Financial Technology

Blockchain – Disruption or Hype? Until recently, blockchain was a term only known to geeks and specialists. But in the last six months it has become a buzzword among bankers.

Blockchain – Disruption or Hype?

by Jean-Marc Servat, Chairman, The European Association of Corporate Treasurers (EACT)

This month’s EACT column is not about upcoming potentially harmful regulations, but about a technology that could both disrupt our financial world and bring opportunities to treasurers and the companies they serve.

Until recently, blockchain was a term only known to geeks and specialists. But in the last six months it has become a buzzword among bankers. On October 31, The Economist put Blockchain on its front cover.

What is sometimes called ‘distributed ledger technology’ was created in 2008 and is the underlying algorithm to the bitcoin cryptocurrency. Let’s not focus on the dark uses of bitcoin or even the debatable use as a currency with no central bank controlling the monetary mass. Blockchain potential goes far beyond cryptocurrencies.

On September 29, 2015, the R3 initiative (www.r3cev.com) announced that 13 banks had joined its partnership, taking the total number of financial institutions to 21. Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street, UBS , were joined by Bank of America, Bank of New York Mellon, Mitsubishi UFJ Financial Group, Citi, Commerzbank, Deutsche Bank, HSBC, Morgan Stanley, National Australia Bank, Royal Bank of Canada, SEB, Société Générale and Toronto-Dominion Bank. Their objective is to develop commercial applications for this emerging technology in the global financial services industry.

As I write this article, the prime minister of Singapore is urging the country’s banks and regulators to keep up with technological developments such as blockchain.

So what is blockchain?

It’s a technology, based on distributed computing and cryptography that enables people, previously unknown to each other, to transact and record transactions in a ledger. It makes it possible to transact electronically and record securely transactions on the public internet. Let’s consider what blockchain enables with bitcoin: the exchange and record of value with no centralised trusted parties (like banks) or secure network (like SWIFT).

What is unique is the absence of a trusted third party (a bank that we visit or to which we log in with a key, an Amazon.com, eBay or whoever you know and trust…) and the fact that the information is recorded publicly, rather than on secured servers behind firewalls. The blockchain is the encrypted database of transactions and is available and replicated on multiple computers on the network. The trust is created by the mathematical and the computational force that underpin the technology.

The applications that come to mind immediately are related to payments or financial transactions. The distributed ledger eliminates the need for a trusted third party and centralised record. This means that transactions can be faster, cheaper and easier to access, while maintaining security. Santander invested in the Fintech start-up Ripple (www.ripple.com) and made a bullish announcement that distributed ledger technology could save the banking industry some $20bn per annum by 2020.

But payments and transactions might just be one field of application. There are projects to record transactions of valuable items (diamonds) and to apply the technology to land registry which in some countries is particularly slow and costly. ‘Smart contracts’ have been mentioned as a possible application of blockchain. Contracts and their performance could be decentralised. To the treasurer, does that seem like an interesting platform for documentary credit? The technology could be used more simply on private networks. Could a company make all its accounting entries in a blockchain on its intranet? Is this a new era for ERM systems?

There are many questions. In which areas does blockchain bring real benefits compared to other proven technologies or centralised databases? Is the cryptographic algorithm secure enough? Is it cost-effective, in particular in terms of computing power? Can it scale with large numbers of transactions?

There are numerous start-ups in ‘blocktech’ related to exchanges, brokerage, wallets, compliance, payments, payroll, trading, supply chain and so on. With technology, there is always the risk of falling in love with it, or of losing time being a guinea pig. Treasurers have little time and financial services providers will contact them to showcase applications in their field. My recommendation is to open our eyes and our minds, put blockchain on your radar screen and to stir the debate in our organisations.

Treasurers are familiar with themes which echo well with blockchain: technology, transaction, information, value and security. Their know-how in these fields makes them good trend-spotters for this technology. Blockchain may enter the corporate world through payments, but its largest impact may end up being in another area. Treasurers can show their strategic importance by facilitating the debate within their organisation.

As William Gibson said: “The future is already here, it’s just not evenly distributed yet”.

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