Blockchain is transforming financial services but its potential as a business enabler is much wider


The concept of blockchain has come a long way since it first emerged as the technology that underpins the pioneering virtual currency Bitcoin.

Initial suspicions around a system that facilitated a totally new form of transactional structure were not helped by the early popularity of Bitcoin among users of the so-called Dark Web.

However, those quickly evaporated when major financial institutions around the world realised its potential and effectively legitimised both blockchain and latterly Bitcoin itself.

And while the popularity of Bitcoin itself persists despite often wildly fluctuating values and increased competition from a swarm of imitators since it launched in 2008, it is blockchain which is the true Bitcoin success story.

Also referred to as distributed ledger technology, blockchain is set to become the system of choice as banks and other financial companies around the world look to enhance security and trust in multiple transactions and reconciliations taking place simultaneously.

In the process it has become one of technology’s biggest growth areas, spawning myriad new business opportunities. From logistics to IP protection, supply chain to diamond provenance, the uses for blockchain go way beyond its original roots in virtual currency.

Yet while the buzz around blockchain grows increasingly loud, the evolution remains in its relative infancy. The enormity of its potential as a business enabler has seen investment in the technology soar over the last year or so.

In its most basic form blockchain is a decentralised electronic ledger which appears in duplicate form on thousands of computers worldwide. It is a peer to peer network where records are known as blocks, with each one timestamped and linked to a previous block. This means that data in a block cannot be altered retrospectively, enhancing both security and transparency.

In effect it provides a layer of certainty which has never before been seen, particularly in the complex and fast moving world of international finance as Keith Bear, vice president, financial markets IBM explains.

Blockchain, he says, “is all about taking advantage of what the technology offers in terms of trust”.

“Across financial services, if you are one party dealing with another there is always an issue in terms of the level of trust that might exist in the network,” he says.

“And because trust is never absolute you end up having to reconcile – my view of the world versus your view of the world.

“What the distributed ledger technology does is to allow us to have one view of the world which is by definition the same based on all the parties that are part of that network.

“Fundamentally that makes a significant change when you consider large international banks may have thousands of people involved with reconciliations of various forms and types based on different versions of the truth - so the potential has always been very large in terms of what it can deliver in that respect.”

Further, while ledgers are shared they also have high levels of privacy due to the sophisticated cryptography in place to ensure only authorised parties have access. “In a financial services environment that is pretty critical,” says Bear.

“Inherent in this model is that you have the means of establishing agreement as to what is on the shared ledger. When a transaction comes along it is not good enough for one party to say this is a version of the truth, therefore for it to be a version of the truth for everybody, there has to be agreement among the participants in the network that this is the truth. Therefore there needs to be a consensus mechanism.”

An additional feature of blockchain is the means to be able to execute so-called smart contracts on individual nodes within the network which are essentially the same contract at each node. “This enables you to do in financial services terms, financial executions or specific transactions that take place which are essentially the same on every element of the node itself,” says Bear.

With so many compelling elements it is hardly surprising that blockchain is taking off – and while there is still some way to go before it becomes established practice, change is happening very quickly.

“All the major activity has taken place in the last six months,” says Bear. “If we were having this conversation in Q2 [of 2016] we would be talking about experiments. Now we are talking about largescale production.

“Given that kind of trajectory it is going to be fascinating to see what will be happening in a couple of years’ time, simply because of what is going on at the moment.”

Research by IBM and the Economist Intelligence Unit undertaken in 2016 on the adoption of blockchain technology showed that of 200 financial institutions surveyed, 14% of them were planning to implement blockchain into production by the end of this year. The overwhelming majority (70%) expect to be in production by 2020 at the latest.

“There was a lot of debate in the middle of 2016 as to whether this [blockchain] was just about experimentation – no-one was actually prepared to pull the trigger,” says Bear. “So the figure of 14% was quite interesting at the time as a statement.”

There are, however, issues which exist. “The classical one if you are using blockchain in a settlement context, what happens at the point of settlement finality when settlement has actually happened but for whatever reason one party is in dispute with the other?” says Bear. “Is what is on the blockchain at that point a legally viable statement of fact? Technically it is but is it true from a legal and regulatory point of view? So the question of settlement finality is something where the law to some extent has to catch up with what the technology enables, because you are talking about a different environment to what exists today in the markets.”

The transparency of blockchain is a distinct advantage from a regulatory perspective.

“One of the blockchain network participants can be the regulator, so they have complete visibility and transparency about what is going on, which they don’t have today because that is typically based on post factum reports that are provided which may or may not be accurate depending on the systems and the processes supporting them. There is a direct benefit to market transparency in the race for that.”

While many businesses are still getting to grips with the possibilities of blockchain, IBM has already introduced the technology into some of its processes. Something Bear calls “quite a statement on its maturity”.

IBM implemented a blockchain network using Hyperledger aimed at reducing the number of days to resolve invoice-related disputes in its global financing business. Six months into the process and Bear says it is on track to reduce resolution time from 40 days to fewer than 10.

“This has been incredibly insightful as it shows what it takes for us to run a blockchain network because this is a very different environment as you can imagine to a master-slave relationship in a traditional IT environment,” says Bear. “This is one of the earliest examples in production which is proving very helpful to understand the major steps you have to go through in terms of the design and development of the business in this production-critical, industrialised environment.”

The possibilities for blockchain are seemingly endless, with Bear citing uses around crowd sourcing as an example of what can be achieved. Options increase further when it is linked to other new technologies such as the Internet of Things.

Bear says that blockchain and IoT integration could be highly effective in the shipping industry.

“We see a large complex supply chain when we go through the various steps – from the banks’ point of view, the letters of credit and parts of the financial element of the supply chain, all the way through to customs and ports and physical containers,” says Bear. “So being able to integrate IoT technology into that will help with validity, verification and validation.”

This, he says, should stop ships being delayed before they can load or unload their cargo.

“Supply chain efficiencies are now so advanced that sometimes the paperwork is slower than the transportation,” Bear says.

“You end up with log jams in the supply chain where they cannot physically import because they are waiting for the paperwork to catch up. In those environments there is no single organising body – as you are dealing with different elements such as customs, tax, regulation, quality control, provenance and all those things.

“Part of the [blockchain] design is if you get the smart contract part right you can trigger automatically things such as break payments, early payments, payments for early delivery etc. You can build those in so if you can prove the goods have physically arrived at the port and are ready to be transferred to the handler and you can swipe a container and it identifies the goods that started on this process, then it can trigger a payment or transaction that can then move it on.”