Banking on blockchain

We first got excited about blockchain two or three years ago. The Economist called it “The Trust Machine”, others: “The End of Banks as We Know Them”. Established players responded by flooding developers with money in the hope of backing the right technology. Have six global banks done just that? Ian Henderson finds out.

Like many disruptors, blockchain technology – less excitingly known as distributed ledger technology (DLT) – was seen as a threat by many established banks. By enabling direct transactions and open ownership, the innovation underpinning peer-to-peer cash system Bitcoin – itself known as the currency of choice for dodgy dealings on the dark web – seemed to threaten their very role. Not to mention unleashing uncontrolled global fraud.

That clearly has not happened. Instead, a tidal wave of investment (much of it from the banks themselves) has started to fulfil what the UK Government’s Chief Science Adviser Mark Walport once called, “One of those explosions of creative potential that catalyse exceptional levels of innovation.” The latest of which is the very ungroovily named ‘utility settlement coin’, new blockchain-based digital cash designed to clear and settle transactions between banks.

Put simply it can make securities trades almost instant, allow deals to be done direct across any currency, free up billions otherwise tied up mid-deal and reduce cost to almost zero. Quite neat for the banks, their customers and just about everyone. Unless your job is (or was) in that back office, of course. The new currency (perhaps with a snappier name? AML would be delighted to help) is expected to go live towards the end of 2018, but it will take a while for it to become an accepted part of the system – and meanwhile there is always the risk of the disruptive technology itself being disrupted by something even smarter.

“Placing big bets on new technology is the way to not only ensure survival, but to evolve the entire system of which established banks are the biggest components.”

The biggest beneficiaries of new financial technologies will not be the innovators themselves – although FinTechs like Clearmatics will do well – but the established banks. Barclays, BNY Mellon and the others who joined UBS in the settlement project have shown that placing big bets on new technology is the way to not only ensure survival, but to evolve the entire system of which they are the biggest components.

The new blockchain currency will probably only get used for clearing between large financial organisations, at least for now. But it does feel like a precursor of a future where all cash is digital, all transactions are instant, and all costs virtually eliminated. It’s fascinating to think of the implications for everyday life. Maybe another “explosion of innovation” is just around the corner.

A version of this article first appeared in Chartered Banker magazine