These days, a wide range of companies are exploring blockchain as the potential solution to challenges both inside and outside the financial services industry. While these distributed ledger technologies, known mostly for underpinning the Bitcoin digital currency, offer potential opportunities for banking and capital markets firms, there remain substantial implementation barriers to overcome.
During 2015, Citibank, Santander, Wells Fargo, HSBC and other big banks announced partnerships with fintech companies to leverage blockchain to make banking processes more efficient, timely and secure. At the same time, IBM moved forward with an open source blockchain initiative in tandem with numerous partners, from the London Stock Exchange to technology companies like Cisco and Intel. These organizations believe the potential disruption blockchain could create – in terms of decreasing transaction times, self-automating smart contracts, lowering transaction costs, minimizing fraud and opening the door to micro-transactions – is impossible to ignore.
While blockchain’s potential impact is interesting, regulatory and market changes could hamper blockchain’s use on a global scale. Some analysts also suggest that blockchain has been burdened with excessive investor expectations that cannot realistically be fulfilled. Corporate investors also need to accept that blockchain solutions will need time to be tested and adapted to industry requirements at scale. Corporate investors need to encourage industry-focused engineers to define the problems blockchain can help resolve, find the best and most cost effective technology solutions and work through limitations to scope, scalability, velocity and usability.
The key to success is the combination of:
There are significant challenges with respect to each of the above success factors when it comes to applying the status quo application of distributed ledger solutions to the mainstream components of the banking system, such as trading or payments technologies.
For example, right now, blockchains created for and demanded by banking regulators are not scalable to a degree that can fundamentally replace large scale, high availability platforms. Nor do they provide the speed, ubiquity, APIs or controls environment needed by banks and demanded by regulators to conduct day-to-day activities. In addition, many banks continue to work with antique legacy IT systems, which may not be capable of supporting blockchain initiatives or will provide significant challenges if linked to new blockchain technologies.
The models for these use cases range from open source protocols, such as Bitcoin or Ethereum, to federated server models, better known as permissioned blockchains or those that support a consensus model. The result is a fragmented marketplace in which it is critical for clients who are experimenting with blockchain solutions to align with the provider and protocol that will provide the most economic value for any particular use case of interest.
In spite of these challenges, there are many reasons for the banking industry to pursue innovation in distributed ledger technologies, such as the potential short-term benefit of digital identity or digital financial passport. Many banks see positive improvements related to how digital identity is currently being facilitated and enabled at banks, which could allow better choice and portability of customers between financial institutions and ultimately higher customer satisfaction as individuals are able to take control over and gain benefit from their own identity.
At KPMG, we believe that now is the time for experimentation, not for wholesale technology implementation. Corporates that encourage use case testing – whether for the securities trading life cycle, the processing of a loan or digital identify verification – and who can learn from this experimentation will be better positioned to adjust course and achieve the most value.
We see how a number of major financial services institutions we work with have Proof of Concept (POC) and prototype initiatives underway related to blockchain. Having said that, investors need to take a balanced approach to their blockchain investment strategies. To be a true disruptor, blockchain protocols and solutions must evolve to support the reliability, efficiency and scalability requirements expected in the banking industry. It also needs to be a differentiator, rather than simply an enabler. And, it needs to be adoptable by all parties in the banking supply chain, which will require significant collaboration across industry, bank regulators and those supporting potential solutions.
Potential blockchain investors need to look beyond the hype and ensure that any technology solution is underpinned by exceptional engineering, a full understanding of the barriers and clear economics on the cost and benefits associated with the technology. At KPMG, we advocate for selective and targeted experimentation as a first priority that will yield greater benefit down the road.