By now you’re probably familiar with the term ‘blockchain’, and maybe even familiar with some of the services it’s projected to disrupt: payments, remittances, corporate audits, electronic medical records, etc. And you may have even heard about the fury of investment activity in the technology, from large banks like JP Morgan, Goldman Sachs and Citi making strategic bets to over a quarter billion dollars of venture capital investments in the last 12 months. But do you have a real plan for how to leverage this technology or are you just following the hype?
Blockchain technology doesn’t just offer an opportunity for future disintermediation or a means to offload risk. It can also provide immediate benefits for institutions, including dramatic improvements in efficiency and security. Enterprise deployments of the technology can reduce reconciliation and fraud remediation costs, while easing the deployment of innovative digital services. But to truly appreciate its potential benefits, bank executives will have to move beyond the hype.
Every institution should have a set of hypotheses and quantifiable metrics for how this technology can transform business in the near and longer terms. Focusing solely on hypothetical long-term potential will put institutions at risk of falling behind by not laying the internal foundation necessary to compete in a blockchain-enabled future.
The first barrier to practical adoption is often a basic understanding of what a blockchain is. The term itself has become convoluted to the point where it can be used as all things to all people.
A blockchain is simply a cryptographically proven record of events. A ledger with a mathematical proof of its integrity. You can think of it as a line of cardboard boxes whose tops are secured with a single long piece of packing tape. Within each box can be any type of information: financial transactions, supplier orders, digital identities, etc. As long as the packing tape hasn’t been cut, you know the things inside those boxes haven’t been altered.
That’s all it is: an immutable record of events over time. The data integrity it ensures is the basis for all other benefits it can provide.
Blockchain technology has been the subject of research for over 30 years. Bitcoin’s success has brought a lot of attention to the concept, but it’s not new. What makes the Bitcoin blockchain special is how the cryptographic proof is maintained without any central authority. It is ingenious and serves as the basis of its independence from external authority.
However, that independence comes at a cost. To operate without any central authority, the protocol needs to enforce a cost of use in order to mitigate security risks. As a result, it takes a lot of computing power and can only handle low transaction throughput. Centrally managed blockchains – disliked by Bitcoin purists, but an incredibly powerful institutional tool – also provide an immutable record of events, without the costs. This makes them significantly more efficient.
The lure of decentralized ledgers as a way to offload risk and eliminate the need for settlement clearinghouses has driven much of the investment in blockchain technology to date. The power of the technology for such applications is obvious, but it depends on systemic adoption and regulator acceptance. There are nearer term opportunities for disruption that banks can wholly control, which will help strengthen their posture for that longer-term systemic disruption.
Most financial institutions have core settlement infrastructures that are incredibly inefficient. The costs of these systems are measured in the labor and time associated with account reconciliation, the remediation costs of fraud, and the time it takes to provide value to their clients. While those costs are significant, the opportunity costs, particularly in the face of threatening technology-enabled competitors, are potentially existential.
Blockchain technology offers institutions a way to modernize without putting core settlement systems at risk. Private deployments can integrate data across the byzantine mess of internal transaction and accounting databases to create universal systems of record. An immutable ledger provides data integrity, guarantees that drive down reconciliation and fraud remediation costs while allowing for more direct integration with third-party providers and partners. Immediate data synchronization drives down time-to-value and enables innovative new client services. In short, blockchain technology offers significant near-term potential as a transformative digital banking platform for financial institutions.
Chris Finan is cofounder and CEO of Manifold Technology, a provider of an enterprise blockchain-based platform for financial innovation, and a former White House director of cybersecurity policy.