Why blockchain won’t disrupt banks first

By Oliver Bussmann and Nick Williamson

As two people who have been working closely with blockchain for a while now – Oliver as a FinTech advisor and former Group CIO of UBS, Nick as the CEO and Founder of Credits – we have no doubt about the technology’s potential to radically transform the financial industry.

A far better way to build and maintain interconnected ledgers – the heart of the financial system – it seems predestined for the job.

But while banks and FinTech companies around the world are busy developing blockchain-based solutions, we are likely to see blockchain “go live” in other industries first.

This is something of a paradox, and so we think worth a closer look.

Regulation, regulation, regulation

As Oliver can attest from his own experience, the main drag on implementing innovation in financial services is regulation.

As part of one of the most highly regulated sectors in the world, banks will need to wait for regulatory certainty on any number of issues before they can release blockchain-based platforms. Stringent rules regarding collecting, storing and sharing customer data add layers of rigorous validation, verification and internal signoff on top of the regulatory approval.

Even though many regulators are actively supporting banks in exploring blockchain, this is simply not an environment geared to early adoption in the wild.

The fact that banks are coping with dwindling IT budgets, as well as heavy legacy IT investment, is an obstacle as well. As to an extent are legacy mindsets: The financial industry is heavily invested in centralized models; blockchain represents the opposite worldview.

More fertile ground

We believe blockchain will be implemented first in more lightly regulated sectors, particularly those which face challenges in managing data access control and ensuring data integrity. This can be sensitive personally identifiable information (PII) such as health care records, competitive secrets or other internal corporate data. Or it could be intellectual property, as with managing copyright for music or art.

Areas poised for takeoff include e-government, supply chain management and finance, insurance, real estate and the Internet of Things. BHP Billiton’s announcement last week that it was using blockchain to improve its supply chain processes is a perfect example of how this is already happening.

Useful use cases for all

At Credits, Nick has been observing this trend closely too. The company has been exploring a number of use cases outside of financial services, such as proof of identity, procurement processes, and interdepartmental payments. It recently worked with a client on a corporate identity blockchain solution.

Credits has also been very active in e-government, where blockchain has the potential to inject trust and accountability into many processes. This includes providing means to share sensitive personal data between departments that prevents data leaks while still allowing for data integrity checks.

The good news for banks is that many of the non-financial use cases also provide compelling first customers for the eventual financial ones. If we can solve supply chain management, for example, then we are not far from solving supply chain finance.

So while we may not see distributed ledgers taking over in financial services right away, that shouldn’t be interpreted as meaning it will never happen.

When it comes to blockchain and banks, there is no escaping destiny.

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Best FinTech accelerator? Your regulator.

My good friend Chris Skinner has been pointing out the different ways regulators around the world are supporting the FinTech ecosystem. And rightly so. From setting up dedicated FinTech offices to providing sandboxed environments to safely try new tech, regulators in the UK, Singapore, Hong Kong and elsewhere are actively focused on financial services innovation.

In other words, along with their remit as policy makers, rule writers and enforcers, these regulators are now also taking on a business development role. This is a significant development, and it is to be welcomed. But if regulators want to be really effective, they need to approach this new role in the right way.

Here’s why I think so.

Fast track

Financial services is one of the most highly regulated industries in the world. Even in the most stable times the regulator plays a key role in how banks run their businesses and how a given financial center operates.

In our current environment of highly disruptive new tech and massive innovation, with high numbers of new entrants from outside the industry and banks rethinking business models, regulatory decisions will have even more impact.

If the regulator is not part of the innovation ecosystem it can among other things greatly reduce the speed at which innovative ideas become workable products. And let’s make no mistake: when it comes to business development, time to market is essential.

Your regulator, the FinTech accelerator

As I have written elsewhere, I believe strongly both that innovation can be orchestrated, and that open collaboration – even among competitors – is unavoidable in today’s complex world.

I think regulators are in a unique position to take on the role of innovation orchestrators. In particular I believe they:

  • need to bring the whole ecosystem together – high-tech firms, consulting firms, startups, incumbent banks and other stakeholders.
  • should foster collaboration, if not mandate it.
  • if possible, provide sandboxed real-time production environments to try out new capabilities in ways that are safe for the companies and the financial system.

Sandboxed environments, such as those of the FCA and MAS, are I think particularly powerful tools. They are also prudent measures in our age of highly disruptive, often cloud-based, FinTech, and considering such thorny issues as data location, data privacy, operational resiliency and so on.

A virtuous circle

Building and supporting this kind of an innovation ecosystem can result in the following virtuous circle of advantages:

  • It means all parties go through the learning curve together. This helps avoid redundant work and quickly spreads adoption of the best new ideas.
  • It replaces the traditional, formal regulatory discussions with a more informal, open and proactive regulatory dialog.
  • Working together the ecosystem will not only more quickly understand the new possibilities, it will also more quickly uncover the risks and limitations – as well as ways to overcome these.
  • With the regulator as part of the process, these learnings can be more quickly reflected in better policy and laws.
  • Better policy and laws in turn will reduce regulatory uncertainty and hence attract business.
  • As business flow moves towards a particular jurisdiction, that financial center is naturally strengthened.


Compete together

One last thought on competition.

There is no doubt we are seeing a fierce battle between financial centers being played out in the tech and innovation space. When regulators become business developers, they naturally join the fray. But it is in the interest of all regulators to strengthen the global financial system as a whole as well.

The good news is that we are also seeing cooperation between regulators, as with recent bilateral agreements between the UK and Singapore authorities or the UK and Australian ones.

This is the right way to go. Just as in the tech environment, in the regulatory environment we need to build the standards, the rules, and the rest of the foundation together, across jurisdictions.

FinTechs in jurisdictions with supportive regulators should seek them out and become part of the dialog. Those regulators still on the sidelines, or which take an overly restrictive stance on innovation, risk getting in the way of progress – and potentially doing harm to the financial centers they are tasked with caring for.

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