities come when the largest industry players unite with a common approach. While many financial firms have banded together in various efforts on blockchain initiatives, 2017 also saw some large players step away in favor of working on their own projects internally and keeping the intellectual property.
The road ahead
Trade finance: the place to watch? Today, trade finance is high volume, costly, and time-consuming. Financial institutions and shipping fleets have been experimenting with blockchain to create smart contracts between parties. We think this could be one of the most interesting areas to watch in 2018.
Overhaul of the financial market utility. We see more clearinghouses, custody providers, and others looking at what blockchain can bring to clearing, settlement, and other intermediated functions. Look for blockchain use cases spreading into more mainstream financial market utilities.
Security on the horizon. Expect more attention on security. So far, regulators haven’t expressed exactly what they want to see when it comes to controls. As intermediaries press ahead with blockchain projects, expect more focus on issues like security and monitoring.
What will the world look like when blockchain grows up? In 2018, we think the conversation will shift away from the specifics of blockchain code toward bigger issues. What will a distributed ledger world look like? How will parties work together in a multi-blockchain environment? What data can be shared—and should it be? What business processes will we be able to completely rethink?
What to consider
Break out of the holding pattern. Some firms have pursued a wait-and-see strategy with blockchain, tracking other firms with the intent to move ahead when the time is right. This is becoming increasingly risky. The technology is evolving quickly, and the learning curve is significant. You’ll also need to convince a range of internal stakeholders, and they’ll want to see small successes before signing off on larger projects. All of these things will take patience and finesse. Don’t wait.
Be proactive with regulators. Regulators haven’t yet set standards around controls and protections for blockchain-based systems, but we expect them to begin setting some ground rules soon. Financial services firms should think about what standards make sense. Consider joining a consortium or trade group to have a say in the conversation. If you don’t participate, you’ll need to accept what others decide.