While major financial institutions are investing more time and resources in investigating the potential benefits offered by blockchain technology, the key question for many is not whether to look into the technology, but how.
Recently, this question has been gaining new definition as institutions seek to grapple with the more complex implications of using blockchains and distributed ledgers for real-world use cases. For example, it remains to be seen whether the use of distributed ledgers will require the use of a digital asset, which at least for now bears regulatory uncertainties.
On the bitcoin blockchain, the longest-running iteration of the technology, the network’s distributed ledger tracks a native asset representing a digital currency. And while some global regulators have confirmed the use of these bits of data represent real value, others have yet to make any announcements. Such uncertainty is magnified by the rising interest in blockchain trials at major institutions, where private networks are being created with tokens representing everything from shares in companies to shareholder votes.
However, some institutions are choosing not to use blockchains with unique assets, instead leveraging cryptographic distributed ledgers as a way to ease the ability for participants to share information on existing transaction processes.
To Ed Budd, chief digital officer of global transaction banking at Deutsche Bank, this question is less an either/or proposition but evidence that financial institutions are becoming more discerning when applying the technology to real-world business problems.
Budd told CoinDesk:
“The degree of the efficiency you can get – it’s asset class specific. Some asset classes are mostly electronic today. But, there are many asset classes today that aren’t. The weight of the benefit is different by asset class.”
Budd said he doesn’t believe there is one version of the technology that will prove to be a silver-bullet solution, saying that there will be a “spectrum” of approaches depending on the business challenge.
“People are looking at this issue, and looking to take that challenge on. In some areas you might digitize an asset that isn’t digital. There are lots of smaller markets that might prove more practical, real-world testing grounds,” he explained.
At Deutsche Bank, Budd specializes in analyzing the potential of blockchain from the standpoint of its transaction banking division, which services corporations and financial institutions.
However, he said the bank is analyzing the issue across multiple departments.
Discovery and testing
Deutsche Bank, according to Budd, is now in the middle of a research and discovery phase centered on the technology, one that’s primarily focused on what he called the “business model questions” it poses.
To start, Budd said Deutsche Bank elected to focus on digitizing corporate bonds for use in blockchain-based environments due to their value across the transaction and investment banking verticals.
“We chose the corporate bond because it had more complexity than cash, but it wasn’t a highly complex niche instrument. Yet, the test led to questions around the key life cycle events that needed to be approached along with it,” he explained.
Budd said Deutsche Bank trialed blockchain-based corporate bonds on two different blockchain networks, with two different partners, in its London lab last year.
He went on to explain the goal was not simply to just recreate existing assets as digital assets, but to look at compliance, architecture and business process questions that would result from the wider use of such instruments.
“What we were testing was not the multi-party configuration, but ‘What does it look like from a business model perspective?’ ‘How do we feel about it from an instrument and legality perspective?’’ and ‘How does it really operate and what type of support would its use require?'” Budd said.
‘Portfolio approach’
Still, such siloed tests can only inform the bank in so much detail about what many in the industry have termed a network technology.
As a member of banking consortium startup R3CEV, Budd said that Deutsche Bank has another way to explore the technology with multiple partner institutions and competitors.
Combined, the proprietary and collaborative efforts make up what Budd termed as a “portfolio approach” to learning about the tech.
Budd described Deutsche Bank’s labs in Berlin, London and its latest in Silicon Valley as the “backbone” of its strategy given that these outlets have the mandate to look at opportunities posed by new innovations. Deutsche Bank opened its Silicon Valley incubator on 6th April, with an event that allowed startups to present elevator pitches.
The bank did not provide the number, but indicated several blockchain startups may have been part of the event.
Yet, in other instances, Budd said that Deutsche Bank has explored ideas in theory, without putting such investigations into practice.
From his own vantage point on transaction banking, Budd said that Deutsche Bank explored how digital assets could be settled in cash, though he said this was outweighed by the bank’s desire to look at how it could model securities.
Winners and losers
Also up for discussion was whether Budd believes, like many industry innovators, that the spread of the technology will create winners and losers, or those who succeed in adapting their business model to the tech, and those that fail due to their inability to do so.
The topic was a hot-button issue at a recent event held by the DTCC, but Budd said he thinks it’s too early to tell if the technology will lead to such an outcome.
Budd cited Deutsche Bank’s work on blockchain-based smart bonds as providing evidence that the expertise of financial incumbents will be required in new blockchain-based systems. For example, he said the outcome could differ based on where in the lifecycle of this business process changes brought by the technology are most impactful.
“If you start by digitizing the assets from the beginning, then the roles are more efficient. Many are still required, there can be fiduciary roles, but the business models will be transformed,” he said. “You’re able to fundamentally change what is needed downstream.”
Some applications, he said, could see changes further down the processing chain, resulting in less disruption to existing stakeholders in the value chain.
Next steps
As for what’s next from Deutsche Bank, Budd said that the bank would be focusing on its efforts as part of the R3 consortium and moving forward on what he called a next “stage in discovery” in its internal evaluation of the technology.
Notably, Budd said that Deutsche Bank’s conclusion is that, ultimately, it will have to seek to launch a real-world blockchain application to get “definitive answers” for how its strategy toward distributed ledgers will be shaped.
Still, he did not provide details on how the company may take action toward this goal.
“Deutsche Bank is running a portfolio of blockchain activities across the bank. We are in the process of entering the next phase and are partnering with customers and competitors to get that done,” he said.
Budd said that Deutsche Bank will continue to watch the movements of global regulators on the technology, noting that he’s been encouraged by the frequency and positivity of the dialogue from nations such as the UK and Australia.
The UK’s Financial Conduct Authority (FCA), for example, recently granted digital currency startup Circle an e-money license, while the Australian Securities and Investment Commission (ASIC) has been similarly positive in frequent public remarks.
He said Deutsche Bank would be keen to monitor the technology from a regional perspective, keeping an eye on jurisdictions where business and regulatory interests align.
Budd concluded:
“I think it’s a space where, in order to get to something practically testable, you need all those pieces to come together.”
Ed Budd is speaking at Consensus 2016 in New York. Join him at the Marriott Marquis from 2nd to 4th May. A list of the event speakers can be found here.
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