Today, business networks run by banks create profits by maintaining traditional ledgers to record intra-ecosystem transactions, transferring files and other types of financial data between business participants to create trust and uphold transactive value.
Yet, all too often, such transactions are beleaguered by inefficient and highly vulnerable underlying asset ownership and transfer processes. Current banking processes are simply too inefficient to be sustainable. While banks already know this, the biggest and most influential among them have, until recently, been too unwieldy, conservative, and bureaucracy-laden to innovate according to these needs.
Across the water, far from Wall Street and the halls of the New York Stock Exchange, change is brewing. Cells of secluded, low-key technical teams under such names as Citi Fintech and BNY Mellon Innovation Center quietly work, far away from their parent companies to undertake a single mission: develop banking apps, platforms, and software to help their employers rebrand themselves not as tech-savvy banks, but as tech firms that deliver financial services. The common thread: blockchain.
This is the second part of my eight part series on the impact of blockchain across industries, and you can read the first part here.
Citi and BNY Mellon are not alone. In the last 9 months of 2016 alone, $1.4 billion was invested globally in blockchain startups. In addition, 90% of all North American banks are exploring the integration of blockchain technology into their current activities. If integrated successfully with their asset ownership and transfer processes, blockchain would enable North American banks’ business network participants to share a single recorded system: an infinitely replicable, shared ledger providing consensus-based, encrypted, final and completely trustworthy asset transfer between business participants.
This singular capability of blockchain’s most popular banking use case, called distributed ledger technology, holds the key for permanently reducing cost and time, enabling 100% trust between any and all business participants engaging with banks across industries. Most compelling is that since the process is all digital. Integration, implementation and execution would all be relatively inexpensive.
Yet, with all this said, the most exciting aspect of blockchain’s applications in banking has nothing to do with the banks themselves. More to the point, blockchain’s most exciting application in banking is one that may make banks obsolete: decentralized transactions. The shared distributed ledger holds the potential for C2C (customer-to-customer), not just B2C (bank-to-customer) or B2B (bank-to-bank) banking applications.
With this in mind, any consumer, regardless of the sophistication or complexity of their business transactions, would be able to bypass any bank and transact with other individuals essentially unhindered. This opens up a large vault of questions regarding the continuing role of banks as the gatekeepers of traditional forms of value, and it’s why so many banks in the US are investigating or investing in integrating blockchain applications into their current activities.
Blockchain is also changing the face of investment, you can find out why here.
It’s also why all of the bulge-bracket banks, from JP Morgan to Goldman Sachs, have invested over $15 million each in blockchain startups and technologies for use in their future activities. Some banks are trying to drastically rebrand themselves as blockchain develops, since, as the probable foundation of the Web 3.0, blockchain—like the Internet before it—is poised to increasingly intersect with human life in all forms of activity and proclivity as has never been seen before.
Yet, while it’s easy to laud blockchain as the wave of the future as so many in the fintech space are doing, it’s more important for executives to understand that their own institutional cultures may inhibit their banks from adopting the technology. This is a problem, since foregoing blockchain may make any bank who chooses to do so obsolete. It’s important to remember that blockchain became famous among cryptographers because of its potential to dis-intermediate, destroy the financial system and make banks obsolete.
Peter Borovykh, a blockchain specialist at BlockchainDriven notes that banks will need to change in order to keep up:
“Given growing interest in blockchains from both public and private enterprises, banks have two main options to preserve a larger market share of their businesses: create a technologically advanced, trustworthy, transparent, and accessible solution that is so attractive to enterprises and individuals that it becomes a substitute for existing blockchains on the market, or launch and nurture partnerships with existing solutions such as Ethereum by making the network more adaptable for use cases, offering financial and business expertise and bringing leadership.”
It’s also important to remember that nothing is ever certain, especially in the context of transitioning whole industries over to new technologies that originated from startup companies. Last year, American Banker’s Saifedean Ammous pointed that out.
“…despite banks’ attempts to test and use blockchain technology for their own commercial gain, it is outside the realm of possibility for the technology to serve any useful purpose for the intermediaries it was designed to replace. That is akin to burdening horses with engines in the name of technological innovation: the approach would only slow down the horse and alleviate none of its problems. Such a ridiculous notion will find no real world demand.”
Banks are still trying, though. Just last month, Citi partnered with Nasdaq to introduce a pioneering blockchain-enabled global banking integrated payment solution. The partnership enables automated cross-border payments via link between Citi’s CitiConnect for Blockchain connectivity platform and the Linq Platform powered by the Nasdaq Financial Framework. Essentially, the collaboration between the two giants has created “a pioneering institutional banking solution,” tightly integrating blockchain via an integrated API by leveraging Citi’s massive global financial network.
Thus, while banks are beginning to make progress in integrating their functions with blockchain, such progress is and will continue to be slow. While outfits like Citi Fintech and others are starting to create and release game-changing technology, it has taken them between 8 and 9 years since Satoshi Nakamoto developed the first blockchain database to do so reliably.
Investors and consumers alike must continue to track and adopt such technology as it is released, since, as blockchain innovations continue to appear, disrupt, and change banking, it will eventually change the way everyone on the planet conducts business, transacts, and leverages currency to improve their quality of life.
Stay tuned for more articles in our 8-part cross-industry coverage of blockchain innovations in New York!