It’s only been a short time since I left the world of traditional banking and, as an early advocate of “Blockchain” technology in that traditional world, I thought it might be interesting to write about it from the outside. To me, there seems be a disconnect between the entrepreneurs and technologists driving the technology and (us) bankers and I hoped an article written from the perspective of a traditional world, non-technical proponent may prove thought-provoking. I teamed up with TechVision Research to put together a complete paper on my thinking. Below is an outline of that.
The primary goal for most Bankers these days is regulatory compliance closely followed by cost reduction. And it is in light of both of these that I saw huge potential in Blockchain. I believe that some variation of “Blockchain” technology has a huge potential to reduce cost and improve efficiency in the operational and risk aspects of banking, and at the same time improve the transparency and auditability required to demonstrate that regulatory obligations are met. Moreover, bankers do not want to use Blockchain to remove trusted third parties – they view themselves as those third parties.
The fundamental premise of the paper is that the shared ledger aspect of Blockchain can drive a massive process efficiency improvement helping banks move from a process-centric reconciliation methodology to a more data-centric orientation. Thus Blockchain for banking is predominantly about a change in architectural and business process thinking. In this data-centric arrangement, processes associated with copying and moving data between applications are no longer required and applications may directly access a single, centralised data store. The data-centric model eliminates the need for multiple copies of the same information to be stored in individual silos leading to a massive reduction in the need for reconciliation processes. Further efficiencies could be obtained by creating “smart contract” representations of financial products that manage their lifecycle.
However, not all banking data can be combined into a single traditional database due to myriad of privacy/regulatory reasons. Thus, the shared ledger is not the only important aspect of Blockchain from a banking perspective. The distributed nature of Blockchain means that physical local storage requirements could be met (i.e. jurisdiction x wants data stored in their country) and judicious use of cryptographic keys and, potentially, smart contracts could ensure that the data is only available to users (jurisdictions) with the appropriate permissions.
Finally, use of Blockchain technology will create an immutable audit trail of all actions on any financial product in a bank. This will help banks prove to regulators (and ultimately their customers) that they have control of their processes and have carried out all actions as promised. It’s almost ironic: banks, who basically do not wish to be displaced as the trusted third party by the trust mechanism inherent in Blockchain, may ultimately be able to use that trust mechanism to prove that they are, in fact, trustworthy!
For me, Blockchain for banking is about a change in architectural and business process thinking. There are many benefits for the financial world, and for them to be realised not all features of Bitcoin or any other Blockchain need to be included. I think it will be hard for banks to implement without a fundamental rethink of their business (process) model. And that rethink will require them to act in isolation initially as they figure out the impacts and then slowly start to collaborate with any partners. A link to a 15 page excerpt from the research is here: Banking Executive’s Guide to Blockchain