To Blockchain Or Not To Blockchain?


This much hyped, much misunderstood technology promises so much more than cryptocurrencies. The prevailing wisdom (words I am always wary of) states unequivocally that blockchain is a panacea with the potential to revolutionise entire industries through increased security and transparency, cost reduction, scalability and speed of transactions. Clearly, this is an attractive sales pitch – one that’s almost impossible for senior decision-makers to resist.

Let’s face it, banks are obsessed with blockchain right now. I’ve lost count of the number of internal projects, external collaborations, consortiums and startup acquisitions. Blockchain was supposed to sound the death knell of “traditional” finance with a host of innovative blockchain startups vying to “disrupt” and “reform” the status quo. To say it hasn’t quite panned out like that is an understatement. Incumbents have adapted to the technological gold rush and are now planning to harness blockchain to optimise their operations and reduce costs while improving the customer experience. That’s the idea, anyway.

Is the wave of chatter and investment around blockchain indicative of an ephemeral trend, or does it imply a structural change in the way that investment banks do business?

Since 2016 major players such as Morgan Stanley were extolling the virtues of blockchain. In particular, there’s been much excitement about the possibilities for streamlining post-trade settlement for a wide range of securities, including syndicated bank loans by automating the human resource intensive process of review, authorisation, verification and dispute resolution. CNBC recently reported that blockchain can reduce settlement times for private equity transactions involving leveraged buyouts from twenty days to a matter of minutes. Other potential use cases abound.

These are no doubt exciting times. But genuine breakthroughs are being drowned out by hype and ill-informed chatter from people who don’t understand blockchain and its use cases. The mantra internally is, “blockchain, blockchain, blockchain”, but there is little substance to back it up. Senior decision-makers are not typically technologists, they’re business people who are interested in driving revenue, reducing costs and positioning banks for growth in a competitive market. So it’s easy for them to be distracted by the hysteria surrounding blockchain and convinced by others to invest in the technology without a comprehensive and nuanced understanding of the pros and cons.

At the same time, bank IT staff get excited as blockchain is a lot more sexy and interesting than their day jobs trying to fix mountains of technical debt left behind by their predecessors. And exposure to blockchain related projects is a great way to increase market value and reposition oneself as an innovation professional. A new breed of dubious “blockchain evangelists” are engulfing financial services and they are rarely credible technologists. Indeed, we’ve had a few situations with clients where self-styled “blockchain gurus” have entered mid-meeting and asked, “Why not put Origin on the blockchain?’. This facile question is posed with no prior knowledge of what we do, or how incorporating DLT would be remotely useful.

The truth is that many of the use cases being touted by banks, consultants and media commentators don’t require a decentralised, trustless, immutable system. They could – and should – be executed via a trusted centralised party with tried and tested technology that allows real-time updates and clean API interfaces. This is actually how finance has operated for a long time, DTCC and Euroclear being pertinent examples.

The hype makes it hard for anyone to look past blockchain, but this technology, in its current nascent and heterogenous form, doesn’t necessarily feel like a natural fit for sales and trading. Some aspects of blockchain may even be undesirable for investment banks. The immutable aspect is actually problematic for certain use cases, like settling a bond. If you make a mistake, you can’t just recall it on the traditional blockchain. Mistakes do happen in markets, especially during settlement, and it’s handy to have the flexibility to correct them. And I’m yet to be convinced that issuers and buy side clients actually want decentralisation. They want accountability and the ability to lean on dealers to make stuff happen, fix mistakes, expedite processes and improve pricing.

I’m not saying that blockchain isn’t an exciting and potentially transformative technology. Clearly, it’s going to shake up some long established processes and drive efficiencies. But we need to think soberly and intelligently about how banks can benefit from blockchain on a case by case basis in order to avoid wasting time and money on technology that doesn’t make a meaningful impact.

Perhaps the real value of the blockchain movement (and it does feel like a movement) is serving as a way of focusing various parties inside banks onto the topic of modernising and re-architecting IT systems. It’s time to take a step back and look at everything from the ground up, before diving into the detail. Banking is a now a bonafide technology business, so let’s not simplify and trivialise a complex and beautiful beast with buzzwords and soundbites.