17 October 2017
John Bertrand

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John Bertrand - SAP

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Blockchain: Time To Get Your Feet Wet

13 January 2017  |  9780 views  |  0

If you haven’t dipped your toe in the blockchain water yet, then it’s time to start.  Your competitors are.  After all the talking and evaluating in 2016, we’re now seeing banks embark on pilot projects, accelerating the blockchain revolution. So if you’re considering something similar (and you should be), I thought I’d outline a few obvious areas that are ripe for blockchain pilots.

In general, I see three immediate areas – Payments, Trade and Capital Markets – where you can create industrial pilot solutions.  These pilots can bed down, grow in scale and make the regulatory comfortable with steady progress.

And because these areas are typically involved with the core process, once underway, chances are the powers that be within your bank will let them continue to run.  Banks rarely uninstall activities once they’re up and running. That means your pilot, coupled with cloud technology, can be installed with minimum interference with legacy systems.

Cross currency payments pilots, especially where the ‘Lender of Last Resort’ is clearly known, are an easy place to start as they’re pretty much ready to go.  The lender of last resort is the Central Bank for a given currency, and for the corporate, it is the Group/Board of Directors. If you’re in any doubt as to the need for such a function, the current banking issues in Italy are a motivating reminder.

Blockchain’s inherent benefits include no middlemen. By having currencies such as Bitcoin, where there is no Central Bank (middleman), payments can be moved instantly just like a domestic currency. An excellent pilot would be between two central banks. Here, you can discover the real benefits of blockchain at an increasing volume across two currency sets seamlessly linked and with currency owners embedded. The EBA has announced a consultantion to provide real time settlement for instant euro payments

We are seeing a number of POCs now underway between banks and corporates, who own subsidiaries in other countries, utilising blockchain in multi-currency movements. A pilot involving multiple and bi-lateral netting, for example, could demonstrate blockchain’s security and efficiency.

POCs in trade are also going well. The concept is proven with ethical finance, which has fuelled interest. If you’re considering a pilot in this area, you need the underlying technology to scale volume. Volume brings anomalies which will need addressing. But, again it should not impact the day to day running of the bank. Scaling the trust and provenance guarantees blockchain can run alongside the legacy systems. In my experience, most banks are expert at linking data from one system to another, and have more IT professionals than some of the largest software companies.

No discussion in this area would be complete without mentioning the Capital Market and Investment Bank (CMIB) sector, which McKinsey noted as having an inescapable reality that is restricting efforts and is yet to produce sustainable performance with costs remaining high. No surprise here as every bulge bracket bank has developed one off, custom crafted systems and now maintenance is taking the majority of the IT budget. 

CMIB has some great blockchain POCs underway. In my view, this is an area ripe for collaboration for pilots, such as syndicated lending - after all each member already knows each other.

Likewise, there are many back office functions that have grown over time which blockchain can automate and provide certainty.  It’s worth considering collaborating on blockchain pilots for ‘utility’ functions to diminish costs, improve trust and certainty, and increase security in a world of increasing cybercrime.

Regardless of where you start, I’d urge you to do just that - start. Let the revolution begin.

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