Blockchain in Financial Services Today: Where Are We Heading?
From Goldman Sachs to Visa to Accenture, major firms across the financial services landscape have invested in Bitcoin and blockchain startups. So far, over $1.4 billion has been injected globally into blockchain ventures, highlighting the craze surrounding the technology.
In the financial services industry, the blockchain is perceived by many as a revolutionary technology that could help banks save billions in costs, increase efficiency and reduce risk.
Accenture estimates that blockchain technology could allow financial institutions to save between $8 billion and $12 billion in annual infrastructure costs. Capgemini, a French consulting firm, claims that consumers could save up to $16 billion in banking and insurance fees annually through blockchain-based applications.
There has been plenty of noise, no doubt, but deep down, is there any substance? Where are we currently standing in terms of development and implementation? And what should we be expecting for the year to come?
According to Benjamin Jessel, managing principal at Capco and a blockchain expert, 2018 will be the year blockchain technology comes into production. He names lending, CDS swap trade and post-trade lifecycle, trade finance and business-to-business payments as some of the areas that would first benefit from blockchain technology.
Jessel has 12 years of experience in managing technology change within large-scale business transformation programs. Over the last two years, he has been focusing on blockchain technology.
In an exclusive interview with Bitcoin Magazine, Jessel shares his views on the state of blockchain technology and the journey ahead toward widespread adoption.
Bitcoin Magazine (BM): Which stage of the innovation cycle are we currently at with blockchain technology?
Benjamin Jessel (B.J.): There has been extensive news flow about blockchain, and fintech more broadly, which is why we saw record investment in this area in 2015.
However, despite venture capital investment, for consultancies, the actual flow of work has been muted, which led many earlier in 2016 into Gartner’s “trough of despair,” which typifies the capitulation of expectations after a year of overhyping.
I see this market as the classic S-curve: periods of little news flow, followed by a significant market-moving announcement, a significant uptick in activity followed by another plateau.
The key events that significantly heralded that this market was beginning to come of age were the DTCC announcement to move $14 trillion notional of CDS swaps in partnership with Axoni [and IBM and R3], as well as Axoni’s numerous proof of concepts in FX swaps, CDS and equities swaps, and [Digital Asset and] the DTCC’s project to create a blockchain repo system.
Also, the announcement of the state of Delaware to move company documentation onto the blockchain was significant, as well as the various announcements of the “re-platforming” of exchanges onto [the] blockchain of the likes of Australian Securities Exchange and the Japan Exchange Group.
With these announcements, we have moved from small proof of concepts relatively under-investmented within innovation centers of financial institutions that were not getting leadership attention, to C-level mandated proof of concepts supported by actual business cases and a roadmap into production. This is why we are calling 2018 as the year of production for blockchain [technology].
BM: What should we be expecting in the space this year, and in which areas do you see blockchain technology being implemented first?
B.J: The nature of blockchain [technology] is that there is an element of secrecy because of the first-mover advantage, so there is an element of piecing together some of the clues.
I see leveraged loans as something that could transition into an initial production environment (albeit few parties initially), the major players being Ipreo, Synapse and Credit Suisse, as well as Digital Asset Holdings with JPMorgan. This is a red-hot market that represents $762 billion and which is still being done primarily manually.
Also, the Chain–Visa deal, which is about implementing a new network for Visa (their first new one [in] 60 years), will result in Visa entering the business-to-business lending space.
We know that the Australian stock exchange has spent $20 million so far on implementing a blockchain solution to replace its CHESS system, so we may see some additional news flow about this as well.
Settlement is an interesting area. Financial institutions are working on mechanisms to settle vast amounts of money between each other without having to settle in actual currency, which is costly. However, to be really effective, they need central banks to get behind it and either enable financial institutions to treat this digital settlement as if it were as good as cash, or to actually underwrite the digital settlement as if it was fiat currency. The Bank of Canada has been making moves in this area, and the R3 project Jasper was a great example of a proof of concept in this area.
In terms of consortia, I do see R3 continuing to go from strength to strength. It’s possible that they may have challenges in retaining some members as what happened early this year, but I see that as a natural churn as parties with more capabilities have less to gain from a consortium than other members.
Also, the recent announcement of a European consortium in blockchain trade finance is noteworthy, so I will be keeping a close eye on that.
BM: Will blockchain technology become a standard in the financial services industry?
B.J: We need to be a little careful about using the word “standard” with blockchain [technology].
First of all, we’re actually now seeing a move away from blockchain [technology], which is about all transactions chained together for everyone to see, and a move toward a distributed ledger, one place for all transactions but only the ones that organizations are contractually able to access.
Secondly, there will not be a single standard. Just as in the handling of data, we moved from flat file in the ’70s to relational databases in the ’80s with a whole ecosystem of ways to access and manipulate the data.
So what we’re going to see are the principles of the technology: provenance of information, immutability of records, single source of truth accessible to those that are permissioned to do so, the ability to build business process logic on top to automate operational functions based on that data.
In terms of areas I see moving first, I see the first wave being: lending, CDS swap trade and post-trade lifecycle, trade finance, business-to-business payments and reference data.
BM: Besides financial services, what other industries could benefit from blockchain technology?
B.J: The provenance aspect is very powerful when it comes to supply chain. Walmart, for example, is looking into provenance for meat. In Europe, there was a big scandal with horsemeat entering the food chain. Knowing exactly where your food is coming from is something blockchain [technology] could do very well.
Similarly with any kind of product that has been created using constituent parts. Particularly in electronics, where security of what country manufactured a certain part is becoming more important.
Dubai has recently announced an initiative where they are integrating blockchain [technology] into their smart cities and has recently selected an organization we worked closely with, Loyyal, to integrate blockchain-based loyalty into the city.