Future of blockchain for financial services
I clearly remember when I bought my first Bitcoins back in 2011: just three, for around a hundred euros, to get a feel for this strange new currency. For me, that moment was career defining; while I certainly didn’t become a crypto millionaire, after a few days of hard maths and complex theories, my hundred euro investment led me to a new passion: the revolutionary ‘chain of blocks’ connecting those digital assets.
Fast-forward seven years and I stand by my original assertion that the underlying blockchain technology actually out-values the new currency; in fact, it could change the world. So why do I say that? Let’s look at some applications and examples of blockchain in financial services.
Blockchain is the first technology that offers a way to fully manage digital assets in a trusted, traceable, automated and predictable way. What distinguishes blockchain is that each ‘block’ is linked and secured using cryptography. Trust is distributed along the chain, eliminating the need for a trusted third party to facilitate digital relationships.
Bitcoin was an early and famous application for managing digital assets. The second application of blockchain is ‘smart contracts’ whereby contracts can be maintained and managed entirely digitally between participants.
Enabling digital transformation
This ground-breaking technology does, however, come at a price, because the whole network needs to invest in it to achieve the necessary levels of trust to make it secure. Given Bitcoin’s particular profile and less reputable associations, other blockchain innovations have emerged that have trust built into the network through the power of reputation. The result is a third application of blockchain: the digital ledger. This is a simple distributed database where an undeniable sequence of events can be logged, possibly as a foundation for automated business process handling.
The technology is flexible for all sorts of purposes, for payments, retail banking, investment banking, corporate banking, corporate treasury and risk and compliance. It can truly strengthen (or replace) most of the financial or legal facilitation that is currently offered by banks, governments, or the notary.
Given that blockchain is a versatile automated solution that can be applied to a broad range of business processes, value chains and even business models, its value - as the final piece of the puzzle for fundamental digital transformation - seems clear.
Challenges to address
If blockchain is such a great and unique new tool, then why isn’t it a mainstream service yet? There are two key challenges that need to be addressed for blockchain to enter the mainstream.
Firstly, interoperability. There is no one blockchain to serve all purposes and requirements. And on top of that, if the financial services industry has taught us anything, it’s that there is great value in creating networks of service providers rather than multiple platforms.
The second challenge is sustainability. There is no way that a consensus protocol like the one used for Bitcoin can offer a long-term solution to high-volume transaction processing because of the huge amounts of energy it consumes. This makes it too slow, resource-intensive and difficult to scale. While some work has been done in developing alternatives, there is not yet one that has gained enough traction.
Blockchain is clearly a promising technology that needs to get out of the lab and into business. Most predictions are that this will happen within five to ten years. While I like to think that five years is closer to the mark, blockchain’s maturity still has some way to go.
Digital Vision for Financial Services
This article is part of the Atos Digital Vision for Financial Services opinion paper. We explore the challenges and opportunities in a newly disrupted space for banks, insurers, FinTechs and technology incubators, who are today experiencing an unprecedented rate of technological and regulatory change.