As two people who have been working closely with blockchain for a while now – me as a fintech adviser and former Group CIO of UBS, Nick as the CEO and founder of Credits – we have no doubt about the technology’s potential to radically transform the financial industry. A far better way to build and maintain interconnected ledgers – the heart of the financial system – it seems predestined for the job.
Yet, while banks and fintech companies around the world are busy developing blockchain-based solutions, we are likely to see blockchain “go live” in other industries first. This is something of a paradox, so we think it’s worth a closer look.
Regulation, regulation, regulation
As I can attest to from my own experience, the main drag on implementing innovation in financial services is regulation. As part of one of the most highly regulated sectors in the world, banks will need to wait for regulatory certainty on any number of issues before they can release blockchain-based platforms. Stringent rules regarding collecting, storing and sharing customer data add layers of rigorous validation, verification and internal sign-off on top of the regulatory approval.
Even though many regulators are actively supporting banks in exploring blockchain, this is simply not an environment geared to early adoption in the wild.
The fact that banks are coping with dwindling IT budgets, as well as heavy legacy IT investment, is an obstacle as well. As, to an extent, are legacy mindsets: the financial industry is heavily invested in centralised models. Blockchain represents the opposite worldview.
We believe blockchain will be implemented first in more lightly regulated sectors, particularly those which face challenges in managing data access control and ensuring data integrity. This can be sensitive, personally identifiable information (PII) such as healthcare records, competitive secrets or other internal corporate data. Or it could be intellectual property, as with managing copyright for music or art.
Areas poised for takeoff include e-government, supply chain management and finance, insurance, real estate and the Internet of Things. BHP Billiton’s announcement last week that it was using blockchain to improve its supply chain processes is a perfect example of how this is already happening.
Useful use cases for all
At Credits, Nick has been observing this trend closely, too. The company has been exploring a number of use cases outside of financial services, such as proof of identity, procurement processes and interdepartmental payments. It recently worked with a client on a corporate identity blockchain solution.
Credits has also been very active in e-government, where blockchain has the potential to inject trust and accountability into many processes. This includes providing means to share sensitive personal data between departments that prevents data leaks, while still allowing for data integrity checks.
The good news for banks is that many non-financial use cases also provide compelling first customers for the eventual financial ones. If we can solve supply chain management, for example, then we’re not far from solving supply chain finance.
So while we may not see distributed ledgers taking over in financial services right away, this shouldn’t be interpreted as meaning it will never happen. When it comes to blockchain and banks, there is no escaping destiny.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo: Unsplash.com