The Madness Of Blockchains

Chris Skinner

I’ve written about bitcoin and blockchain for half a decade, and now banks are talking about it, too. There is a belief that the blockchain technology that came from the bitcoin structure could revolutionize banking. There’s a problem, however. The problem is not with blockchain protocol, but with the hype and confusion that surrounds it. How will banks make any progress if no one understands it?

Blockchain has become a little bit like cloud and Big Data: a hype of discussion in which all the media, technology firms, and conferences focus upon the word so that after a few years, it has become meaningless. Mention blockchain today to most bankers and they yawn, as though they’ve been there and done that. It’s even been the focus of a Dilbert cartoon — at that point, you know the hype cycle is in full tilt.

The reason there is so much discussion is that the blockchain protocol is believed to be able to revolutionize the way we transact and trade, and the hype cycle is hiding what is actually happening in the markets underneath.

For example, in banking, there is no blockchain. There are just a range of areas where we can see this technology applied to banking processes could save billions. For example, Santander produced a white paper that estimated over $20 billion a year could be saved in clearing and settlement alone. For this reason, tens of startup companies are developing Settlement Coins, which could process post-trade clearing in minutes or even seconds for almost no cost.

That’s the promise, at least, but the reality is that this is not just a technology change but a business process change across the industry. For example, when explaining blockchain protocol, most pundits talk about using it for shared distributed ledgers; others call it a shared Internet database; some talk about blockchain structures as smart contracts; and still others refer to programmed transactions.

This is where the madness comes in. There are so many people discussing blockchain today that the terminology has become incredibly confusing.

Some talk about permissioned versus permissionless ledgers, consensus versus distributed ledgers, public versus private blockchains, and so on. It has, in other words, become a madness of markets with everyone talking about it and few understanding it.

The only agreement at the core is that this is a shared system, which means that more than one player must be in the game for a blockchain development to work. Those players may be internal – you could use blockchain protocol as a shared database of employee identities and authorizations – but most startups are looking externally.

There is some method in madness, however, with four of the leading lights in blockchain developments for banking being R3, Digital Asset Holdings, Life.SREDA, and possibly surprisingly, SWIFT. R3 is backed by 42 of the largest global banks, which are investing $600,000 a year each in being a member of the development. R3 has made some significant announcements, the most notable being the early April 2016 release of Corda, a distributed ledger platform designed from the ground up to record, manage, and synchronise financial agreements between regulated financial institutions. Corda captures the benefits of shared ledger structures, without the issues that make blockchain developments inappropriate for banking.

Digital Asset Holdings is led by Blythe Masters, a former investment bank lead in JPMorgan Chase, which led the creation of the credit default swaps markets a decade ago. Digital Asset Holdings is backed by a number of large banks, as well as Accenture and the DTCC.

Life.SREDA is a venture capital fund in Singapore that has inspired many of the leading bank startups, such as Fidor, Moven, and Simple. It announced a new $100 million VC fund in April that will invest exclusively in blockchain startup companies with use cases relevant to banking.

Finally, SWIFT has a key role. As mentioned above, blockchain is useful only if it’s shared, and SWIFT is the largest shared network and standards organisation in banking.  Not shirking that responsibility, SWIFT recently joined the Hyperledger Project with IBM, Fujitsu, J.P. Morgan, and many more.

What’s the Hyperledger Project?

Formed in February, the Hyperledger Project “is a collaborative effort created to advance blockchain technology by identifying and addressing important features for a cross-industry open standard for distributed ledgers that can transform the way business transactions are conducted globally.” In other words, we now have a standards organization for blockchain structures, created by the Linux Foundation and supported by the largest firms in financial infrastructures.

Blockchain may be confusing and appear as madness at the highest level, but look under the hood and the next generation of financial systems are being developed by the world’s leading infrastructures based upon this technological change. Therefore, it is not just important, but fundamental.

For more insight on blockchain, see Blockchain: The Good, The Bad, And The Business Case.


About Chris Skinner

Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd. and comments on the financial markets through his blog the Finanser. He can be reached at Chris.Skinner@BalatroLtd.com

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Blockchain