Five things transaction bankers should know about Blockchain

By Whitman E. Knapp, chairman, GTBInsights LLC

Sibos 2015 provided a unique opportunity to understand the significant issues driving the transaction banking world.  Blockchain technology dominated the conversation. Rarely has one subject so dominated a Sibos.  There was standing room only at the Innotribe meeting, and every session covering payments or trade included a discussion of the use of blockchain technology, whether it was on the agenda or not.

So what were the five key take-aways for wholesale transaction banking from this outpouring of interest?      

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One: Blockchain technology is still in a formative stage. While there is general agreement that blockchain will improve efficiency, transparency and reduce cost for transaction banking, there are more questions than answers surrounding its application. Key issues such as proof of work vs consensus, permissioned vs permissionless, and scaleability to name a few, still need common understanding and mutually agreed definitions.

Two:  Transaction banking is about to undergo a fundamental transformation. Previous milestones such as the shift to electronic communications with the introduction of the telex after World War II, and the subsequent adoption of the internet for communications, pale in comparison to the changes introduced by blockchain – or more accurately, “distributed ledger” technology. When combined with cutting edge cryptography to assure the security and safety of transactions across web-based distributed ledgers, the transformation will be profound.

Three: Change is being initiated by new, non-bank, technology players inspired by the white paper published January 3, 2009 under the name of Satashi Nakamoto and entitled Bitcoin: A Peer-to-Peer Electronic Cash System.  The financial institutions who “own” the foundations – the rails – of transaction banking are only beginning to take an active role. While the original acolytes of bitcoin technology were determined to replace the banking system with a completely new ecosystem outside the reach of all government control, the current promoters of the new technology, the emerging fintech community, appreciate that the original utopian visions are not fit for purpose in the real world of transaction banking. They are moving to a more collaborative model, working with the banks at the center of wholesale transaction banking.

Four:  There is apprehension by current practitioners of transaction banking that the fintech innovators are dangerous predators rather than potential partners.  A moment of reflection will suggest that this concern is baseless. Innovation is taking place in the fintech world because the innovators are agile firms with nothing to lose. Failure in the fintech world is seen as a badge of honor. Banks on the other hand do not have the flexible structures or mind set required for successful innovation. They are more concerned about what they could lose. Failure in the banking world is unacceptable.  In the real world, however, this dichotomy of skills and interest provides ideal ground for cooperation between the fintech and banking worlds. Fintech companies are creating the innovative technology needed by the banks; banks have the customer base in need of that technology.  While backed by considerable funding, the fintech companies have neither sufficient resources nor the patience to replicate the essential customer service infrastructure which banks have spent decades building. Partnership is the only rational and ultimately successful way forward.

Five: while the promise of the new technology has attracted enormous attention, the one issue which remains largely ignored is what happens as blockchain meets CARL. CARL – compliance, audit, risk and legal – i.e. the controlling foundations within which all financial businesses must work. The success of the new technology will depend on how well the combined efforts of the fintech and the transaction banking worlds learn to exist within CARL’s domain.  There are critical questions posed by CARL which must be answered before benefits from the new technology can be realized. In the US and Europe, new regulations regarding cybercurrencies are being promulgated. History indicates this will take time, trial and error, and a good measure of effort by both regulators and the regulated, to achieve workable regulatory frameworks. On the legal front, questions regarding definition of identity, definition of enforceable contracts and ownership of assets moving across cyber-distributed ledges, remain to be determined. 

Resolution of issues posed by CARL should, nevertheless, be within the capability of the same innovative minds which are now creating the new world of transaction banking. 

Transaction Banking Academy is running a one-day workshop designed to give transaction banking leaders a 'deep dive' into the world of distributed ledger technologies and what they will mean for the future of the sector. Moe details are at www.beyond-blockchain.com