Blockchain: A Reality Check

We are forever being told by the press that blockchain is the answer to all the problems of banking. But decision-makers across the industry are starting to question the relevance of this technology, providing a useful reality check.

According to Accenture, blockchain could reduce infrastructure costs for 8 of the world’s 10 largest investment banks by an average of 30%, translating to $8bn to $12bn in annual savings for these banks. It’s great to see banks taking technology seriously, but the kind of waste we are seeing is shocking. Executive committees are shelling out billions on blockchain projects on the basis of little more than vague promises.

Just as the crypto bubble has burst in retail, so too the blockchain bubble has popped in wholesale. Many of the big blockchain projects for capital markets are being delayed or cancelled.

Digital Asset, a blockchain startup founded by former JPMorgan superstar Blythe Masters, has been working with the Australian Stock Exchange to put its post-trade activities on the blockchain. Blockchain proponents believe that their approach reduces complexity, but it tends to do the exact opposite. So it came as no surprise when the ASX recently announced that project would be delayed due to “too much new functionality […] to be implemented in too short a timeframe” resulting in “increased complexity and risk across project phases and in the implementation timeframe.”

NEX Group, which owns electronic trading venues for bonds and currencies, has downsized its blockchain activities so banks don’t have to be “forced to change their entire infrastructure”. And a trial to improve repo clearing and settlement via blockchain has been shelved by the Depository Trust & Clearing Corporation. They found “the desired scope and business objectives of the start-leg repo project could be achieved using traditional technologies.”

We’ve been saying this to clients for years. Having started Origin in the midst of the bank blockchain hype of 2015/2016, we’ve seen this technology touted as the answer to every problem in finance and we’ve always been incredibly skeptical.

We build technology. That’s our day job. So we know how hard it is to build best-in-class tech. Blockchain exponentially increases the complexity and build times required. Building systems from scratch doesn’t happen in financial services. There is a legacy infrastructure inside banks and between banks. Our job is to develop products that integrate with what’s there. This is where blockchain falls down. New proof-of-concept systems must integrate with legacy tech, which is exceptionally challenging.

At its heart, blockchain solves a trust problem. But in most aspects of finance, this does not exist. Banks are trusted counterparties. They are highly regulated. They have long track-records and client-franchises. They are staffed by people with a commitment to excellence. And over the past decade, investment in compliance has skyrocketed due to the regulatory backdrop, providing a further layer of oversight and security.

It’s easy for bank CTOs to get in-house developers excited by working on cool new technology. But you need to re-train these developers, which slows down projects and presents security risks. Some banks hire talent, but you’re bidding against other firms and blockchain projects, many that are cash-rich from the wave of recent ICOs.

The bottom line is that blockchain projects usually end in failure. They don’t get past the trial phase because the benefits don’t justify the cost and complexity of the build. In debt capital markets, we have yet to come across a single problem that dealers and issuers face that could be resolved better by using blockchain than a traditional database.

Blockchain is a cool technology with great potential. But we shouldn’t blindly apply it to banking and expect it to cut costs and drive revenues as if it were some kind of business panacea. In fact, it might turn out to be quite the opposite, piling on costs and complexity when tried and tested technologies can do the job far better.

We believe that meaningful change within the capital markets will come from working within the confines of the existing setup, and we’re convinced that the correct approach is to work closely with market participants to optimise existing processes as opposed to starting from scratch with blockchain.

If we’ve learned anything since starting Origin, it’s that anything that requires large scale behavioural change from end users most likely won’t work. It’s all about making incremental improvements.