When the 2017 Accenture report that claimed blockchain in banking could see a reduction in infrastructure costs for eight of the worlds ten most prominent investment banks by an average of around 30 percent was released it was just one instance that had fed into hysteria over blockchain technology.
Savings of anywhere between USD 8 billion and USD 12 billion in annual savings were being mentioned, and banks seemed to be taking the potential seriously, as annual spending on blockchain technology was estimated to be around USD 1.7 billion according to a report by Greenwich Associates.
Is the bubble bursting?
Despite this, we have seen a number of capital markets projects being delayed or even shelved indefinitely.
Could it be the case that much like cryptocurrencies themselves in some peoples eyes, the technology it runs on is merely a bubble that is in the process of bursting as well?
There are definitely a few blockchain in banking projects out there, some of which were highly-anticipated, that have seemingly run into issues.
Digital Asset, founded by former JPMorgan executive Blythe Masters has been working with the Australian Stock Exchange since early 2016 to implement a blockchain system to deal with clearing, settlement, and various other post-trade procedures.
The ASX claimed at the time that the project would help to reduce risk, cost, and complexity by way of an improved record keeping system with less requirement for information sharing between multiple databases.
Earlier this month the ASX announced that the project was to be delayed by around six months, saying in a consultation report that “while there was general support for this new functionality, there was a common view in responses that too much new functionality was being proposed to be implemented in too short a timeframe.”
“It was argued that this would result in increased complexity and risk across project phases and in the implementation timeframe.”
Using traditional technologies instead
Digital Asset was also working on another blockchain in banking project with The Depository Trust & Clearing Corporation, who is recognized as the most significant financial transaction company in the world.
The aim was to use blockchain technology to help improve clearing and settlement of repurchase agreement transactions, but this project has now been abandoned entirely, with a DTCC spokesperson saying that “after consultation with banks and other financial institutions, we found that the desired scope and business objectives of the start-leg repo project could be achieved using traditional technologies.”
Despite this cancellation, the DTCC is continuing to work with Digital Asset on other projects, as well as working on a trade-records system for the derivatives market in partnership with IBM and FinTech companies R3 and Axoni which has been described as “progressing well.”
NEX is another company who have been rethinking their blockchain in banking project, as they tried to put together a distributed ledger that could be utilized across the entire lifecycle of a trade.
Now they are targeting the project only towards payments and settlements instead, with the reason given by someone claiming to be close to the project as “so banks aren’t forced to change their entire infrastructure.”
The more skeptical out there when it comes to blockchain in banking are asking if the finances invested in exploring the technology has been money well spent, with talk last year of developers who specialized in blockchain technology earning anywhere up to USD 500,000 on an annual basis.
The founder of blockchain startup Setl, Peter Randall, commented in June last year that “it’s hard to see how people make a return on that investment.”
Is it a worthwhile investment?
Upon the change in direction by NEX they have declined all opportunities to comment on the possibility of staff being let go, but the individual who was close to the project telling Financial News that their decision “changed the composition of the team.”
Andres Choussy, CEO of NEX’s Traiana commented that “In order for the banks to generate the savings, they either need to be able to actually streamline specific processes, reduce headcount, eliminate reconciliations or effect an actual saving in their operational costs.”
“And if they can’t do that, it’s just not a worthwhile investment.”
There are a lot of theories as to why the finance industry, in general, hasn’t taken as much advantage of blockchain technology as it could have, with the more popular of those theories revolving around banks being, for the most part, highly regulated and conservative institutions.
Blockchain in banking would mean a level of transparency that it seems many institutions aren’t entirely comfortable with at this point.
It could also, in theory, result in the banking institutions themselves becoming less relevant, as blockchain technology removes the requirement for a trusted intermediary.
There is sometimes a portrayal that blockchain in banking is a no-brainer, and that there is only upside for the banking institutions that choose to implement the technology, but that isn’t the case.
Any technology that could dilute the requirements for banking institutions poses a particular risk to those institutions, and as such, it wouldn’t be as easy a decision to make as many of us may think.
A tipping point yet to come
Finance hasn’t given up entirely on blockchain technology by any stretch of the imagination, it’s still very much in the discussion, but there may be a tipping point that’s yet to come when banks see less of a risk in using the technology.
Banks are conservative and generally risk-averse.
Oliver Bussmann, founder of Bussmann Advisory and former CIO of UBS summed it up nicely when he said –
“The question many banks ask themselves is, ‘Is there any emerging competition going after my market share?’”
“As long as the banks are profitable there will be no change in behavior.”
“At the moment the threat level is low because there is not enough competition. So why would you change your business model?”
Lover of all things crypto, blockchain and AI, professional tech scribe & part of the editorial team at Crypto Disrupt.