Views on the integrity of global capital markets
10 August 2016

Euromoney Blockchain Forum: A Collaborative Jump from Hype to Reality

Posted In: Market Structure

Recently, a series of blockchain-oriented conferences have collectively advanced the discussion regarding the business case for this buzzword technology. A few weeks ago, I attended the Euromoney Blockchain Forum in London at which several themes emerged. First, there has been a welcome shift towards developing and demonstrating concrete use cases for blockchain technology in financial services. Second, there is increasingly a sense of the likely candidates for initial, or at least early, blockchain adoption. Finally, there is increasingly a consensus forming around what the true motivation is for blockchain adoption in financial services.

Banking Models Are Under Pressure, and So Are Others

The motivation for adopting blockchain technology in financial services appears to have shifted from disruption and the creation of new business models towards simply making existing systems and business models more efficient, be it in terms of explicit costs or capital provision costs. This revelation may be disappointing to those who hoped blockchain would disrupt the industry, but it does help in predicting the early use cases. These early use cases will not necessarily be the ones with the most future potential, but rather they will be in areas that are currently under pressure to reduce costs. In the traditional “disruption theory” jargon, this use makes blockchain a wholly sustaining, not disruptive, technology.

Peter Randall, CEO of SETL, provides some context for the idea that interest in blockchain is essentially a defensive play. In his presentation at the Euromoney Blockchain Forum, Randall argued that a bank’s back office is next in line for a technological revolution (by comparison, the front office was already transformed by algorithmic trading in the 2000s). Making the back office more efficient is one way for banks to mitigate the lower revenues they are seeing from front office divisions because of capital requirements, negative interest rates, and fines from the financial crisis ($325 billion and counting) that are cutting into the bottom line.

Collaboration Will Be Necessary

Whatever the motivation for blockchain adoption, it is clear that most in the industry think that it will have to be done collaboratively or not at all. Ed Budd, Chief Digital Officer at Deutsche Bank, noted that the technology is so new that sharing brainpower is necessary to simply understand potential use cases and economic models, let alone technical implementations. All participants at the forum agreed that some common set of standards are necessary, further encouraging the collaborative approach. Simon Taylor, vice president of Entrepreneurial Partnerships at Barclays, cautioned that a few more years are needed to see who will set the standards and what they will look like, noting that standards are earned, not given.

Another new insight that seems obvious in hindsight was given by Devie Mohan, a FinTech industry adviser, who argued that the collaborative approach is the correct one to take because, in the medium term, blockchain infrastructure will become commoditised, and as such, owning the IP behind it will likely not be particularly profitable.

More Time Is Needed to Distil Use Cases: Trade Finance an Early Win

If owning the blockchain IP will be equivalent to owning some copper telephone cables, where will the real value in this ecosystem be created? The increase in business models and use cases being proposed globally faces some issues.

Jeremy Gelber, Global Markets Lead for Innovation at HSBC, noted that many companies with blockchain concepts do not need the blockchain for their use case or business model. In attempting to shoehorn the blockchain into their business, they are merely distracting themselves. Elias Haase, founder of B9Lab, similarly cautioned against having a blockchain hammer and thus seeing everything as a nail, suggesting that many proposals will simply result in an expensive, slow database. Thomas Labenbacher, managing director of Life.SRED Blockchain Fund, argued that even a customer use case is not enough: A realistic business model is necessary for a successful blockchain application.

Richard Crook, head of Innovation Engineering at RBS, outlined a framework for helping to understand what use case would likely work in the real world. Applications that currently have a single point of failure are good candidates for blockchain applications as are applications in which the incumbent cost base needs to fall. He also noted that although consumer payment applications are considered (including by myself) to be a non-starter in the United Kingdom, it is because UK consumers are spoiled with choices. In other parts of the world, and even Europe, that is not the case, and he was still bullish on the potential for blockchain to improve payment systems in these markets.

What became quickly apparent is that trade finance is the leading candidate for being the first to implement blockchain. Taylor noted that it was already logically centralised but technically decentralised, all that is left is digitising it onto the blockchain.

What About Asset Management?

To date, the asset management industry has mostly been on the side lines of the blockchain debate.  A report just issued by JPMorgan and Oliver Wyman argues that the industry is mostly hoping that cost savings or opportunities will trickle down and be taken advantage of without much need for speculative investment today. The report contends that this approach may be a mistake and makes the case for early engagement.

According to the report, the need for collaboration and early engagement will enable asset managers to help direct and design systems that will be most suitable for their business. A counter-example of what could go wrong was given at the forum by Rob Palatnick, Chief Technology Officer and managing director of DTCC. Palatnick noted that fund management in a blockchain world will still likely be done by intermediaries (whether robo-advisers or human ones). Palatnick also noted that by having equities trading done in a noncollaborative way on a myriad of distributed ledgers, the market would become even more fragmented than it is today, which could, in turn, lead to negative outcomes for investors.

Another interesting issue raised at the Euromoney Blockchain Forum regarding the asset management industry was that client onboarding is currently extremely burdensome and is one use case in which an industry-wide distributed ledger solution could yield significant cost savings. The general sense from the discussions at the forum was that data management and sharing, rather than any applications related to underlying assets, would be the main use case for distributed ledgers in the asset management industry. But for this use case to result in significant efficiency gains, it would need to be industry-wide, which returns us once again to something heard again and again in blockchain discussions — the need for collaboration.

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Image Credit: ©iStockphoto.com/posteriori

About the Author(s)
Sviatoslav Rosov, PhD, CFA

Sviatoslav Rosov, PhD, CFA, is an analyst in the capital markets policy group at CFA Institute. He is responsible for developing research projects, policy papers, articles, and regulatory consultations that advance CFA Institute policy positions, focusing on market structure and wider financial market integrity issues.

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