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Blockchain... Prepare for change!

If you’re asking yourself whether the hype around blockchain is worth looking into it, the answer is yes. You should definitively try to understand what is the fuss about because there is a high probability that it will impact your work, your business or even possibly your day to day life much sooner that you realise, let me tell you.

 

Let me first demystify this concept – because Blockchain has become a concept beyond the technology itself – and make one point very clear: Blockchain is NOT Bitcoin. The Blockchain technology (commonly called blockchain) otherwise known as Distributed Ledger Technology has been invented to enable Bitcoin transactions, in a fully decentralised and transparent approach. Imagine a giant, decentralised, shared, replicated, synchronised and distributed database that records immutable electronic transactions in a secure way. You have the global picture of a blockchain.

 

The transactions are chronologically entered, shared and replicated between the participants and secured by cryptographic sealing making them very difficult to falsify. The ledger is synchronised periodically and blocks of transactions are verified and validated by peer monitoring. Every participant has a replica of the ledger and a private key that represents a legal identity. The blockchain therefore, allows traceability, authenticity, accountability, privacy, security and data handling.

 

The decentralised part illustrates the peer-to-peer transactions, and that, to me, is probably the most important idea to retain because it gives you a glimpse of the potentiality of the Blockchain as a transformative technology beyond the Bitcoin application. Even though no consensus has been reached on whether and how it should be applied to other markets, the idea of a decentralised ecosystem endorsed by the blockchain technology has started to flourish. We are about to enter a new era, repeating the same patterns as e-commerce: internet has allowed to intermediate consumers and consumers have become producers. Similarly, the Blockchain has started to create a paradigm shift in many industries and especially in financial services.

 

The loss of trust in financial markets since 2007, coupled with a fragmented, inefficient architecture are pushing towards a decentralised system.

So how the blockchain could answer inefficiencies inherent to the system while complying with new requirements – greater transparency, better management of risks and higher capital requirements – demanded by the regulators?

To start, you would have to define the technology you need – whereas the Bitcoin application works on a public blockchain, financial institutions are looking at private blockchain where only authorised parties could access the records for confidentiality purposes.

 

Then, define use cases. The technology will be applied to many departments; the question is where to start? For instance, Blockchain will be useful for KYC. We can imagine a secured, distributed ledger shared between a close group of banks and a regulator; this could help reduce duplication of verifications at the client on-boarding stage.

The other use case of blockchain implementation that is sort of obvious in terms of benefits is the post-trade application: by removing the intermediaries, the blockchain will reduce costs and time. A real time clearing and settlement process would remove the counterparty risk, mitigate the settlement risk and decrease the scope for data error.

 

Exciting, isn’t it? Of course those kinds of changes don’t come easy. And the technology being in its infancy, there is a lot of interrogations about the technicalities and the implications.

 

How to ensure anonymity, confidentiality and privacy – essential for financial institutions –while enabling greater transparency? Should you start by implementing small blockchain for different activities and scale up or participate in a consortium to avoid interoperability issues? If the Blockchain remove the middlemen what will be the roles of banks, custodians, clearing and settlement houses? What would be the impact on the whole architecture of the financial markets? Last but not least, to what extent the regulations around blockchain will impact its implementation?

 

Nevertheless, one fact has been indisputably acknowledged: The Blockchain revolution is on its way and will disrupt many industries but will not be implemented overnight. A wait-and-see strategy is no longer an appropriate response and every organization must prepare for change. This change will require a pragmatic, well-adjusted approach and an active early engagement of all the stakeholders.

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This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.

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