- Expert Views
The growing momentum of the blockchain
5 February 2017 • Author(s): Dhiru Tanna, Head of Relationship Management – UK, Ireland & Southern Europe, BNY Mellon Treasury Services
Blockchain continues to be a buzzword in the finance industry, tipped to have the ability to bring about monumental change to the way in which we transact. Dhiru Tanna, Head of Relationship Management – UK, Ireland & Southern Europe at BNY Mellon Treasury Services, examines the progress of distributed ledger technology, and how it has helped to ignite a whole new approach to innovation in the banking world.
Blockchain – the distributed ledger technology (DLT) that underpins bitcoin – holds huge potential to transform legacy transaction p
ractices. With decentralised properties that could allow for enhanced risk mitigation, improved speed and mobility, increased transparency and traceable transaction histories, it certainly holds enormous promise. And a great deal of investment is being dedicated to exploring how this new technology can be harnessed.
Smart contracts is one area where it is believed the blockchain could be particularly beneficial. Smart contracts are programmable codes capable of automatically facilitating, executing and enforcing the obligations, benefits and penalties of an agreement or ‘contract’, using blockchain technology1. This presents the opportunity to remove human intervention – inherently a potential point of error or failure – and thereby significantly enhance efficiency.
Elsewhere, blockchain could help to improve risk mitigation processes. For example, currently, know your customer (KYC) compliance is particularly time-consuming and repetitive, involving clients often being contacted multiple times by different banks for the same information. While KYC registries have been introduced in some countries to address this issue, the shared distributed database properties of blockchain mean that information could be accessed by all members, with everybody owning and updating their own data. That makes blockchain particularly valuable as a means of addressing this pain point.
Regulators and central banks are increasingly receptive to the idea that DLT could improve existing security methods, as well as other areas of finance, and some are becoming involved in initiatives to explore such concepts.
For example, the Financial Stability Board has announced its involvement and interest in blockchain2. Some countries, such as the UK, Hong Kong, Singapore, Australia and the UAE have already launched, or have plans to launch, regulatory sandboxes3. These enable fintechs to develop new concepts with regulatory oversight but relaxed restrictions, thereby creating a safe environment to test ideas and products. Elsewhere, Switzerland’s Federal Council is calling for regulations on fintech firms to be eased in an effort to promote competition in the finance sector4. The buy-in of regulators is integral if new digital concepts – blockchain-based or otherwise – are to succeed, and it is encouraging to see blockchain becoming part of their agendas.
Of course, it is not just regulators that are keen to explore the opportunities blockchain offers. The number of blockchain initiatives underway is surging, with banks increasingly at the heart of the action. For example, the R3 consortium, for instance, comprising approximately 70 financial institutions (as of December 20165), has been founded with the aim of addressing the practicalities – including achieving common standards and communication protocols – required to turn blockchain from a proof of concept into a practical solution for the financial services industry6.
Certainly, with a growing interest in the technology and acceptance that it could be a game changer for the future of the industry, banks are getting on board with blockchain in ever-increasing numbers. Yet what is perhaps even more exciting is that blockchain has helped to spark a shift in the industry’s approach to innovation and development. Indeed, collaboration is becoming increasingly commonplace as it is realised that a ‘joined up’ approach – working unitedly on a common problem to solve it from an industry perspective – is key to achieving change on a huge scale.
Blockchain has been key in triggering what has become an almost industry-wide quest to digitise transactions and enhance the client experience. While uncertainty about its role in this respect persists – and while we are not yet at a stage where it is poised to dramatically transform current processes – increased awareness and momentum mean we are edging ever-closer to understanding its real-world value, and applying the technology to the benefit of our industry.