Why All The Fuss About Blockchain?

Chris Skinner

It is worth tuning out the white noise surrounding blockchain because real change is in the works – provided everyone understands what it involves.

Much is being written about bitcoin and blockchain these days, especially now that banks are talking about it too. Some believe that the blockchain technology that came from the bitcoin structure could revolutionize banking. But there’s a problem—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 like “cloud” and “Big Data:” Media, technology firms, and conferences have focused on that one word to the point that it has become meaningless. Mention blockchain today to most bankers and they yawn—been there, done that. It has even been the focus of a Dilbert cartoon. At that point, you know the hype cycle is at full spin.

Don’t ignore the hype

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 the technology, applied to banking processes, could save billions of dollars. For example, Santander produced a white paper that estimated more than $20 billion/year could be saved in clearing and settlement alone. For this reason, dozens of startup companies are developing settlement coins that could process post-trade clearing in minutes or even seconds at almost no cost.

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

This is where the madness starts. There are so many people discussing blockchain today that the terminology has become incredibly confusing. Some talk about permissioned ledgers versus permissionless; consensus versus distributed ledgers; public versus private blockchains; and so on. It has, in other words, become a madness of markets in which everyone talks about it and few understand it.

The only agreement is that this is a shared system, which means that more than one player must be in the game in order 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.

Big name backing

There is some method in the madness, however. Five of the leading lights in blockchain developments for banking are Ripple, R3, Digital Asset Holdings, Life.Sreda, and—perhaps surprisingly—Swift.

Ripple is a real-time gross settlement system (RTGS), currency exchange and remittance network based on the Ripple Labs version of blockchain. Royal Bank of Canada is leveraging the technology for remittances, while Standard Chartered and DBS have begun using Ripple’s tech for trade finance applications. ATB Financial, the largest Alberta-based financial institution, has collaborated with SAP to trail Ripple, with ReiseBank AG in Germany sending one of the first international blockchain payments from Canada to Germany. Santander also recently launched an app for international payments using Ripple Labs’ blockchain technology, and more announcements are on the way. So this is a credible attempt to build something

R3 is backed by 49 of the largest global banks, which are investing hundreds of thousands of dollars a year each in membership. R3 has made some significant announcements, the most notable being last month’s 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 at JPMorgan Chase who led the creation of the credit default swaps markets a decade ago. The company is backed by a number of large banks as well as Accenture and the Depository Trust & Clearing Corp.

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

Finally, Swift has a key role. I mentioned above that blockchain is useful only if it’s shared, and Swift is the largest shared network and standards organisation in banking. Swift is not shirking that responsibility, having recently joined the Hyper Ledger Project with IBM, Fujitsu, JPMorgan, and many others.

What’s the Hyper Ledger Project? Formed in February, it’s “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 organisation for blockchain structures, created by the Linux Foundation and supported by the largest firms in financial infrastructures.

All in all, blockchain may be confusing and appear close to 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 on how blockchain could influence the future of finance, see Can Blockchain Technology Simplify Lending?


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