In June, we’ll pass the two year anniversary of oft-cited research estimating blockchain could reduce banks’ infrastructure costs by $15-20 billion per year by 2022.
While our team staunchly supports innovation, the last two years of blockchain fever have been clouded by smoke with little fire, leaving three key hurdles in front of financial institutions demanding fast and efficient post-trade solutions today, not five years from now:
Blockchains – whether public like the Bitcoin or Ethereum blockchains or private (“permissioned”) networks – require a critical mass of participants to be effective. If only a few institutions participate in a blockchain network, transacting with non-network institutions will require maintaining two systems and harmonizing their datasets.
This level of fragmentation isn’t just burdensome, it infuses entirely unacceptable levels of operational risk. And while inefficiency has certainly become a mutated component of institutions’ DNA, the most mature blockchains (mostly public networks) require a radical overhaul to banks’ standards for data privacy and sharing.
Despite anonymity of the actual parties when on the blockchain, financial firms require confidentiality in the amounts, timing and other details (such as currency) of transactions for the protection of their own business dealings and their competitive strategies.
I don’t know many C-level executives that are comfortable with the irresponsibility of putting their post-trade settlement functions on the same decentralized platform that hosts takeout ordering services. These privacy and information security concerns have challenged regulators to plot a multi-year course for a technology that at its core relies on active disruption, innovation and experimentation.
It’s like pathologists trying to develop a flu vaccine for the 2025 season. They may wind up with the right mix, but any vulnerability can become catastrophic.
Regulators’ plodding, methodical course often draws the ire of frustrated start-ups and institutions that want to move their technology out of the lab and into a live environment. But policy requires shrewd, calculated maneuvering to ensure that when banks do transition their enterprises to a blockchain, investors and stakeholders will not be rashly exposed to these operational hazards.
A shared, permissioned ledger that works with the existing rails of financial services, is the optimal route while the battle of the blockchains is fought and victor(s) are crowned. But without the luxury of the expansive balance sheets and stores of operational resources of days gone by, institutions can’t afford to wait for the prophetic revolution to post-trade processing.
Ledger-agnostic payment systems capable of working on any existing system within current operational workflows, but still equipped to capture the efficiencies of a blockchain-enabled future, ensure that institutions won’t be cuffed to a legacy system or bolted onto a single blockchain.
Seamlessly recording the movement of money and assets, from issuance to settlement, isn’t a pipedream years away. It’s a reality now, and we’ve engineered it.