From stealing the spotlight at gatherings like Sibos and the World Economic Forum, to headlining innumerable news and opinion pieces on what disruption means, blockchain has become a ubiquitous buzzword.
Blockchain technology, a distributed and decentralised immutable ledger, originally developed as the infrastructure on which to underpin bitcoin transactions, attracted attention for its potential to reduce costs and improve speed and security of financial transactions, as well as allowing for deep financial inclusion in the long run. “The opportunity to create new revenue streams has made blockchain technology banking’s ‘golden child’,” says Sanjay Saigal, head of customer success at Skuchain, a blockchain-based supply chain finance company, and a lecturer at the University of California, Davis.
Blockchain technology is benefiting from a hype cycle. There is definitely a ‘me too’ aspect to some announced projects. Sanjay Saigal, Skuchain
Most of the news concerning blockchain relates to exploratory efforts, the developments of proof of concept – such as the Standard Chartered, DBS Bank and Infocomm Development Authority of Singapore (IDA) invoice trading platform – and partnerships involving both banks, new fintech players and established tech giants such as Microsoft and IBM. Everyone seems to be trying to understand the potentially disruptive technology. “Blockchain technology is benefiting from a hype cycle. There is definitely a ‘me too’ aspect to some announced projects,” says Saigal.
Despite this hype, there is still a lack of awareness of what the technology and its potential use cases are. Conversations about blockchain are still relatively confined to a certain environment and have yet to become fully mainstream, so some banks have started to take a proactive approach in increasing the understanding of blockchain’s potential.
Collaboration within a bank
One of these initiatives, specifically targeting the transaction banking space, was led by French bank BNP Paribas, which organised a two-day hackathon in January. The aim was to create a space for the bank’s clients and employees to work together on exploring the technology and developing aptly-named ‘bankable’ projects.
The hackathon involved 70 participants from a number of backgrounds, from BNP’s various departments such as IT, operations and compliance, to large corporate clients, fintech start-ups, experts and consultants. A Twitter stream of the event under #bizhackathon shows that, amongst others, Gavin Wood, founder of Ethereum, a distributed ledger platform for smart contracts, was present at the event.
BNP’s hackathon focused on six themes within the global transaction banking spectrum, including cash management, trade finance and documentation, inventory management, payables and receivables, commodity financing and open account. Each of the six teams, formed by people from different backgrounds, developed a blockchain-based project pertaining to one of the themes: Paytrack, Smart LC, Invest2rise and Collat’ Shaker were some of them.
Despite being extensively discussed in the general press, blockchain technology is still in its infancy. Jacques Levet, BNP Paribas
A team from BNP’s Corporate and Institutional Banking (CIB) management ultimately assessed the projects, and picked a few to develop further. “Among the six ideas identified, we will start with two or three proof of concept and prototypes, which will then be tested with our clients that participated in the hackathon and have happily indicated their willingness to continue working with us on those new solutions,” explains Jacques Levet, head of transaction banking Emea at BNP Paribas, who is not yet able to say which blockchain will be used for these purposes. “We want to stay flexible and use whichever solution makes the most sense for each individual project.”
“Despite being extensively discussed in the general press, blockchain technology is still in its infancy and nobody really knows yet which are the players that will emerge as leaders,” he adds. According to him, in the infancy of a technology, one has to keep their options and eyes open to be aware of what is going on in the space and decide the directions worth pursuing. The hackathon was extremely useful in identifying immediate uses for blockchain technology. “Beyond the true future potential for disruption, there are probably some immediate uses to improve the quality of the service that we give to our clients,” he tells GTR. It also made it possible to experience a different way of working, one that relies on collaboration between different areas of expertise, and between bank and client. This process of “co-creation”, as Levet calls it, was particularly revealing, to the point that he believes the bank should “institutionalise co-creation”, as “we clearly wouldn’t have come up with these innovative solutions without our clients’ input”, he says.
Collaboration between banks
A spirit of co-operation has also driven the banking world to develop blockchain standards, one of the R3 consortium’s primary targets. BNP Paribas is one of the 42 banks that has joined the consortium and one of the reasons for doing so, according to Levet, is to develop interoperability between banks. “Being open means you need a common standard and if you need a common standard you need to co-operate between the banks and the clients, so it is a dual relationship,” he says.
