Thu. Aug 22nd, 2019

Planet Compliance

Innovation & Regulation in Finance

Why Blockchain isn’t the Silver Bullet for everything (yet)

4 min read

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There is no question that Distributed Ledger or Blockchain Technolgy is one of the hot topics in FinTech right now. Though the predictions vary depending on who you talk to, but the numbers are nevertheless impressive:

  • According to PwC, $1.4 billion has been invested in blockchain startups in the first 9 months of 2016. Spending on capital markets applications based on blockchain technology alone is expected to reach $400 million annually by 2019. Another report even put the number of spending by financial institutions at over $1 billion already in 2017.
  • Adoption will see some Blockchain solutions in commercial productions in 2017 with the majority of the large banks having Blockchain projects in production within the next three years, according to IBM research. This in line with a recent survey among financial market participants, which see DLT being widely used within the next 3 to 6 years.
  • According to a Santander study, Blockchain technology might cut costs by up to $20 billion each year by 2022.
  • If that wasn’t enough, the fact that a rising number of lawmakers are reviewing regulations in light of DLT and cryptocurrencies gives proof that Blockchain is real.

No wonder the technology has created such hype and it is touted to be applied in any angle of financial services from payments to asset management to loans and even compliance, for example, for customer onboarding and AML obligations.

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However, there are a couple of stumbling blocks the technology has to overcome for mainstream adoption. One key element is the development of common business standards. Examples from other industries of fragmentation of standards have shown that they can seriously hinder innovation or at least delay adoption significantly; take the format war between Blu-ray and HD DVD. The complexity of financial transactions will make it necessary that certain aspect swill need to be standardised, which is, for instance, why more vanilla agreements like ISDAs can more likely be used for Smart Contracts than more bespoke derivative transaction agreements.

This potential threat to the adoption of DLT is underlined by news this week that several banks are to leave the R3 blockchain consortium. R3 is a blockchain tech company that comprises of more than 70 of the world’s large financial institutions. It aims to raise $150million through equity financing from its member banks. Three banks, Morgan Stanley, Goldman Sachs and Banco Santander are reportedly not going to extend their membership and participate in the fundraising. They are not going to give up on Blockchain though, but continue to pursue other roads such as own developments instead. The WSJ added Bank of America and UBS as potential leavers to the mix.

Another aspect we already discussed on this platform is regulation: even though regulators have woken up to the technological trend, many of the initiatives focus on rules for digital currencies. Regulation for specific solutions like asset management will be driven though by the underlying rules for the respective instruments or services. Regulators will have to determine how these rules apply and have only just started to gain an understanding how the new technology might affect these. Where gaps are identified in existing regulatory frameworks, new rules will have to be drafted, which isn’t a thing to happen overnight.

Lastly, some things just need time to find the right opportunity, the right moment and level of industry acceptance. Returning to the example of AML compliance, some RegTechs have confirmed to us that they have been toying with blockchain technology, not least to take advantage of the increased visibility and funding willingness in contrast to more “traditional” innovative technologies. However, simply creating standardised data sets to be implement on distributed ledger technology might still be too complicated or lack industry wide support to invent a sustainable solution at this point. Having said this, it doesn’t mean that it will stay this way and it might just be a question of timing and the right opportunity.

 

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