Blockchain will not solve all your problems

Away from the fanfare of cryptocurrency, bankers show optimism towards blockchain technologies. Many pundits, panels and surveys show the technology is top of mind for the industry.

However,  the general enthusiasm looks more like part of a zeitgeist rather than a systematic approach to exploration and implementation.  

In their basic functions, banks are big books that record information: who has how much, who paid whom, who owes whom and how much, was the deal completed and the like. Banks spend a lot of time and money making sure that if I move money from Bank A to Bank B, the big books of both banks are up to date and show the correct information.

With blockchain, bank A and bank B will have access to the same big book that updates in real time. This, of course, can streamline a lot of a bank’s work. Blockchain technology can also be applied inside Bank A to streamline internal operations.

This, of course, is exciting and industry insiders expect the technology to mature soon. 80 percent of market participants anticipate the technology will be operational in the next 6 years, according to a market trends survey by Deutsche Bank published last week.

Respondents were also asked to name the IT risks blockchain is most likely to help, resulting in the following list:

• System failure and market disruption (48 percent)
• Increasing regulatory requirements (36 percent)
• Legacy IT (36 percent)
• Inadvertent data disclosure (36 percent)
• Cybersecurity (31 percent)

When examining the general atmosphere towards blockchain, this list is very telling because it can be grouped into two main categories: data integrity concerns and infrastructure concerns.

System failure and legacy IT both fall under infrastructure concerns. Though it is not unreasonable to say that blockchain technology might increase resiliency, thus decreasing the risks of old IT systems failing, there aren’t many real life experiments with such applications. Initiatives to mitigate those problems are very effective without the use of blockchain technology.

It seems that respondents to the survey used blockchain as a catch-all phrase to mean “cool new technology”. It just stands to reason that the cool new technology will save banks from the not cool, old and clunky technology. This would explain why almost 50 percent of respondents cited such a down-the-line use case as system failures for the nascent technology.

Data integrity concerns, like inadvertent data disclosure and cybersecurity risks and regulation, are more viable use cases, but they, too, haven’t reached even proof of concept stages yet.    

The most tangible use case for blockchain in banking includes trade finance. Wells Fargo and Commonwealth Bank of Australia are testing a trade deal using chockablock technology. Cross border payments systems are entering their tween years with blockchain startup Ripple recently securing $55 million in funding from industry giants and some successful pilots. Clearing and settlement is seen as a field that will see some applications for blockchain, but no real movement has happened there yet.

Blockchain has the potential to change the way banking has been done for decades. For that reason, it might be more beneficial to curb the general enthusiasm, and focus on real tests and pilots.