It has been hailed as the future “beating heart of the global financial system” – a technology that could save the industry $110 billion over the next three years. Suffice to say there’s a lot of excitement around blockchain in the financial services industry right now.
In theory, this distributed-ledger technology has many potential applications for financial institutions. Its impact is already being felt in areas like payments and know-your-customer compliance, for example.
But how long will it be before blockchain moves beyond theory and begins to have the revolutionary impact many are predicting?
Progress and potential
There have certainly been some exciting developments on the blockchain front in recent months. Dutch bank ING announced that it had been working on 27 blockchain proofs of concept in six key areas, including payments, lending and compliance. It said the technology could one day “change the face of the financial industry”, partly by facilitating P2P payments without mediators like central banks and governments.
Mariana Gomes de la Villa, ING’s senior blockchain program manager, said the bank has been focusing on experimentation and familiarizing itself with the technology.
Ivar Wiersma, head of innovation at ING Wholesale Banking, noted: “Blockchain started eight years ago with bitcoin. Now we need new developments like smart contracts and digital identity so blockchain can become the technology standard for the next generation.”
According to Deloitte, 2017 could be a “make or break year” for blockchain. The professional services firm has established a development lab in New York to focus on this “key technology”. The focus of the lab will be to turn proofs of concept into functioning prototypes, which could become ‘ready-to-integrate’ solutions for FIs.
Eric Piscini, a principal with Deloitte Consulting, said: “Financial institutions have the power and ability to move blockchain to the next level. To get there, companies will need to move away from churning out proofs of concept and begin producing and implementing solutions.”
Only 12 percent of finance executives surveyed by the firm said their company had deployed blockchain in production. However, 24 percent had plans to go live with the technology in the coming year.
Barriers to growth
Amidst all the excitement and grand predictions about the potential of blockchain, it’s important to acknowledge the obstacles that could inhibit the growth of the technology. One of the biggest potential challenges is regulation. For example, if distributed ledgers with no single location are more commonly used in the financial services industry, what does that mean in terms of regulatory jurisdiction and liability?
Other possible hindrances to the implementation of blockchain include the need for efficient collaboration and making the business case to justify transition costs. According to McKinsey, the combination of these various issues means it could be another five years at least before the technology brings about widespread change in the financial system. The company also stressed that blockchain is not a “silver bullet solution for all the pain points in the industry”.
It’s beyond question that blockchain has the potential to have a huge impact on financial services. However, it’s also clear that it will be at least a few years before the technology really starts to exert its influence across the industry. If 2017 indeed proves to be a make or break year for blockchain, we will have a much clearer idea in 12 months’ time just how revolutionary the technology will be.