Jeffrey Billingham is vice president in Markit’s processing division and a leader of the Chain Gang, Markit’s group implementing distributed ledger technology.
In this opinion piece, Billingham examines the challenge of developing a long-term framework for blockchain in financial services, while advocating the industry needs to be bold in its action to realize its potential.
The financial industry began 2016 with a host of blockchain promises. While many of these promises show encouraging momentum, a clear implementation strategy remains elusive.
If every bank, exchange, infrastructure provider and clearing house put their internal working groups in one room, all would agree to one point: blockchain technology is not a silver bullet for financial markets.
However, beyond defining what the technology isn’t, few seem to agree on what the technology actually is.
The financial industry has invested over $1bn in the last 14 months to support blockchain consortia, pilot programs, companies and other efforts to create consensus about implementing blockchain. This activity indicates a high level of interest, but is atypical of how innovative technology usually enters a market.
We would expect the industry to eschew consensus and exhibit bolder, unilateral moves in pursuit of competitive advantage. Moreover, if incumbent institutions were slow to move, we would expect blockchain startups to build new banks.
Starting points
For now, neither of these expected scenarios are playing out in earnest. A cynic would say the focus on partnerships only shows that the players involved are hedging their bets. The eternal optimist would say that those players need to partner to be successful.
Nevertheless, there is merit to this collaborative approach. A blockchain isn’t simply software to install, but rather the foundation of a robust peer-to-peer network. We at Markit certainly appreciate the time and efforts necessary to build a successful network. And, to be fair, at least one startup has obtained a banking license.
However, the question persists: why a blockchain? How did we go from a conversation about a digital currency to talk of a revolution in the creation and transfer of financial products and agreements?
Though unfashionable to admit, it started with some key perceptions about the bitcoin protocol.
Specifically, that:
- Bitcoin transactions settle within minutes – minimal settlement latency
- Payers and receivers of bitcoin use a distributed ledger – no central data store.
While the financial industry has struggled to come to terms with the post-crisis financial framework and its associated systemic costs, the Bitcoin protocol provides tantalizing solutions.
Settlements, reconciliations, and the security apparatus around these processes, all of which can theoretically move to a blockchain, are massive drivers of cost for a financial enterprise.
Second act for industry
At the same time, digital currency and distributed ledger startups had to reinvent themselves after the price of bitcoin slid throughout 2014.
Realizing that budding interest from capital markets offered a lifeline, these companies moved away from digital currencies and toward concepts like enterprise blockchains, colored coins, metacoins, sidechains, smart contracts, etc.
This union of convenience between cost-conscious financial firms and revenue-hungry technology firms propagated visions of a new operating paradigm in finance, but has yet to produce a long-term framework that gets us there.
Instead, the industry distracted itself with a spate of false choices: it is “bitcoin” or “the blockchain?” Should a blockchain be “public” or “private?” Is this technology “the end of banking” or “just a database?”
These questions prevent us from exploring the real elegance of blockchain technology.
A call for bravery
If blockchains are to play a revolutionary role in financial services, 2016 must be the year that firms agree to disagree about the role of blockchain, forge their own paths and dare others to follow.
Blockchain technology presents a new model for the architecture of the global financial system. That’s why consensus building, however well-intentioned, often results in a focus on the least common denominator, dimming our understanding of the bigger picture.
Speaking at South by Southwest conference, Mark Thompson, CEO of The New York Times Company, explained how he thinks about new technology, specifically applying virtual reality tools to news reporting:
“You can’t wait for someone to jump off the cliff, you have to jump first…We want to be braver than our rivals and be out there and be smart about it. Don’t make crazy bets when you’re not sure. But we cannot be complacent. We know what complacency leads to and we have to be brave.”
The financial industry must adopt the same mindset with blockchain.
We can start with cost saving initiatives that digitize assets and agreements, but we need to also understand blockchain’s potential to transform management of collateral and securitize a range of financial products represents new market opportunities that will captured by truly forward thinkers in the industry.
Knight image via Shutterstock