Chris Skinner is Chair of the European networking forum: the Financial Services Club. He is best known as an independent commentator on Fintech through his blog, and as author of the bestselling book Digital Bank and its new sequel ValueWeb
There is a lot of talk about blockchain. A lot. Loads. But when you get past all the talk, what is actually happening with blockchain? Answer: not enough.
I say this because there are some stand out firms out there – like R3, Digital Asset Holdings, Ripple – who have gained traction with the banks, but the banks are still unsure of their commitment to blockchain developments. Talking with several, they see their commitment was funding these firms to do the work for them. Now that they have funded, they feel that’s it.
Some are actually scaling back their internal blockchain developments on the basis that the industry needs to create the capabilities. The problem with that view is there is no industry to create something. Just a few major players who can push the button, then the rest need to follow. That’s why the involvement of the JPMorgan’s and HSBC’s of this world in these early project developments was of interest, but now those commitments are in question.
I say this because of the lack of any real consortia to create a shared system and without sharing, blockchain developments will come to nought. After all, blockchain protocol is focused on building shared ledgers on the internet, and shared ledgers require the banks to come together to create shared structures.
Unfortunately, from where I stand, the banks are not doing that. I thought they were doing it with R3, and R3 is certainly developing something of interest, but there is already questions from some of the banks in the consortia about R3’s direction:
The questions about direction started when R3 announced Corda, their version of blockchain developed specifically for the banking system. If you didn’t see the announcement at Money2020 in Copenhagen, then you can read more at R3’s CTO, Richard Gendal Brown’s blog. In summary, what R3 announced is a new version of blockchain that keeps the best bits of the original protocol but has adapted it to meet the needs of complex counterparty clearing structures in the banking system. The key features required by the banks include:
- no unnecessary global sharing of data: only those parties with a legitimate need to know can see the data within an agreement
- choreographed workflow between firms without a central controller
- consensus between firms at the level of individual deals, not the level of the system
- the design directly enables regulatory and supervisory observer nodes
- transactions are validated by parties to the transaction, rather than a broader pool of unrelated validators
- supports a variety of consensus mechanisms
- records an explicit link between human-language legal prose documents and smart contract code
- is built on industry-standard tools
- has no native cryptocurrency
So the first question that comes to mind is: does the R3 Corda development negate all other blockchain-based developments in banking? Does this destroy the Hyperledger Project (no, as R3 is involved there too)? What does it mean for Ethereum? Will Ripple still make ripples?
My answer is that it is too early to tell, and we need to watch with caution the developing blockchain space in financial services. In fact, having rocketed through the hype cycle during 2014-2015, it is my belief that blockchain has now entered the trough of disillusionment. This is made clear when you realise that blockchain is like Big Data and Cloud. A lot of talk, but little action at first.
In fact, if I correlate blockchain with Cloud, it took a good seven years for Cloud discussions in banking to move from what the hell is it to I don’t trust this to does this make sense to ok, let’s create a cloud project to shall we try this out to let’s implement cloud as it saves us millions For me, blockchain is in those early day sections of the bank.
Most bankers I talk to are trying to get to grips with what the technology is and whether it makes sense, but few have reached the point of implementation or commitment. Until they do, no shared ledger project is going to work as it needs a consortia of firms to make a banking blockchain structure work. Once again, shared ledgers only work if they are shared.
This is when I come back to look at the key players who offer shared infrastructure already for the banks, such as the ECB and SWIFT. The reality is that these organisations should be at the front-end charge of making blockchain work if it is going to succeed. Yet neither organisation has yet made any key commitment to the technology, apart from SWIFT joining the Hyperledger Project. However, this lackadaisical approach begs a critical question: if R3 develop the shared infrastructure using blockchain-based principles for the next generation financial system, will SWIFT or the ECB have a role in that new system?
Another big question raised in my mind recently is the real impact blockchain might have on our incumbent institutions. Not the banks per se but the bank controllers. Central banks and Central Counterparty Clearing systems surely become a bit of an anomaly in a decentralised world. Can you still have central structures in a decentralised world?