Blockchain technology could be disruptive or merely transformative, but it’s coming to a financial institution near you.
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From the pages of In Business magazine.
There is an interesting debate brewing in technology circles about whether the digital technology known as blockchain will be the next disruptive technology, or merely a transformative one, but that argument might be missing the point.
There are those who believe just as the internet changed how we share information, blockchain-enabled internet will provide a new, collaborative ecosystem to track and trade almost anything of value. One of them is IBM chief executive Ginni Rometty, who when speaking at the 2017 FinTech Ideas Festival, espoused her belief that blockchain will be as transformative as the internet itself.
“I’m not talking about an anonymous cyber security,” she told the gathering. “I’m talking about technology underneath it that allows you to have an efficient and trusted exchange of anything, and I think that will change the way the world works.”
Blockchain is not only for recording and verifying transactions, but also for accelerating the settlement of transactions while lowering the risk of tampering. IBM believes it will become an invisible, foundational layer for conducting transactions over the internet. Also called a distributed ledger, blockchain features an open, security-rich network that can be applied by business organizations across industries to more cost efficiently trade and transact. While the ledgers are shared and distributed, they are visible only with permission by all the participants.
Pramod Achanta, who leads IBM’s blockchain practice for the financial services industry in North America, calls blockchain a proven technology with applications in health care (where hospitals could cut claims processing costs), global supply chains (with estimated savings of more than $100 billion), and insurance, where “smart contracts” could bring unprecedented savings. “There is no reason why they can’t all be revolutionized using blockchain,” says Achanta, a presenter at WTN Media’s 2017 Fusion Conference. “The technology has immense potential. How fast an industry adopts and how quickly they will benefit depends on the industry participants and how conducive that industry is to change.”
Some of the fundamental concepts used in bitcoin have the same roots as blockchain technology — blockchain is the technology behind bitcoin that allows for a distributed, encrypted ledger — but the implementation process is different.
Looking for co-pilots
IBM has conducted numerous blockchain pilot programs and is working with several clients to build and provision blockchain applications, including one for IBM Global Finance. The company recently announced a pilot with Northern Trust Corp., and it also has announced a generally available version of blockchain through its own hyper ledger open source initiative based on the Linux Foundation’s hyperledger fabric.
Achanta sees several applications spanning the entire spectrum of finance. There are use cases within asset management in financial services, the broker-dealer post trade clearing and settlement space, and the payment space. In the wholesale banking space there are trade finance use cases, and in retail banking there are several use cases around mortgages — thanks to the aforementioned smart contract.
“My take on smart contracts is there is the application of business logic — that’s one part of it,” Achanta explains “Second, replacing an existing legal contract with a smart contract, that’s a different part of it. A lot of work is now being done on automating the business process using smart contracts.”
Achanta does not believe the cost-reduction benefits will come as the result of workflow elimination and therefore workforce reductions. The benefits come in removing the friction that exists today across multiple parties involved in a business transaction. “What it does is eliminate the need for reconciliations across multiple parties,” he explains. “It also streamlines the transaction in such a way that it can be executed in a more transparent fashion and much more quickly than what happens today.”
In the payments world, there are a lot of business-to-consumer or even consumer-to-consumer applications. Achanta normally focuses on business-to-business benefits, but he notes that IBM also is enabling its clients to reach out to customers. “It’s business-to-business-to-customer eventually, but there are a lot of creative ways in which this technology is being used to solve the current complexities that exist in the financial services world. It’s certainly not limited to business-to-business.”
So instead of taking days before funds are verified and money is exchanged, payments and transactions are exchanged almost instantly. Supply chains can be managed in real time, and manufacturers can share product information to help reduce product recalls. “Even simplifying the end-to-end business process across multiple dimensions, that results in cost take out and the elimination of more risk,” Achanta says. “So depending on the use case, clearly there are certain benefits the parties are looking to accrue. Disruptive is on the one side of the spectrum, but there are a lot of other benefits, as well.”
Some have speculated that if banks are slow to adopt blockchain technology, they risk becoming the victim of yet another technologically disruptive business model. Asked if he buys into that, Achanta notes that banking is a regulated environment and so blockchain would have to be introduced in such a fashion that regulators are comfortable with the way the innovation is being applied. “The technology actually simplifies the ways that regulatory oversight can take place today,” Achanta states. “The more regulators start to look at this technology and understand this technology, they can actually see the possibilities this technology provides to make their lives easy and witness the entire process enter into the marketplace. Most regulators are just getting warmed up in terms of trying to understand this technology, and as they know more they will get more comfortable with it.”
Achanta recommends that banks, no matter what their size, engage in pilot projects, which can be done at a very affordable cost, to see what value they can derive from it. “My advice is that it’s time for you to embrace this technology and start working with it.”