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Christophe Van Cauwenberghe, Head of Payment Innovation at Société Générale. |
The emergence of the blockchain has stirred considerable debate in the financial community, especially about its implications for banks and other financial institutions. It was quickly identified as a technology with transformational – even revolutionary – potential, and the hype has piqued interest at the highest echelons of the community.
Yet blockchain’s intrinsic complexity makes it difficult to understand, and without fully understanding the inner workings of blockchain it is easy to misjudge its potential. There is a risk that, in some quarters, expectations have been set unrealistically high.
Bitcoin is where the blockchain originated and it remains its most well-known manifestation to date. It was originally designed by some libertarian geeks to be an asset in itself. It was never intended to be used by financial institutions, but rather to bypass them and render them obsolete.
But some in the financial community itself harbour similarly grandiose visions of blockchain’s power to transform the way banks operate. Bitcoin and its crypto-currency derivatives are sometimes seen as an equivalent to digital gold. Their potential in digital payments is largely overblown at this stage, and they are more commonly used for speculative purposes than commercial transactions.
Authorities are monitoring exchanges platforms, where crypto-currencies are exchanged for fiat currencies, to maintain some control. A more pragmatic group sees blockchain’s potential as evolutionary, rather than revolutionary. This technology can complement existing technologies and systems, rather than usurping them, thereby improving the services they provide.
“Banks must learn about the blockchain and then decide how best to apply it, but they should avoid seeing the technology as a potential solution to any given problem,” says Christophe Van Cauwenberghe, Head of Payment Innovation at Société Générale. In essence, the blockchain is a shared database providing a token manager and programmable transactions that can be updated securely by many different actors in a network. All changes made to the blockchain are logged, effectively leaving a complete audit trail of data.
This feature is probably the single biggest attraction of the blockchain for banks, because this functionality does not exist in such an integrated and convenient form elsewhere. A token can be used as a digital representation of an asset – like shares or property. But it can also be used for time-stamping or as a programmable transaction in the form of so-called “smart contracts”.
There are therefore a number of ways banks could potentially use this technology. It could play a role in digitalising and automating trade finance, or improving know-your-customer processes, potentially reducing the compliance burden on individual institutions. But the technology has to be trialled by fire before it will be mature enough to be widely used within the industry.
For blockchain to fulfil its full potential it needs to be developed to make it easier to use. It is provided with very basic technical layers, which still require huge efforts to be integrated with industry-class information systems. That is why many software vendors like IBM and Microsoft have begun to join some open-source initiatives, to ensure they are ready to move quickly when the technology matures.
For banks, using blockchain internally is now, finally, a viable technological choice. But it remains unclear whether it will deliver cost reductions and process optimization, since legacy systems would have to coexist for a long time. The industry will find out more about its cost-saving potential by testing and learning, and making proof of concepts. But the industry has also a common interest to pursue a cooperative and inclusive approach to the development of the blockchain. R3 in the US and LaBChain in France are good examples of a test-and-learn approach at the industry level.
“The blockchain technology has an interesting potential, in partnership with fintech companies, where much of the world's technological creativity resides,” says Van Cauwenberghe. The industry is still in the early stages of learning about the blockchain. While there is plenty of potential, there are few certainties about how it will evolve, how long its evolution will take or how transformational it will ultimately be for financial services. Its most useful applications may not have even yet been conceived.
Banks are conglomerates of independent business lines and blockchain’s impact will be experienced differently by different areas within banks. “Banks must not feel threatened by the potential creative destruction of the blockchain, but should develop their ability to embrace progressively its potential for improving the service they provide their customers,” says Van Cauwenberghe.
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