Is Blockchain just another fad? (Securities Services View)

By Damien Jamet, Chief of Staff and Chief Digital Officer for SGSS - 2016

“At present, the simplicity and efficiency that DLT is supposed to bring to the financial world is not quite there. But a great deal of research and investigation is taking place and the potential of DLT will eventually be realised.”

  • There are very many companies and also financial institutions creating applications around distributed ledger technology (DLT) and among some of them a belief that the technology will solve all problems. But DLT is not a magic wand. What is striking is that even the financial institutions that in theory could be threatened by this technology and the Fintechs that are developing apps around it are investigating how it fits in with their own needs and how it can be used. DLT has the potential to remove many of the intermediaries that exist in the financial world today – for example in peer-to-peer environments – and some institutions in this category are investigating DLT to try to understand how they can preserve their positions or reinvent themselves.
  • Blockchain and DLT have the potential to revolutionise financial services but this will not take place in the near-term; it is more likely to take 5-10 years before we see major change. Everyone involved should make a distinction between what works well during tests in your own environment and for your own purposes with actually changing business operating models and the way services are delivered. Financial institutions are trying to understand how far they can go with DLT to change processes and make savings both in terms of costs and resources.
  • For DLT to really succeed and live up to its potential, many different actors have to get around the table. This will ensure large scale adoption of this type of technology and its success outside of internal applications and into the wider world.
  • There is possibly too much buzz around DLT and too many people think they will be able to do everything with it. It can certainly help to improve some processes of financial institutions but at present the discussions around DLT tend to be dominated by Fintech companies or financial institutions that have achieved some internal success on a limited scale. It is impossible not to look at DLT but there is so much ‘noise’ surrounding the topic it can be difficult to understand what exactly DLT can do.
  • At present, financial institutions are launching small-scale initiatives to try to understand how DLT can improve the way they deliver services and improve their bottom lines. But in investigating the technology, we also need to bear in mind that the regulatory environment is evolving and new requirements may emerge that could have an impact on how DLT will change business models.
  • There are questions surrounding DLT’s scalability, particularly in regard to the open source version. However, more proprietary versions of DLT are being developed that will give a transaction per second rate that is more in keeping with the needs of financial institutions. Another question is connected to confidentiality – everyone in the blockchain sees everyone else. That doesn’t fit with how business is conducted in the financial world. Banks do not like other banks to gain access to information about their clients or their transactions.
  • DLT has the potential to significantly reduce the burden of some tasks for financial institutions. This is particularly the case in reconciliations processes, which are very labour intensive and costly.