Noelle Acheson is a 10-year veteran of company analysis, corporate finance and fund management, and a member of CoinDesk’s product team.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to our subscribers.
We caught a glimpse last week of how blockchain tech will go mainstream.
No, it won’t be through killer apps developed by startups, consortia rolling out a consensus solution or breakthroughs in privacy or security. Rather, it appears it will happen when large incumbents roll out blockchains in existing processes.
That may not sound exciting, but it is a big deal (or at least, as big as we’re going to get in the short term).
But, we need to remember that financial institutions are not generally known for their flamboyance or risk taking. And we need to bear in mind that only the incumbents have the reach to test the technology at scale in the short term.
Two events indicate that this process has already begun:
- The DTCC’s announcement that it will migrate the post-trade processing of credit derivatives to a DLT system in 2018
- SWIFT’s reveal it is launching a proof-of-concept to test the blockchain’s impact on real-time reconciliation of international accounts.
Diving in
On the surface, the two announcements have remarkable similarities:
- They both come from structural giants owned by their members or users, ensuring buy-in from most of the main sector participants.
- Both instigators dominate their respective activities. The DTCC is the largest central securities depository (CSD) in the world, and it provides processing services for about 98% of all credit default swaps. SWIFT, on the other hand, is the world’s largest electronic payment messaging system, used by more than 11,000 financial institutions.
- Both SWIFT and DTCC are founding members of blockchain consortium Hyperledger, which indicates an interest in experimentation and collaboration.
- Both announcements may seem bold and sweeping, but they are actually exercises in caution.
This last point merits further consideration, as it is likely to be a key factor for success:
- Both DTCC and SWIFT plan to combine the new technology with existing systems. Even after the new platform goes live in 2018, DTCC will continue to run its old one in parallel. SWIFT plans to combine the blockchain under trial with its current identity protocol and public key infrastructure.
- Both plan to make adoption optional. This should reassure those members and users who prefer a “wait-and-see” approach, and allows for gradual roll-out across their respective sectors.
- In neither case are we looking at new, innovative services. We’re looking at potential improvements on current processes.
- In both cases, blockchain technology will not initially be used for actual settlement or payments, to mitigate systemic risk. The focus will be on the handling and reconciliation of information, not money.
Slow and steady
While blockchain enthusiasts may be disappointed at the limited scope of the applications, we need to bear in mind that for the technology to have significant real-world impact, it needs broad implementation in a conservative industry.
Also, it needs regulators to be comfortable with the pace of change.
Whichever project becomes a reality first, a large portion of the financial sector will be using blockchain technology to simplify processes and reduce costs. This is likely to trigger a domino effect, with other securities markets and clearing services adapting to keep up.
Increased confidence will trickle over into further blockchain applications for payments and settlement. Substantial amounts of capital will be freed up. And millions of users will get used to the subtle efficiencies of a new technology as it quietly and cautiously powers the beginning of a fundamental structural change.
Assuming the initiatives go to plan, one thing is certain: We are looking at a tipping point.
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