Blockchain - Interesting idea but what's it for?

A popular staple of business courses on innovation is the story of the Post-it-note, which started with a scientist at 3M accidentally developing a new type of glue. He spent the following five years looking for uses for his “solution without a problem” before a colleague came up with the idea of using the glue to anchor a bookmark. Then it took another six years and one failed product launch along the journey before 3M was able to make the product stick.

So what have Post-it-notes got to do with financial technology, other than perhaps their usefulness in requirements gathering and design workshops?

Blockchain comes to mind. Great solution! What’s the problem again?  A flurry of activity is currently focussed on finding problems for the blockchain solution with participants including start ups (Etherium, Digital Asset Holdings, Overstock t0), bank consortia (R3CEV) and established exchanges (ASX, Nasdaq) building prototypes. Despite the uncertainty and cost of research, the prize of potentially remaking significant sections of market infrastructure is proving too tempting to ignore.

Solutions have been mooted in all areas where there is advantage in simplifying existing infrastructure and speeding up processes. Areas include trade settlement, trade finance, private and complex contracts (i.e. syndicated debt), collateral management and margin processing. In asset management obvious areas would be transfer agency and fund dealing.

So which of these solutions might be ultimately successful? Sadly, we do not have a crystal ball, but we thought a series of simple questions might help cut through the hyperbole:

  • Does the solution require a fundamental change of mind-set? Technology is important but is ultimately an enabler for business. While some industries have been disrupted by technology innovation, the finance industry is conservative and guarded by powerful interests. Solutions that require customers or market participants to completely change business paradigms are much less likely to succeed.
  • Which organisations are backing the solution? The ambition of the solution will need to be matched to the ability of the participants. Large scale change will need the support of key participants in the industry.
  • Can the solution be implemented incrementally? Implementing new technology is often as much about building organisational capability as the technology itself. Solutions that can be built out step by step are usually more successful.
  • Is the solution being mandated by the regulator or some obvious and inevitable market forces? Given the conservatism and cost of failure in financial services, the case for change often has to be overwhelming before established and stable solutions are reinvented.

Given the size of the opportunity, it seems likely that blockchain based solutions will be adopted into the mainstream and become a key part of financial services infrastructure.

Will the more outlandish or revolutionary use cases play out? Who knows, but sticking with the Post-it-notes analogy we might say: Post-it-notes are great, but we wouldn’t recommend wallpapering an entire room with them.

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Andy Hope

Andy is an experienced consultant in investment management, change and risk management. He has over 20 years experience across a range of projects including operating model design, leading large asset pricing and derivative structuring teams, system selection and enterprise architecture.

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