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For all the talk about blockchain, what is really happening?

For all the talk about blockchain, what is really happening? Photo: maradon 333, Shutterstock.com
Written by Chris Skinner

There’s a lot of talk about blockchain, yet very little action. Chris Skinner looks at the current state of ‘disillusionment’.

There’s a lot of talk about blockchain. A lot. Loads. But when you get past all the talk, what is actually happening with blockchain? Answer: not enough.

I say this because there are some standout firms out there, such as R3, Digital Asset Holdings, and Ripple, who have gained traction with the banks, yet the banks are still unsure of their commitment to blockchain developments. Talking with several, they see their commitment was funding these firms to do the work for them. Now that they have funded, they feel that’s it. Some are actually scaling back their internal blockchain developments on the basis that the industry needs to create the capabilities.

The problem with this view is that there is no industry to create something – just a few major players who can push the button that the rest then need to follow. That’s why the involvement of the JPMorgans and HSBCs of this world in these early project developments was of interest, but now those commitments are in question.

I say this because of the lack of any real consortia to create a shared system, and without sharing, blockchain developments will come to nought. After all, blockchain protocol is focused on building shared ledgers on the internet, and shared ledgers require the banks to come together to create shared structures. Unfortunately, from where I stand, the banks are not doing that. I thought they were doing it with R3, and R3 is certainly developing something of interest, but there are already questions from some of the banks in the consortia about R3’s direction: “Blockchain startup R3 is raising $200m from big banks – but one of them is ‘throwing stones’.”

The questions about direction started when R3 announced Corda, its version of blockchain developed specifically for the banking system. If you didn’t see the announcement at Money2020 in Copenhagen, you can read more at R3 CTO Richard Gendal Brown’s blog. In summary, what R3 announced is a new version of blockchain that keeps the best bits of the original protocol, but has adapted it to meet the needs of complex counterparty clearing structures in the banking system. The key features required by the banks include:

  • no unnecessary global sharing of data: only those parties with a legitimate need to know can see the data within an agreement
  • choreographed workflow between firms without a central controller
  • consensus between firms at the level of individual deals, not the level of the system
  • the design directly enables regulatory and supervisory observer nodes
  • transactions are validated by parties to the transaction, rather than a broader pool of unrelated validators
  • supports a variety of consensus mechanisms
  • records an explicit link between human-language legal prose documents and smart contract code
  • is built on industry standard tools
  • has no native cryptocurrency.

So the first question that comes to mind is: does the R3 Corda development negate all other blockchain-based developments in banking? Does this destroy the Hyperledger Project (no, as R3 is involved there too)? What does it mean for Ethereum? Will Ripple still make ripples?

My answer is that it’s too early to tell, and we need to watch with caution the developing blockchain space in financial services. In fact, having rocketed through the hype cycle during 2014-2015, it is my belief that blockchain has now entered the trough of disillusionment. This is made clear when you realise that blockchain is like big data and cloud. A lot of talk, but little action at first.

In fact, if I correlate blockchain with cloud, it took a good seven years for cloud discussions in banking to move from what the hell is it? to I don’t trust this, to does this make sense? to OK, let’s create a cloud project, to shall we try this out? to let’s implement cloud as it saves us millions.

For me, blockchain is in those early day sections of the bank. Most bankers I talk to are trying to get to grips with what the technology is and whether it makes sense, but few have reached the point of implementation or commitment. Until they do, no shared ledger project is going to work, because it needs a consortia of firms to make a banking blockchain structure work. Once again, shared ledgers only work if they’re shared.

This is when I come back to look at the key players who offer shared infrastructure already for the banks, such as the ECB and Swift. The reality is that these organisations should be at the front-end charge of making blockchain work if it’s going to succeed. Yet, neither organisation has made any key commitment to the technology, apart from Swift joining the Hyperledger Project. However, this lackadaisical approach begs a critical question: if R3 develops the shared infrastructure using blockchain-based principles for the next-generation financial system, will Swift or the ECB have a role in that new system?

Another big question raised in my mind recently is the real impact blockchain might have on our incumbent institutions – not the banks per se, but the bank controllers. Central banks and central counterparty clearing systems surely become a bit of an anomaly in a decentralised world. Can you still have central structures in a decentralised world?

Just wondering.

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo: maradon 333, Shutterstock.com

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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