Richardo Williams | Blockchain stirring a quiet revolution in financial services
Blockchain, the technology behind cryptocurrencies such as bitcoin, has the potential to disrupt the financial services industry.
Popular and business media tend to focus almost exclusively on cryptocurrencies, however, this is just one application of blockchain. That narrow focus on cryptocurrencies has detracted from other far-reaching potential applications of the technology.
Some of those applications could simultaneously challenge the value proposition of incumbent financial services providers, and at the same time provide a new platform to radically change how financial services providers conduct their business.
Conceptually, block chain may be viewed as a massive spreadsheet that records and store data that are generated in unique transactions, by unique users. In technical terms, it is called a distributed ledger, and it is expected to be applied to many areas both within and outside of finance.
Satoshi Nakamoto, the nom de plume used by the unknown inventor of Blockchain, was motivated to build a system capable of facilitating peer-to-peer online payments between people without the need to go through a financial institution. Therefore, financial institutions spanning the gamut of bill collections agencies to remittance companies and banks are in the crosshairs of Nakamoto's blockchain.
Transactions are validated on the network, thereby removing the need for any intermediary or third party to give legitimacy to a transaction. This arises from the fact that no one person can change the information on the network.
Consequently, people could directly conduct financial transactions among themselves. For example, a father in England could transfer the college tuition directly to his daughter in Jamaica, without the need for a bank or remittance company.
But, before blockchain can be fully diffused and accepted, the technicians must solve for certain advantages that the traditional financial companies currently enjoy. One of those advantages of existing financial services providers is that they provide privacy and protection to their customers.
Blockchain is not there yet, since each person on the network is able to view the transactions of other people on the network. Furthermore, with direct peer-to-peer financial platforms that bypass traditional intermediaries such as banks and remittance agencies, the question will ultimately arise about who will protect the customer.
Given these limitations, it makes sense for incumbent financial companies to adopt and integrate the blockchain technology within their existing businesses, thereby disrupting themselves rather than being disrupted by large tech companies.
Significant work is continuing apace to solve for privacy issues and concerns and consensus is slowly emerging around the blockchain standards to be adopted globally for applications such as Bitcoin so that it becomes a universal digital currency. Once those issues are addressed, then slowly the notion of 'national borders' in the provision of financial services could become obsolete and new competitors will emerge.
The technology is already being adopted and deployed by traditional companies across the spectrum of financial services. For example, the Australian Stock Exchange, the ASX, will in short order begin to use the technology to settle all its post-trade equities transactions. Credit Suisse, as part of a consortium of global investment banks, is exploring the use of blockchain to significantly disrupt global syndicated lending.
IBM and the United Nations have just concluded a joint project on blockchain identity systems, which could significantly improve bank's 'know-your-customer' and anti-money laundering or AML compliance processes.
So, for us in Jamaica, the conversation is not so much about whether blockchain is coming, but more so how we will adapt the technology to ensure the survival and transformation of local businesses.
Through blockchain technologies, the notion of competing with another local financial institution is rendered obsolete. Suddenly, your remittance or payments competitor could be Facebook, Amazon, Ripple, Google or Apple.
That blockchain applications are not widely adopted by mainstream financial services providers, at the moment, is an imperfect indicator of a real but quiet stirring of the revolution that is to come: many proof-of-concept applications are being tested and refined, beneath the radar of the popular and business media.
However, once those prove to be commercially viable, the pace of deployment will be swift and wide-scale.
Financial companies in developing countries, such as Jamaica, must therefore begin to develop the dynamic capabilities to compete effectively, in what is going to be a new competitive space.
- Richardo Williams is a Research Analyst at NCB Capital Markets.