Blockchain technology is, at its heart, about engaging with other organisations, other entities within the financial system. Luke Scanlon, Pinsent Masons
Another initiative that has seen banks partnering has been led by Digital Asset Holding, a company that builds distributed, encrypted straight-through processing tools. The company is headed by former JP Morgan executive Blythe Masters and recently closed a fundraising effort worth US$60mn involving 15 financial and tech institutions: ABN Amro, Accenture, ASX, BNP Paribas, Broadridge Financial Solutions, Citi, CME Ventures, Deutsche Börse Group, Goldman Sachs, IBM, ICAP, JP Morgan, Santander InnoVentures, the Depository Trust & Clearing Corporation (DTCC) and the PNC Financial Services Group. “Collaboration is necessary because blockchain technology is, at its heart, about engaging with other organisations, other entities within the financial system; it’s not a simple banking-consumer product,” says Luke Scanlon, consultant lawyer specialised in technology use for the financial sector at Pinsent Masons.
People within the industry are doubtful over how quickly this co-operation can produce results. Despite its benefits, collaboration hampers the speed of development, as it takes time for all the different stakeholders to come together and reach an agreement, with the result that banks’ collaboration is hardly as disruptive as the work done by start-ups.
“R3 is a major player in blockchain-powered finance, driving new thinking and setting new norms around the subject. That said, R3 is colouring within the lines defined by the banking sector,” says Skuchain’s Saigal. “Outside of the banking ecosystem, start-ups are simultaneously more disruptive in potential and more likely to crash and burn when confronted with the harsh realities of force of custom, sector norms and regulations that lurk past the proof of concept.”
Saigal explains that being a first mover in developing a patent or for reputational purposes is not Skuchain’s goal; its priority is to get the service right. “Even though our four to eight-month lead gives us tremendous traction in the trade finance community, if there is urgency at Skuchain, it is to deliver the value we’ve promised our customers, and in turn, to establish Skuchain’s underlying technology and protocols as the de facto standard for modern trade,” he says.
Regulatory question marks
When working with banks in particular, regulation is a key priority, and start-ups like Skuchain are aware of the importance of being involved with various industry standard-setting and compliance bodies – such as the International Chamber of Commerce – to ensure their applications meet regulatory needs. “We work closely with banks precisely so that regulatory compliance is baked into Skuchain solutions,” says Saigal.
Whether banks co-operate within themselves or with fintechs, regulatory uncertainty presents a risk. With blockchain use still at the early stages of development, regulators are just beginning to look into its potential issues, with few indications of how they will act to regulate the technology. “Regulatory changes are a heavy burden for every financial institutions and that is a consideration they have to take into account,” says Scanlon.
Only the development of proof of concept will be able to guide the regulators in creating an appropriate environment to cover blockchain’s applications. “Only when we see the effective application of blockchain technology will any jurisdiction be able to provide specific rules about authentication, liability, security and decentralised organisations,” says Scanlon. “The regulators are looking into it, but it is also a question of resources and expertise. Until they have a clear understanding as to its applications, they will find it difficult to look at the legal questions in detail, beyond the headlines.”
If you’re looking at creating a shared ledger, you need to know who will be backing the assets which that ledger represents. Gideon Greenspan, CoinScience
Build your own blockchain… or not
Blockchain technology is essentially a computerised ledger shared on a network, where a set of validators thoroughly and collectively check cryptographically-signed transactions before they can be recorded in a chain of computer code.
In the bitcoin blockchain, the validation of transactions requires proof of work. This is obtained through a process called mining, which involves the solving of complex algorithmic calculations, and consumes electricity. This factor is important, because it allows participation of anonymous parties without prior approval. This system, which also creates new bitcoins to reward the miners, was intentionally designed to be controllable, so as to regulate the amount of bitcoins in circulation.
New blockchain models are developing new, less energy-intensive consensus models, but the current proof-of-work requirements entail that the volume of transactions that can be processed is limited, and perhaps insufficient to satisfy a growing demand for real-time settlements. This is why developers like Gideon Greenspan, founder of CoinScience, a company developing a range of technologies for public and private blockchain – and whose latest platform, Multichain, allows for the creation and deployment of private blockchains – invites financial institutions to resist the blockchain hype and only invest in developing blockchain-based products when no other regular relational database can satisfy the banks’ requirements.
In a post written on Multichain’s website, Greenspan advises to look only for blockchain solutions where there is a clear use case for a single, shared database, with multiple users who wouldn’t otherwise trust each other, who can independently verify the transaction without the interjection of a trusted centralised intermediary (which would normally be a bank). So far, it sounds a lot like transaction banking can offer many a use case, but according to Greenspan there are more elements to consider: “You need to be able to express the rules of your application in terms of the transactions which a database allows. You need to be confident about who you can trust as validators and how you’ll define distributed consensus. And finally, if you’re looking at creating a shared ledger, you need to know who will be backing the assets which that ledger represents,” he writes.
Once all these questions are answered, then you can be sure to have a real blockchain use case, and can get coding for blockchain.
This article originally appeared in GTR March/April 2016 issue. To check out more magazine stories, click here.