Moody’s analyzed in April the potential downside for investors in bank bonds if blockchain technology becomes widely adopted and reduces the cost and time taken up in executing cross-border banking transactions.
Colin Ellis, managing director in credit strategy, concedes: “Banks could benefit significantly from the development and implementation of blockchain technologies in terms of enhanced efficiency, cost savings and risk reduction.”
But he points out: “The adoption of these technologies will also limit processing fees, commissions and gains on foreign-exchange transactions, which will pressure revenue.”
Swiss banks would be most exposed to reductions in fees and commission, Moody’s suggests, with 50% of their revenue coming from that source.
Italian, Canadian and Israeli banks follow at around 35%. Other banking systems that process substantial cross-border transactions – including those in the UK and Belgium – might also suffer considerable disruption from the technology.
By contrast, banks in Asia-Pacific, as well as some smaller European periphery countries, are relatively less prone to relying on fees and commissions in generating total revenue.
It should perhaps come as no surprise, then, that at a Berenberg conference in April, the German bank’s own analyst Paul Marsch reported that the financial services industry has suddenly concluded that enterprise-grade blockchain is complex and difficult, and that timelines to live production will be longer than the hype first suggested.
Sarah Hazzledine, managing director at Accenture, pointed out that enterprise blockchain is essentially still at version 1.0 – ie at a very early stage, with no common standards and with enterprises still adapting to the new collaborative business models required in most blockchain use-cases.
For his part, Berenberg’s Marsch suggests that the best way for investors to gain exposure to the hard-to-predict blockchain theme in the mid-term is through the software and IT services names, such as Accenture, Cognizant and Capgemini, rather than through banks.
One of the most intriguing presentations came not from a bank or a big consulting firm, but from Michael Merz, founder of Ponton, a German software house developing web portals and B2B integration solutions.
Merz detailed progress on Enerchain – a blockchain platform to enable wholesale electricity trading among Europe’s energy utilities. The platform now has 43 utilities backing it, though it will remain a proof of concept pending legal transfer of Enerchain to the consortium of utilities, which is expected during the third quarter this year.
Merz is not alone in identifying the potential for blockchain to transform the market in energy ahead of the market in money.
Euromoney sits down with Mark Cachia, co-founder of Scytale Ventures, which is investing in blockchain infrastructure.
“We are not doing anything in what people think of as cryptocurrency or anything that wants to be a form of money and we are staying away from all of the initial coin offerings (ICOs) you see being advertised,” says Cachia.
“We are mainly investing around the energy industry, as well as technology around data and legal issues while looking across the whole blockchain eco-system.”
Cachia mentions investments including in the Energy Web Foundation, an open-source, scalable ethereum-compliant blockchain platform specifically designed for the energy sector.
It has a number of large industry companies as affiliates, including Centrica, Duke Energy, Engie, Innogy, Shell, Statoil, Swisspower and TEPCO, and claims its mission is to promote a more decentralized, democratized, decarbonized and resilient global energy system.
“The vision that impressed me is for a protocol to make peer-to-peer energy trading available for users that reduces their costs while promoting clean energy and making the grid more robust,” says Cachia.
“If you have hundreds of thousands of households on the system, then those with photovoltaic solar cells and energy storage may more easily sell green energy back into the grid during times of peak demand.”
He adds: “Energy storage is not only a battery array installed in a house. An electric vehicle (EV) is also a means of storage. Now your EV will be able to generate a return when not being driven.”
For blockchain to work it needs these kinds of bridges into the real world, to make it tangible and verifiable- Mark Cachia, Scytale Ventures
Another smaller-scale investment, along a similar theme, is in UK-based Verv, a maker of smart meters that uses cutting-edge artificial-intelligence (AI) technology to identify appliances in the home by their unique energy signatures and tell householders how much each one is costing to use, in real-time.
The longer they have Verv, the more advanced it becomes, using machine learning to learn about new appliances and their behaviours, unlocking more and more features such as alerts if you’ve left an appliance turned on for too long. Another peer-to-peer energy trading platform might emerge here, too.
Cachia says: “For blockchain to work it needs these kinds of bridges into the real world, to make it tangible and verifiable.
“The blockchain industry, such as it is, is still at a very early stage and highly fragmented, and we are in a bubble which raises the price of everything. But the opportunity is great. The technology itself has so many potential applications that it will have a very large impact across many sectors.”
Cachia is profoundly sceptical of ICOs, most of which he describes as clearly securities, suggesting that they look like a better form of exit for founders to cash out than an entry point for early stage investors wanting to put their end investors’ risk capital to work.
“We may look at seed-stage ICOs that are not distributed to retail investors,” he says.
His colleague Mattia Gagliardi, co-founder of Scytale, adds: “We are witnessing an explosion of proposals that incorporate tokens that are not necessary for its ecosystem to function. Why use a token if you do not need one? That is just poor token engineering, which itself is now becoming a subfield of economic science.”
Building a bridge
One technology infrastructure play that has attracted attention is Ocean Protocol, which aims to build what it thinks could be a $1 trillion marketplace in data to enable a leap forward in the use of AI.
The plan is to build a bridge between AI start-ups and researchers that are drowning in algorithms but lack data, and the many large corporations that have vast amounts of data but are struggling to monetize it.
Ocean Protocol is a tokenized service layer that exposes data, storage, compute and algorithms for consumption with a set of deterministic proofs on availability and integrity, and uses blockchain technology that allows data to be shared and sold.
Gagliardi says: “Take the example of the recent Cambridge Analytica debacle. Centralized data marketplaces such as Facebook make individuals and society vulnerable. Ocean will give full control of data to its owners, who can monetize them if they want to.
“For how long do we want to rely on Zuck [Facebook CEO Mark Zuckerberg] and others as benevolent dictators? Not to mention the power of releasing locked data silos to feed our smart algorithms.”
Ocean Protocol is in the process of raising funding through an ICO to build the business.
“The founders could probably have raised $300 million if they had wanted to, but they have capped their ICO at $18 million, with $9 million in a restricted pre-sale and $9 million offered publicly,” says Cachia.
“The deal also ties in the founders for five years, which is exactly what you want to see.”
Banks might be taking years to bring blockchain into production, but the ICO market is transforming from one month to the next.