Banks are both scared and overexcited. Blockchain has the potential to fundamentally alter their business model, and they know it. Understanding tomorrow’s financial tech has become key to minimise business risks, key to remain relevant. A race that all financiers have joined is now going on, despite mocking Bitcoin just a couple of year ago. And blockchain is all over the news, despite most bankers having little to no understanding of what it is about. Financiers of all sorts now back blockchain-based technologies, from credit card companies to stock exchange and banks.
So a few weeks ago the NYT ironically remarked that:
Nowhere are more money and resources being spent on the technology than on Wall Street — the very industry that Bitcoin was created to circumvent.
Bloomberg reports that Blythe Masters, former MD at JPMorgan who helped kick start the credit default swap market, was now CEO of a blockchain startup, Digital Asset Holdings. Probably not what Satoshi Nakamoto, Bitcoin’s legendary creator, was expecting indeed. She says that, as I have explained on this blog, banks could massively benefit from blockchain technology if it can simplify back office operations. That is, if banks aren’t completely disintermediated first.
Matt Levin reflects on Masters’ comments and wonders why it is taking so long for the financial sector to eventually implement systems that drastically cut error-prone settlement delays (that can still be longer than 20 days, in the internet era…), and says that blockchain for banks can’t hurt. It’s certainly true, although don’t expect miracles: it’s going to take a few attempts, and perhaps a few failures or even mini-crises, for a blockchain-based system to evolve into something solid. And if it turns out that blockchain cannot offer a lasting, bulletproof solution, it will disappear.
Masters also declared that US banks were rather slow at looking at potential blockchain solutions. And indeed, most banks that seemed very active in that area, at least that I have heard of so far, were not US-based. Many of them were European, perhaps reflecting the fact that they currently are under more profitability pressure than their US peers. UBS, for instance, has been very vocal about its blockchain initiatives. See also this quite complex article on IBTimes on the various technologies behind UBS’ ideas, which include private blockchains, sidechains (transfer of assets between multiple blockchains) and ‘settlement coins’ (essentially a fiat money representation on blockchain that relies on central banks’ settlement processes):
Recently, UBS demonstrated how a bond could be automated on a blockchain, the shared ledger system similar in design to that used by Bitcoin. It also proposed a fiat currency-backed “settlement coin” to fit within the existing regulatory framework. The bank appears to be leading the way in distributed ledger technology at this time.
What’s happening is fascinating. What’s going to finally emerge remains a mystery. While individual institutions can put in place private blockchain-type systems to cut costs or offer more effective dark pool services to a selection of customers, the implementation of a ‘stock-market replacement’ blockchain requires an industry-wide agreement. And it does seem to be happening. A couple of days ago, the FT reported that 9 of the largest banks agreed to cooperate on a blockchain initiative that would define common standards and protocols (I’d just like to add that this is another example of private market actors cooperation; no need for a state to devise that sort of things in most, if not all, cases).
But blockchain technologies don’t only apply to financial services. The NYT mentioned property titles, diamond and gold ownership, airline miles. But also the music industry. And certainly a lot of other ones, as some at the MIT seem to believe with their Enigma project, or some entrepreneurs I met a few months ago at a conference, who believed that entire applications such as Facebook could be transferred onto the blockchain. It’s now ‘blockchain everywhere’.
PS: I’m on holidays abroad so have little time for updates!