Blockchain technology is being hailed as potentially the biggest disruptor to the global financial system in a generation. This article examines how widespread adoption can be achieved and ensure that this promise is realised.
Corporates and banks alike face an unprecedented era of disruption. In recent years, technological innovations have given rise to mobile-only business models and the ubiquity of internet access on the go. Blockchain is being hailed as potentially the biggest disruptor to the global financial system in a generation.
A landscape ripe for disruption
The current business landscape sees banks and corporates caught between an uncertain world economy and growing costs of regulatory compliance. Corporates face pressure to reduce costs and increase operational efficiency; especially when expanding operations across regions. Banks must not only cater to the priorities of the corporate but also the threat of disintermediation by financial technology (fintech) firms, which are looking to provide some of the same services as banks but at lower cost. The current landscape has therefore created a ‘perfect storm’ for the optimism and hype for solutions powered by blockchain technology.
At its most fundamental level, blockchain technology consists of recording blocks of data, which are linked together in a single unbroken chain of blocks. Every user on the node can contribute to extending the chain with a new block, but no single user or entity can control the creation of a new block, or edit past records captured in previous blocks. The key application is a distributed ledger; a record of transaction data that is replicated, shared and synchronised across multiple institutions, countries and users.
Traditional payments rely on a central clearing authority to derive trust and value, and this centralised authority in turn prevents cheating. Distributed ledgers decentralise both trust and checking into the process. Transactions are validated by participants in the network collectively, and updates occur almost immediately across the network, ensuring transparency for all participants. Additionally, because each block references the previous block in the chain, past transactions cannot be modified or misrepresented, ensuring fidelity of records and preventing fraud or tampering.
Blockchain systems may have the potential to reduce any manual clearing and settlement in legacy architecture. This offer of efficiency and effectiveness separates it from most shared database or networking messaging technologies. The advantages have led to an increased hype and interest in blockchain and distributed ledger technologies (DLTs), particularly for financial institutions. However, there remains a gulf between interest and demonstrable applications.
The gap between deployment and adoption
In April this year, SWIFT partnered with Accenture to produce a position paper on DLTs. Several of the key strengths identified include the complete traceability of transactions and simple reconciliation, efficiency in broadcasting information, and a disseminated system which enforces trust and ensures resilience. These traits underscore the potential of DLTs to bring new efficiency and opportunities to the financial industry.
Many DLTs have been successfully deployed in proofs-of-concept (POC), including a collaboration last December between Standard Chartered Bank, DBS Bank and the Infocomm Development Authority of Singapore (IDA) to enhance the security of trade finance invoicing and a Deloitte POC for tracking the provenance and whereabouts of fine art.
However, current DLTs are not sufficiently mature to meet the needs of the financial community. Some of the key requirements for industry implementation include the current lack of standardisation and identity frameworks, the absence of strong governance, and the need for compliance with currently existing legal frameworks, including financial regulation and data controls. Business standards remain critical in order to ensure production-grade implementation of DLTs.
Collaboration and standardisation key for industry adoption
In order to ensure the full economies of scale and network effects, DLTs require widespread industry adoption, which demands transparency on the responsibility of the shared data in a multi-party business environment.
Widespread adoption by the financial industry relies on strong governance models, clearly defining the roles and responsibilities of the various parties, as well as the business and technical operating rules supporting a particular business service. Strong governance is key to ensuring the delivery of effective, predictable and sustainable financial services.
Governance models will also ensure compliance with regulations, including sanctions and know-your-customer (KYC), as well as preserving data confidentiality. As well, when scaling up to an industry-wide solution, DLTs must be tested to be capable of processing thousands of transactions per second and resisting increasingly sophisticated cyber-attacks.
While there are promising developments in each regard, significant research and development (R&D) work is necessary before DLTs can be applied at the scale required by the financial industry. DLTs are not the ‘silver bullet’ for resolving all business issues. A May 2016 SWIFT Institute paper investigated the potential impact of blockchain on global securities transactions and highlighted the concern of unrealistic expectations given the high commitment of time and resources necessary to achieve all the potential benefits of DLTs, with relatively little short-term payoff.
Global payments innovation initiative
Today, blockchain remains a relatively untested new technology with significant potential. As the development of DLTs steadily progresses, SWIFT is delivering a new global payment innovation (GPI) initiative, which already gathers more than 75 banks worldwide. Using the existing infrastructure already in place around the world, the initiative will already bring a number of enhanced benefits such as same day settlement, upfront transparency of fees, richer information and tracking of payments.
With digitisation and innovation common in the modern era, there is keen interest in how blockchain and DLTs may reinvent and disrupt the financial industry. Beyond the excitement, however, work remains to be done to deliver an industry-standard platform. The collaboration of the industry will be crucial, both in developing compatible standards as well as galvanising early adoption. At the end of the day, beyond the hype and buzz, proper governance and standardisation remain as the two things that will enable widespread adoption.