Though cryptocurrencies such as Bitcoin have received mixed responses from the financial services industry, the underlying distributed ledger technology, blockchain, received a lot of positive buzz in 2015. If it lives up to the hype, blockchain has the potential to deliver significant transaction cost savings – including for inter-bank transactions, foreign exchange trading, maintaining digital records of diamonds, digital transfer for ownership of assets, and near real time securities settlement – and the ability to make secure, efficient, near real-time settlements. Further, the decentralized nature of the ledger backed by multiple miners make the transactions immutable.
Here are some examples of why I call 2015 blockchain’s buzz year.
Consortiums of banks, technology companies, and start-ups came together to work on blockchain’s proof of concepts (PoCs) for the financial services industry. The level of collaboration being witnessed in the industry points to the simple fact that the blockchain technology cannot gain widespread adoption and faster time-to-market without common technology and process standards:
- The resource-pooling participants in the recently announced Open Ledger project include premiere technology and financial services players such as Accenture, ANZ Bank, Cisco, Digital Asset Holdings, IBM, IC3, Intel, JPMorgan Chase, the Linux Foundation, London Stock Exchange Group, Mitsubishi UFJ Financial Group, R3, State Street, Swift, VMware, and Wells Fargo
- R3, the bank-led consortium developing the use of distributed ledger technology in financial services, has 42 global banks as members, and is now looking to extend its activities to work with buy-side and non-bank institutions in 2016
- Kynetix, a post-trade technology company has launched a blockchain consortium focused on using distributed ledger technology in commodities markets.
Financial services enterprises not only doing R&D internally, but also partnering with Fintech startups to develop blockchain’s PoCs to explore use cases for this new technology. In 2015, banks and banking firms (such as Bank of America and Goldman Sachs) have filed patents in the blockchain technology space:
- Barclays has two blockchain labs in London, and is also working with several startups, such as Wave
- Citi has multiple prototypes for internal testing, and has also created its own cryptocurrency called Citicoin
- Japan’s SBI Sumishin Net Bank recently announced that it will develop a PoC aimed at exploring blockchain banking
- Visa Europe’s innovation hub partnered with Epiphyte to develop a PoC for using blockchain for international remittances
- Nasdaq launched its blockchain product, Nasdaq Linq, in October to trial blockchain technology.
Fintech startups are changing the game
- Fintech startups are playing a key role in the blockchain technology ecosystem by demonstrating the advantages of the technology and by evaluating the limitations of the technology at its current maturity level
- Fintech startups have invested themselves in exploring different use cases for the technology, highlighting the fact that the technology has widespread application but also that it has a long way to go before it matures.
In the IT service provider space:
- IBM is the front-runner in blockchain R&D investments
- Capgemini has introduced its own digital cryptocurrency, called SRTCoin, to experiment, test, and learn about the technology behind cryptocurrencies
- Deloitte’s Rubix provides a use case development offering that includes ideation to implementation services. It also has a blockchain as-a-service offering, which has the technology infrastructure and blockchain architecture to enable quick adoption
- Indian service providers such as HCL, Infosys, TCS, and Wipro have demonstrated limited capabilities to enable their financial services clients to experiment/adopt blockchain technology. Their contribution includes research papers on this topic.
Blockchain as a service:
- Microsoft has been steadily building its blockchain-as-a-service offering on the Azure cloud. It has roped in partners such as Ethereum, Factom, and Ripple
- Deloitte also has a blockchain as-a-service offering
- The as-a-service model can enable enterprises to reduce the failure risks with blockchain experiments, while simultaneously abstracting the complexities of the technology to enable faster adoption.
What can we expect from the Blockchain technology space in 2016?
- A major barrier to mainstream adoption of Blockchain by financial services enterprises is IT service providers’ lack of capability in this space. In 2016, we should see vendors accelerating their investments in building capabilities around implementation of blockchain technology – those that don’t may risk losing out on a key opportunity
- Collaboration in the industry between financial services enterprises, technology service providers, and technology startups to drive mainstream adoption of blockchain technology
- Increased focus and concerns on security as industry moves from PoCs to ready products
- An increase in collaboration among the financial services players to drive common standards, and in the number of blockchain innovation challenges, workshops, and startup incubators by leading financial services firms
- Market consolidation, regulations, and an increase in use cases of the blockchain application.
What do you think? Will blockchain pass the 2016 litmus test, making 2017 the year of Blockchain in action?