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Fintech: Blockchain moves from hullabaloo to hard graft

By:
Peter Lee
Published on:

In the second half of 2015 hype around the potential for shared ledger technology to transform banking rose to a peak. Now comes the hard work as banks and fintech companies seek to put test cases into actual use. As the first practical applications begin to emerge, Euromoney surveys the banking market to ask what’s next for the blockchain.

Euromoney published an in-depth investigation in November of banks’ sudden enthusiasm for putting all manner of core businesses ­– payments, securities clearing and settlement, bond issuance, derivatives trading, even the arranging of syndicated loans – onto blockchain, or shared ledger, technology.

A blockchain is an immutable and secure digital record of transactions shared between users in any marketplace and verified by consensus among them.

It seemed that the blockchain was the right answer at the right time: a promise to banks confronting the need to replace antiquated and end-of-life IT systems coinciding with high pressure to cut costs, that there might be a more efficient, cheaper shared utility on which they could dump a lot of their data and processes.

Euromoney invited banks, their clients, technology providers, law firms, regulators, industry bodies and other interested parties to answer questions about the likely impact of the blockchain on financial services and the speed with which it might come into regular commercial use.

We present here the verified responses from 118 institutions that took part in our poll, the biggest two groups being banks and technology companies, with a distinct set of replies from law firms and then a large group of others, comprising asset managers, corporate treasurers, regulators, trade bodies, exchanges and consultants.

More than half of all respondents think blockchain technology will transform banking fundamentally, while another third think it will be an important technological tool for improving efficiency, though perhaps not utterly disruptive.

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Only one in eight think that either it is just hype and will not have much effect or that it should be characterized just as one new technology among many others.

Two thirds of all respondents believe that most business will be done on permissioned blockchain networks, created, controlled and verified by industry incumbents, with less than one in 10 believing that the public blockchain behind bitcoin – the only one currently up and running – will be the main venue for wholesale financial transactions. 

Not a single respondent from any bank believes that banking business will go on the bitcoin blockchain.

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Asked which businesses are most likely to be transformed by the blockchain, 11% suggest trading of securities as smart contracts, 14% suggest clearing and settlement and 18% payments, with 12% suggesting different use cases. 


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Among the use cases put forward by respondents with whom Euromoney conducted follow up interviews are remittances, invoice financing and bill discounting – where the distributed ledger could be a mechanism both for establishing the provenance of an original invoice and then for verifying exchange of beneficial ownership between the SME that first submitted the invoice and a bank lending against it – and commodities trading.

But the biggest support by far, at over 40% of all respondents, is for the notion that the blockchain will have a big impact on all these areas and more besides.

Disparities

There are disparities between the groups of respondents. More than two thirds of fintech companies think the blockchain will transform banking fundamentally, with 16% saying it could mark the beginning of the end for banks. Only 4% of bank respondents are quite so pessimistic, while just 40% think blockchain will fundamentally transform their industry. 

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Just over half of bank respondents admit to being late to the blockchain party, but they still believe that consumers of wholesale financial services will prefer to use them rather than start-ups, while 40% think the blockchain will further strengthen the banks by allowing them to offer better service at lower cost.

That would come as some blow to the early pioneers who created the bitcoin blockchain and clearly have little love for the banks.

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As to the period of time over which the truth will out, there is more common ground. Among banks, 41% of respondents think the first commercial applications of blockchain technology are 12-18 months away, with just over one third saying they might be five years away. None have applications in current production. Among fintech firms, fully one quarter of respondents say they have applications in operation today or will have within the next three months.

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A source at one bank tells Euromoney that big announcements that could mark the impending transformation of certain wholesale banking business segments will come soon. Even he, however, is wary of the hype around blockchain, however. "By mid-2015, if you looked across the biggest 35 or so banks in the world they might each have devoted $500,000 to testing use cases for the blockchain," he says.

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Despite all the rumours, banks are not stupid. They can see the potential for the distributed ledger to disrupt them and they plan to pay close attention to it, but they’re not going to torch their existing systems and build anew at the cost of hundreds of millions of dollars each, just because of bitcoin has won a few million users.

"Right now, most of those banks will be budgeting up to $5 million next year to test against blockchain," the bank source says. "That’s a big market for bitcoin developers to chase. But remember that blockchain is competing for internal budget and senior management attention against other buzzword technologies, like big data and robotic software. I would say that the blockchain now has about two years to prove itself inside the big banks, or it will fall flat on its face."

He thinks it will prove itself but gives a sense of the internal politics. "Senior bank managements are more interested in cutting people right now than incumbent software systems, so its initial use might be in the less technology heavy business, not in securities trading and settlement."

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Guy Halford-Thompson,
Blockchain Tech 

Guy Halford-Thompson, co-founder of Blockchain Tech Ltd (BTL), a builder of blockchain applications which listed publicly on the venture board of the Vancouver stock exchange in November, tells Euromoney: "Banks are telling us 'give us an actual use case that we can implement right now’. 

"Well we are working closely right now with a number of financial institutions in Canada and overseas, including banks, payroll providers and traditional remittance companies, with a prototype remittance platform called Interbit which uses blockchain technology to drastically reduce the cost of sending remittances across borders." 

Halford-Thompson expects the system to be fully operational within months. "Remittances is a big, important market in which to establish the usefulness of blockchain technology without disrupting banks’ core systems," he says. "The key, we believe, to achieving customer penetration and ultimately mass adoption, is absolutely not to inconvenience the customer in any way. The customer may go to his or her bank as normal to initiate sending the remittance and not know or care that the Interbit technology on which that payment is transferred overseas is blockchain based."