Blockchain - the future?

In my previous articles I spoke about the opportunities Blockchain technology could bring and the challenges it is facing. But what is next?

Change is going to be gradual

Implementing Blockchain is going to take time. This is for reasons I’ve talked about before, and also because the world’s financial systems are predicated on such extremely high levels of stability that changes have to be introduced gradually and with care. This is why, for example, there are still major financial legacy systems running on COBOL, and this is also why it takes so long to migrate such systems to new technology. One of my first tasks at Clearstream for example was to investigate the business case for a project called "Mainframe decommissioning" – now, nearly ten years later, we’re still running a number of mainframe applications.

New players are harnessing FinTech to develop new solutions, and the number of new institutions being set up is a testament to the level of creativity and innovation taking place in this field. However, it’s important to bear in mind that the financial sector is necessarily a highly regulated space. Moreover, the current regulatory environment may not be particularly suited to the new Blockchain solutions being proposed by these new players.

As a second point, there’s no point implementing Blockchain-based solutions simply for the sake of doing things on Blockchain. Blockchain is one of several solutions to the challenges faced by the finance industry, and for some challenges a disintermediated solution may not be the most ideal one.

For example, it is difficult to replicate in a decentralized environment like Blockchain the role of exchanges as a centralized place to meet other traders, have trades match and thus have price formation occur. Collateral management of assets held on a Blockchain is also shaping up to be a complex topic in comparison to today’s setup. This is because currently Blockchain does not provide services such as position netting and leverage transactions, and trade participants have to pre-fund their positions before initiating trades. Interaction with non-Blockchain based tools will therefore in the future probably be provided by intermediaries in order to increase the efficiency of disintermediated Blockchain-based settlement.

The solution to these issues is for incumbents and startups to work together to identify and implement the right new technologies to solve current inefficiencies. Startups in this way benefit from the regulatory experience and stability of current market players, while these incumbents can harness the cutting-edge technology being developed by such startups to improve operational and cost efficiency. A high degree of cooperation between incumbents and innovators is the way to ensure that the diverse array of current FinTech innovations realize their full potential. Cooperation also ensures that the new solutions developed are capable of interacting with other legacy solutions, which are likely to continue to exist for some time.

Continuing role of intermediaries

It will be interesting to see how intermediaries adapt their business models around Blockchain. There will be a continued need for intermediaries in some areas of the trading lifecycle.

Blockchain itself also provides business models for new and different types of intermediaries – offering for example issuer and investor services, as well as loans and credit provision.

What does this mean for the future?

There’s little doubt that the advantages of Blockchain that we see today will be harnessed in the not too distant future. Within a five to ten year timeframe there’s strong potential for new business models emerging and significant increases in efficiencies. Old and new business models are likely to run in parallel, sometimes even within the same firm. Change is however going to come about incrementally and through cooperation between a wide range of different players adapting Blockchain and other technologies to meet their business needs. It’s in fact on this last point where FinTech in general has had is most catalyzing role – it’s providing a topic around which a wide range of different players can gather and discuss in order to bring more efficiency to the market. My colleague Marc has written on this point in more detail.

So that’s my two cents – we’ll see a gradual implementation brought about through cooperation. What do you think?

FYI: Do you like this article? My colleagues and I are blogging regularly about key industry topics and global market developments. Find all previous articles here.