Blockchain has been a topic of discussion ever since its inception in 2009 as the underlying technology for Bitcoin. If market hype is any indication, blockchain — the
underlying technology for cryptocurrencies such
as Bitcoin — is poised to solve multiple challenges
facing the banking industry by enabling faster,
secure and more transparent transactions.
The disruptive potential of blockchain is widely
claimed to equal that of the early commercial
Internet. A crucial difference, however, is that
while the Internet enables the exchange of data,
blockchain could enable the exchange of value;
that is, it could enable users to carry out trade and
commerce across the globe without the need for
payment processors, custodians and settlement
and reconciliation entities.
Ever since the first Bitcoin transaction was
carried out in January 2009, the digital cryptocurrency
has been a topic of debate. While banks
and regulators have largely remained wary of Bitcoin,
the underlying technology of blockchain and
distributed ledger began attracting the attention
of banks and startups by the end of 2015.
When it came to investing in this technology, 50% of the banks surveyed have already invested in blockchain technology, or will do so in 2017. In terms of degrees of adoption of blockchain technology, 15% of the banks are innovators, 35% are early followers. The rest (50%) that are waiting for the technology to mature, are late adopters. While average investment in blockchain projects in 2017 is expected to be $1 million, the innovators have already invested funds over $10 million. These investments not only support blockchain initiatives, but also explore use cases beyond the traditional realm of cross-border remittances, clearing, and settlement.
There are three reasons why you need to know about Blockchain:
- Blockchain technology doesn't have to exist publicly. It can also exist privately - where nodes are simply points in a private network and the Blockchain acts similarly to a distributed ledger. Financial institutions specifically are under tremendous pressure to demonstrate regulatory compliance and many are now moving ahead with Blockchain implementations. Secure solutions like Blockchain can be a crucial building block to reduce compliance costs.
- Block-chain technology is broader than finance. It can be applied to any multi-step transaction where traceability and visibility is required. Supply chain is a notable use case where Blockchain can be leveraged to manage and sign contracts and audit product provenance. It could also be leveraged for votation platforms, titles and deed management - amongst myriad other uses. As the digital and physical worlds converge, the practical applications of Blockchain will only grow.
- The exponential and disruptive growth of Blockchain will come from the convergence of public and private Blockchains to an ecosystem where firms, customers and suppliers can collaborate in a secure, auditable and virtual way. It is no longer a question of whether banks will adopt blockchain; but more of when and how they will implement it. Financial institutions and technology providers can feed off each other's ideas and experiments, while identifying areas of focus and avoidance. This will allow banks to identify and build key skill sets and use the collective knowledge to create a blueprint that will ease the seemingly inevitable transition to a blockchain-driven future. My belief is that banks must experiment with the technology in a controlled environment to discover the value it can bring in their context and based on the outcomes of the experiments commit towards production deployments and slowly crafting their organization's blockchain adoption strategy.
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