Blockchain: the next big thing?

“Every once in a while, a revolutionary product comes along that changes everything” – Steve Jobs. Apple stopped us going into shops to buy music. Amazon allowed us to buy presents in our pajamas. Facebook stopped us needing to talk.

Love them or hate them, technology giants have changed the way we live. And if some are to be believed, the next big technology innovation is Blockchain: a platform that allows people and businesses to trade without any middle men. So what exactly is blockchain? Why are people so excited? And it is really going to live up to the billing?

What is blockchain?

Blockchain rose to fame as the technology underpinning Bitcoin (the crypto currency), which created a platform to manage and record transactions between counterparties without a central authority overseeing them. The success of the technology – using perpetual rules to validate all transactions within the blockchain community – meant people could transfer funds without a bank or clearing house, without delay and with a transparent audit trail that everybody could see. No middle man. No bureaucracy. No fuss.

Why are people so excited?

Although the technology has been around for decades, the astonishing success and robustness of its use with Bitcoin awoke a dormant group of technologists in financial services.

Why? Because the whole back office function of financial institutions is based on the movement of money across multiple parties: processes are complex, paper trails are huge and the time to process transactions is lengthy. If there were a way to cut out the middle men, increase the speed to settle trades and do it on a secure technology platform that everybody could see – well, that would be quite exciting.

Cue investment.

$2m investment in 2012 has risen to $391m in the first half of 2015; 300 tech start ups are trying to find new ways of using the technology; banks have specialised tech hubs feverishly testing and patenting innovations; and insiders are saying the technology should be taken “as seriously as you should have been taking the development of the Internet in the early 1990s”.

The potential cost savings and efficiencies are enormous: estimated savings of up to $20bn across financial institutions; reduction in delays as products like syndicate loans settle on the same day instead of 20 days today; Lower risk for banks as they are not holding onto funds; better service for customers as their money is transferred instantly; and the possibility for users to insert their own ‘smart contracts’ that execute transactions based on their own personal pre-defined rules.

Blockchain holds the potential for unrivalled back office transformation

It means for financial institutions alone, blockchain holds the potential for unrivalled back office transformation.

Is it going to live up to its billing?

But there is a catch. We are only at the very beginning of this technology and the hurdles will be significant: the technology is untested at the scale it would need to be; in its current guise it is still expensive to use (every additional transaction increases the size of the database to manage), so there are questions as to whether it will be cost effective; there is the potential for political or regulatory unease at a system that is ungoverned; and what would happen if there were disputes? Currently, there is no precedent.

In addition, blockchain’s success is founded on community: an open, accessible platform that doesn’t allow any one group to hold the power. But banking is traditionally an insular industry: patents and secrets are rife to ensure competitors don’t get whiff of a new innovation that could earn the bank more market share. If community is the glue that holds blockchain together, banks may have to shake off years of competitive rivalry to make it work.

Both technological and competitive challenges mean there is a long road ahead. But the only way to make it work is to try. Big institutions matched with niche start ups and a whole host of cash. And who knows – if financial services strike gold this could extrapolate into all walks of life: Blockchain for property ownership, sharing of wills, or just private contracts between friends. The next IOS, Facebook or Amazon? Only time will tell.

Perspectives

Financial services

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