How Will The Big Bank’s Adopt Blockchain?

Hope, fear and a lot of hype, is how Morgan Stanley describes the advent of the Blockchain as a disruptive financial system that emerged in 2008. Bitcoin is the most widely known element of the Blockchain; a cryptocurrency created with the aim of revolutionising finance around the world.

The hype and hope lived longer than the reality. As a currency, or means of trade, it is more widely accepted, but not going to replace Visa, MasterCard or any financial system in the near future. It could, however, prove a viable way for banks and payment providers to “to streamline their own operations and costs”, according to a recent Morgan Stanley report.

“Banks are rushing to adopt blockchain — the database technology that underpins bitcoin — in order to cut costs”, says the Financial Times.

Banks And Blockchain: Is It More Than Cost Cutting?

Reducing transaction costs and timescales – especially when making international payments – is one aspect of this supposed Blockchain rush. Richard Lumb, chief executive of financial services at Accenture says that, “Pre-2008 the industry would not have lifted a finger to do certain shared things, which may save a hundred million dollars, but now a hundred million dollars is a lot of money and people are now prepared to work together to cut costs.”

Efficiency is now known as a “prevailing ‘ideology’” in financial services, which is a radical shift from the sector’s view of staying efficient before 2008. In this scenario, where settlements and clearing functions could be automated across the sector – using Blockchain technology – the cost of these activities reduces. These savings can be passed onto the consumer.

There are already numerous hurdles in place, according to authors of several studies on this subject. First and foremost are the concepts behind the Blockchain. Bitcoin – the world’s most popular cryptocurrency – was meant to be about transparency. Banks are only transparent to a point. They need to protect their customers, themselves and adhere to data protection laws.

We are, therefore, talking about fundamentally different concepts. One commentator compared Blockchain in financial services and Blockchain as we know it to the difference between a car and a boat. Both have an engine and driver. But one can’t do the same as the other. In financial services, big banks are taking the Blockchain concept and applying it to a shared database model.

Testing a Blockchain Proof of Concept

Since one of the main applications are transactions, either for international consumer/business payments or processing syndicated loans, banks are approaching this within consortiums. Two partnerships have already emerged, the Hyperledger Project and the R3 Blockchain Consortium, with numerous proofs of concept in the pipeline.

Some industry commentators expect results within 18 months. According to an IBM report, 15% of small to mid-sized banks are implementing Blockchain “dramatically faster than initially expected.”

Several banks, including HSBC, have tested Blockchain in bond transactions. Whereas, UBS and Santander have applied this technology to cross-border payments. Bank of America has recently announced a partnership with Microsoft to test a Blockchain concept.

However, we should remember that investing in research is not the same as rolling out the technology across an asset class. There are numerous roadblocks, including regulatory approval, governance, security and legal risks. Blockchain will take time to evolve into something big banks can implement successfully.

Morgan Stanley concludes that: “Even as the industry begins to adopt blockchain technology, institutions are likely to incorporate the new technology into existing systems with workarounds, instead of completely scrapping their current infrastructures for a brave new blockchain world.”

As ever, Secure Trading will be monitoring developments closely and continue to explore how we can support our clients with new technology like blockchain.