If 2015 was the year of blockchain hype, 2016 should be the year of solid progress. At the Retail Banker International Annual Conference and Awards in London on 19 May, presentations provided some solid use cases of the much-discussed, much-misunderstood technology. Anna Milne reports
After all the talk of blockchain over the last year, most people are actually none the wiser as to how this technology can benefit their business, or indeed be built in. And it is no wonder banks are hedging their bets on blockchain exploration, looking at all different models in all different ways.
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The first thing to understand is that blockchain is not just one thing, it is a few different technologies, all being called ‘blockchain’.
Simon Taylor, head of blockchain research and development at Barclays delivered at the RBI conference an easily digestible one-stop presentation to illustrate each technology and its specific use case and business model. Taylor described blockchain as a three layer model, including the application (interface), the smart contract (middleware), and the shared ledger (database).
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By GlobalDataTo put this in context, using bitcoin as an example, the interface would be the bitcoin wallet, i.e. the user interface; the smart contract would be the user spend/transaction and the shared ledger would be the blockchain – which first came from bitcoin.
The application layer can be changed easily without changing the underlying technologies, which has led to the experimentation with blockchain for other use cases than as a transactional digital currency account.
Smart contract
There are different manifestations of smart contract: (coloured) coins built on top of the bitcoin blockchain, such as Colu or Open Assets, and open blockchains, which are tied to the ledger but operate on a public network, such as Ethereum. Some are flexible, in that the smart contracts are not tied to the ledger and can be operated in private (or not), such as Eris or Multi Chain. One concept for banks is that a global shared ledger would allow them to reconcile through cryptography mining two-to-five-second transaction settlements. This would alleviate the current time consuming process of reconciliation through paper on numerous databases, which can take between two and five days.
Taylor explained a shared ledger can be private, permissioned or permissionless.
The outlook – the next five to ten years
Taylor: "There is a lot of white space wherever legal document automation is required. Payments and settlement are likely to be the last to change because of their complexity.
"In many cases, blockchains are being made to fit the scale challenges of banks, however, it is better to start with bank requirements and see what blockchain characteristics apply."
Francesco Burelli, Managing Director, Payments Strategy Lead, Financial Services, Accenture
"Blockchain is set to radically improve components of the financial services industry. It is an evolution in distributed ledgers and its popularity is a bi-product of Bitcoin’s success.
Its advantages of consensus mechanism, transparency, system resilience and the possibility to embed automated logic in a transaction provide significant advantages. Some of the main development areas include private issuance,
clearing, settlement, reconciliations, KYC document management and asset registries.
However one of the biggest areas of potential for blockchain application but not yet fully exploited is trade finance. There are a range of promising developments undertaken by financial institutions on an individual basis, by small geographical communities of banks, and innovators like Ripple.
But the development of standards, like those by Linux’s Hyperledger project and by R3’s consortium, will likely have the most important, long term effect. This will not only enable financial services organisations to leverage the technology more effectively through standardization, but also enable closer integration with core parts of other industries served by corporate banking; for example, treasury services in supply chain finance."
