JOIN USIn the first week of May 2016, an Australian computer scientist Craig Wright declared that he created the Bitcoin under the alias Satoshi Nakamoto, ending years of speculation about the crypto currency’s secret inventor. Not for long. Barely three days later, he reneged on his promise to provide evidence to back that claim.
This is just one more controversy in a long list surrounding Bitcoin, the world’s best known virtual currency, which has sparked a furious debate across financial services, technology, political and civil liberties organisations. Yet it continues to exist. What’s more, Bitcoin is going beyond its alternative currency status to exert a much bigger impact through its underlying technology, Blockchain.
In a few short years, Blockchain has come to be recognised for its potential to create a fundamental, disruptive shift in the way financial transactions are processed, making them safer, faster, cheaper, more accurate and tamper-proof. Its potential impact is such that Blockchain is now being regarded as the biggest disruptive phenomenon since the internet. While a number of technologies, including the SMAC stack, have transformed banking and financial services delivery, none have promised to challenge the operating principles of banking transaction and book-keeping. Blockchain does this in style, questioning the very premise of centralisation by ensuring its transactions are inherently trustworthy, peer-to-peer, and signed off online by counterparty institutions. The technology takes out the centralised authority in a financial transaction — from stock exchanges to clearing houses — and plants its network instead to play that role.
Blockchain is comprehensively automatic; reconciliation is based on consensus and transactions can be traced and audited without causing disruption. Because Blockchain transactions are consensual and traceable in nature, they are inimical to fraud. And they can facilitate a huge range of transactions in areas such as derivatives clearing, KYC, AML, smart contracts, securities assets servicing, payments and remittances, trade finance, post-trade processing, repurchasing, debt distribution and invoice financing.
This is why in a recent report, the World Economic Forum predicts that Blockchain (and Bitcoin) will reach a tipping point by 2027, when 10% of the global GDP will be stored on that technology, a huge jump from the current 0.025%. Listing out the various positive impacts of Blockchain, the report says that it will spread financial inclusion in emerging markets, disintermediate financial institutions by creating new services and value exchanges, massively increase tradable assets, improve record keeping in the emerging world’s property market, make contracts both smart and non-repudiable, and above all, increase transparency of transaction.
Recognising the inevitability and force of this disruption, 42 of the world’s biggest banks have joined a consortium called R3 CEV to define the protocols and standards for using Blockchain in the financial services domain. SWIFT is looking to use Blockchain to secure transactions on its network. The UK’s Central Bank is seeking to leverage Blockchain in clearing transactions, while the RBI thinks it could be very useful in mitigating check fraud. Singapore and Ireland recognise its potential to reduce fraud and improve transparency. But arguably, the most adventurous nation is Tunisia, which is replacing its digital currency eDinar with a Blockchain-based avatar.
What is the way forward?
We now know that this technology is revolutionary because of its ability to build an ecosystem that would transcend geographical barriers, its automation capabilities and the enormous cost benefit that could translate to the consumer.
In the coming months, we will see a lot of banks and financial institutions actively experimenting with this technology in various business domains such as open account, letter of credit, invoice financing, payments, remittances and more. While many are already dabbling in Blockchain and establishing proofs of concepts, the technology will soon move out of the controlled environment. To testify the true performance improvement in business processes, commercial usage is a must and therefore, we will see a lot of institutions gearing up to implement this technology in real time.
What should banks really do about this technology?
The industry saw the internet revolution a few decades back, and capitalised on it to create the digital world of today. Similarly, Blockchain technology has to be treated like a positive disruptor. While it offers immense potential in a lot of areas, banks and financial institutions need to leverage it in chosen business areas, where the impact of this technology is the most. With any change comes uncertainty. Blockchain is undeniably causing a furore in the banking and financial services industry and at the same time it is creating a doubt about its viability. Having said that, we at EdgeVerve believe that the industry has to take this opportunity. As the very distinguished Jared Diamond once said — “Technology has to be invented or adopted.”
It is not too long before we will see the true potential of Blockchain come alive in the financial services industry.
(The author is Associate Vice President and Head — Finacle Product Strategy)