Unpacking the blockchain for Fintech hype

Learn the basic benefits of blockchain and explore the main business use cases in this guest post from iconicchain, providers of blockchain-based solutions for regulatory compliance. 

If you attended any Fintech event recently, chances are you listened to several talks that revolved around the ”four fundamental disruptions” shaping and  disrupting the industry: Cloud, Digitalization, Artificial Intelligence, and Blockchain. These technologies are often presented either as the ”cure-all” solutions for all the issues faced by the financial industry, or as the technologies that would render established players obsolete by new entrants taking full advantage of the great benefits they provide.

But, really, what are the facts behind the hype?

In this post, I will focus on the last and probably most controversial one: blockchain. For some, it’s equivalent to Bitcoin, cryptocurrencies or crowdfunding based on tokens, commonly referred to as ”initial coin offerings” or ”ICOs”. It did indeed originate with Bitcoin (which needed a distributed, zero trust way to record transactions) and for many years, it was little more than a niche technology for the sole purpose of Bitcoin. However, recently more fundamental benefits and use cases start to emerge; it is thus important to get a grip on what blockchain really is to  see how it can provide benefits for business operations.

So what is blockchain? At the very core of it, a blockchain is a distributed, ”write once, read many times” database with a strong policing of what can be stored on that database. Sounds dense, right? But, what does that mean in practice? How can it enhance your business? Certainly databases have been around for ages; why bother with blockchain then?

Unlike traditional databases, blockchains offer a few very appealing characteristics:

• Since it is distributed, it’s hard to hack. While nothing in IT is 100% safe, to hack a blockchain you need to get access to a large number of users’ computer systems and do so without any of them noticing it. The more widely a blockchain is used, the harder it gets to hack it.
• Anything written on a blockchain is immutable forever. Unlike other databases, blockchains guarantee that data is kept persistent, unmodified and strictly ordered. Hence the name itself: it is essentially a chain of blobs of data, cryptographically linked to each other.
• Strong policing means no need for additional trust controls. This is perhaps one of the most fundamental characteristics: once the rules of the game are established – that is, when, how and by whom data can be written to the blockchain – those rules will be strictly enforced and getting around them would require hacking the system (see bullet 1).
• Since it’s distributed and policy-based, there’s no central arbiter. This is also one of the strong arguments for blockchain: if you look at the financial industry, it is built around the concept of trusted intermediaries (SWIFT, credit card companies and the likes). Blockchain offers an alternative to third-party intermediaries, so transactions happen between only the two parties, further increasing security.

As you probably already realized, blockchain is an interesting technology with some cool features; but what about business benefits? When should you consider using it? From my experience, the right questions to ask are these:

1. Do you need to co-operate with your competitors (or other untrusted entities) for recording transactions and sharing data?

Or,

2. Do you have a need to record full history of certain events in a way that guarantees immutability and can stand the rigors of a compliance audit?

Finally,

3. Do you want to get rid of intermediaries for any of the above that are currently slowing down interactions or adding significant cost?

Financial transactions, settlements and supply chain tracking obviously fall under the first category – and in many cases are dominated by intermediaries. No wonder this is where many banks are engaged in the use of blockchain and there are notable successes around. Virtually all major banks in the US and Singapore, 12 out of 24 largest banks in China and many large banks in Europe are experimenting with moving transactions over to various blockchain based solutions. Some – such as Erste Bank in Austria – have even shown how fully automated issuing of debt can be achieved. The benefits are primarily cost savings and in some cases increased speed of processing.

However the most significant opportunity for blockchain lies in the use cases falling under the second question. The truth is, financial institutions, as well as other regulated industries, are facing a growing pressure to prove their compliance and sufficient due diligence with regards to cybersecurity and regulatory requirements. The cost of security breaches and the cost of non-compliance are staggering – and companies are spending the equivalent of 10% or more of the global GDP to tackle these. Audits, paperwork and manual actions make up the bulk of this.

What if you could put in place a solution that records and proves compliance in a secure, immutable way – and do so by sharing the relevant data with your regulator in real time? Blockchain enables recording of the data in a way that was totally impossible just couple of years ago. Our company, iconicchain, is already offering solutions to our customers which enables them savings of over 40% of their cost base. I am sure more will follow suite soon.

Why then is the adoption of blockchain still in its early phases? Why didn’t it conquer the world yet? The answers are multiple, but essentially boil down to two: maturity and buildup time for new platforms. As with any new technology, blockchain did face several teething problems: speed, scalability, flexibility, ease of use – all problems that are slowly being resolved by a mix of established companies and startups. But even more importantly, blockchain is a platform technology that requires a breadth of use to really shine – and introducing a brand new platform simply takes time, measured in years.

Will then blockchain disrupt financial institutions? In my view the answer is ”No” – more than just disruption, it is a transformative innovation that will redefine how financial entities interact, enabling substantial savings and unlocking new use cases.

The next couple of years will show how far this transformation will go.