Firm may have just killed the hype surrounding blockchain
Understanding of the distributed database's technology lags well behind the hype, says research paper
It seems every financial institution is ready to talk up the potential of blockchain – the technology that underpins the cryptocurrency bitcoin – but one firm has taken a more reasoned approach and warned about the "unrealistic expectations" that could arise.
A research paper commissioned by global financial messaging service SWIFT was published Monday based on interviews and focus group meetings with individuals from 75 organizations working in technology and post-trade processing.
The conclusion was that while blockchain – a distributed ledger technology – will be important, there is currently too much hype.
"Strong claims are now being made about the potential of mutual distributed ledgers to reduce costs and risks. A number of initiatives applying mutual distributed ledger to securities settlement are now being pursued, attracting substantial investment from both major banks and venture capital funds," authors Alistair Milne from the U.K.'s Loughborough University and Michael Mainelli from Z/Yen Group wrote.
"Understanding of the technology however lags well behind the hype, amongst practitioners, policy makers and industry commentators alike. 'Blockchain' technology seems to promise major change for capital markets and other financial services – some say it may ultimately prove to be as important an innovation as the internet itself – but few can say exactly how or why."
Banks in particular have been experimenting with ways to use blockchain tech to do tasks from clearing trades to creating contracts.
A firm called R3 has brought together a group of the world's biggest banks including JPMorgan and Citigroup and is dedicated to researching and delivering new financial technology. Meanwhile, Digital Asset Holdings – a firm run by former JPMorgan executive Blythe Masters – is developing blockchain technology that can be used by the banks. Earlier this year, the company partnered with JPMorgan to explore the technology.
Masters has said that various forms of blockchain technology will be "deployed in a commercial setting in less than a couple of years", highlighting the optimism in the industry about its uptake.
And the authors of SWIFT's paper clearly see a benefit too, suggesting blockchain technology provides the industry "with an opportunity to harmonise business processes and address many long-neglected inefficiencies in post-trade and other financial operations".
Still, SWIFT's paper dispelled a long-held myth about blockchain – that it would get rid of third parties in trades. The idea is that two or more parties would be able to use blockchain technology to carry out a trade and this could all be done without the need for any other interference. But SWIFT said that a central third party role would still exist, albeit more narrowly, as a mean of confirming identity and existence of an asset, as well as dispute resolution and enforcing legal obligations.
And financial institutions will need to overcome some challenges to welcome blockchain technology. One of those is opening up and sharing data in order for these databases to work, according to the authors. For example, if four or five banks want to be involved in a trading transaction via a blockchain, they will need to be willing to share certain data that they may not have done in the past.
Using blockchain technology would also mean a "re-engineering of business processes across multiple firms", something that could be time-consuming and costly but ultimately beneficial in the long-term.
Essentially, the adoption of blockchain in financial trading, will require an industry-wide effort.
"While blockchain offers the potential to transform the industry, fully achieving these benefits will require board level buy-in to a substantial commitment of time and resource, and active regulatory support for reform of business processes, with relatively little short term payoff," SWIFT's report said.