In any recent conversation about the new technologies and concepts driving change in the financial services industry, there is a strong chance that blockchain – the shared-database system that allows the cryptocurrency Bitcoin to function – would have featured.
Blockchain has been heralded by some as the future of the industry. In August 2016, the World Economic Forum released a report predicting that the technology will become “the beating heart of the global financial system”. The organization said blockchain has the potential to “profoundly alter” how banks operate, partly through reduced operating costs and improved security and accessibility of financial services.
However, more recently there have been questions asked about the feasibility of a widespread rollout of blockchain. Is it possible that the potential of this technology has been overstated?
Just a ‘fairy story’?
One of the commonly stated potential use cases of blockchain is in payments and money transfers. In a recent whitepaper published by FinTech Network, Chris Mager of BNY Mellon said using blockchain for payments could improve speed, convenience and availability for customers, as well as delivering operational efficiencies and cost savings for banks.
However, one of the views coming out of the recent EBAday 2017 conference in Dublin was that there is still no viable use case for blockchain in payments.
Gerhard Kebbel from German commercial bank Helaba said certain elements of the discussion around blockchain can be compared to a “fairy story”, because of the computing power required to manage high-scale transactions. He added: “This idea that blockchain is going to replace the banks is over.”
The Financial Times recently reported on developments that hint at growing skepticism and uncertainty around blockchain. One is that the term ‘blockchain’ itself is being used less frequently, with other descriptions such as ‘distributed ledger technology’ and ‘shared permissioned databases’ taking its place. This suggests that the blockchain system used in the cryptocurrency market could be incompatible with other, more heavily regulated sectors that place a big emphasis on concerns such as privacy, competition and compliance.
Furthermore, it has become clear that getting rival companies to cooperate on data sharing and storage – which is essential if blockchain is to make a real difference to financial services – is no easy task.
So what does the future hold for blockchain?
It’s possible that blockchain has been overhyped, but that doesn’t necessarily mean the technology is going to disappear altogether.
One potential scenario is that shared databases will become increasingly common for very specific purposes within the industry. It was suggested at EBAday 2017 that private payment networks in the corporate space could be a more viable use case for blockchain than a widespread rollout across the payments market as a whole.
It should also be acknowledged that a few obstacles and challenges are inevitable for any new technology, and with sufficient investment and pan-industry collaboration financial institutions could find the right answers to the questions around blockchain.
According to Deloitte, 2017 could be the “make-or-break year for blockchain technology”. The firm recently opened a client-focused innovation lab in New York City, one of the key aims of which is to help companies “move away from churning out proofs of concept and begin producing and implementing solutions”.
One institution that has been investing in the development of blockchain is JP Morgan Chase. Amber Baldet, the US bank’s blockchain program lead, was among the participants in a panel discussion at the recent Blockchain and Digital Currencies conference, ATM Marketplace reported. The event sought to find answers to a key question regarding blockchain: ‘Are we in production yet?’
Ms Baldet made the point that companies investing in the development of this technology need to be very careful to avoid the pitfall of designing “the systems of tomorrow with today’s limitations”.
“Whether you’re talking about the ability to scale or the transactions per second or the privacy constraints that we have, the technology is changing so quickly that if we move things to production and sink multiple double-digits in millions into really changing market infrastructure, we want to make sure that it’s going to withstand the next generation’s test of time,” she said.