Published on 29 August 2017
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- The Reformer Blog
24 November 2017
Blockchain is one of the most hyped technologies since the Internet. There has been a considerable number of blockchain start-ups announced in recent years (hundreds of thousands in 2017 alone). Nearly every large corporate, government body, trade association and charity has announced proofs of concept (POCs) to demonstrate the feasibility of different blockchain applications.
The potential for blockchain and distributed ledger technologies (DLT) should, however, be considered separately as they are quite different. DLT, or decentralised databases, are “systems that enable parties who don’t fully trust each other to form and maintain consensus about the existence, status and evolution of a set of shared facts” (Richard Gendal Brown, R3 CTO). Although individuals commonly talk about blockchain, blockchain is a type of DLT and therefore use cases for each are quite distinct.
The potential for widespread adoption of blockchain in financial services, which was where some of the earliest use cases were generated including Bitcoin, is limited. Blockchain has often been cited as a potential disruptor to the traditional domestic payments networks. However, as blockchain currently stands, it is not the answer. A bitcoin is difficult to purchase for the average person, the networks are slow, the transaction fees are high, the community is full of trolls, hackers, scammers, and merchant acceptance is scarce. In contrast, there is a potential opportunity in international payments for blockchain enabled payments as they can provide a solution to the existing complex, costly and slow processes.
The adoption of blockchain financial services will therefore depend on the use case. However, some of its inherent characteristics are incompatible with the current or future regulation which protects the transfer of value.
DLT, which is much more compatible with the current and future regulatory environment, provides a significant transformative opportunity. Financial services suffer from considerable inefficiency, with many of the existing processes being a legacy of a bygone pre-computer age. However, realising the potential of digitisation requires collaboration and strong governance to be established between parties who are used to competing.
In addition, successful implementation calls for a genuine re-imagination of what financial services are and how they are delivered. This requires a cultural, people and process change. Anybody who has ever lived through a core banking transformation programme will know how challenging this was and will shudder at the thought of needing to replicate the same amount of effort across multiple organisations.
Perhaps the biggest opportunity for blockchain will lie outside the exchange of value in the exchange of information or identity between parties. In nearly every part of the world identifying the owner of a physical asset is difficult and a digital asset is nearly impossible without the involvement of a trusted third party. Blockchain provides the promise of taking out the friction from exchange in terms of lack of information and certainty around ownership, expanding existing value networks and creating entirely new markets.
Blockchain and DLT both have considerable potential but need to be considered separately as they are suited for different types of applications. Delivering on this potential will not be easy and will require consumer and corporate take-up, supported by regulations and government policy. Encouraging this take-up will need a considerable amount of uncertainty to be addressed in regulations, standards and best practice frameworks. In addition, there will have to be greater consideration of the non-technical user to increase the adoption and use rates.
Rodger Oates, Consulting Partner BFSI, Tata Consultancy Services and member, Tech UK