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LONDON – A few years ago, blockchain was the talk of the financial services industry. Several large banks were testing the technology, lured by the promise of improving some of the industry’s oldest processes.
This year, investors could be forgiven for wondering where the blockchain has gone. After much hype in 2017, when the value of cryptocurrencies like bitcoin skyrocketed, lenders aren’t as explicit about new blockchain drivers as they were back then. But that doesn’t mean they’ve stopped investing in technology.
Originally created as a digital ledger for bitcoin transactions, the blockchain is essentially a different form of database that is maintained on different computers. So far, banks have mainly chosen to adopt some of the principles behind blockchain, adapting the technology for different use cases to cryptography.
In Italy, much of the country’s banking sector now uses Spunta, a blockchain network based on the technology of the New York-based company R3, to reconcile the balances between them, founder and CEO David Rutter told “Squawk Box Europe” of CNBC.
“We’ve been talking about the promise of enterprise blockchain for some time and it’s great to finally see it in practice and work on a large scale,” he said earlier this week.
However, the Italian market represents only a fraction of the European and, of course, global banking sector, while account reconciliation is just a use case where experts say blockchain can be applied.
“It’s a start,” Rutter said. “We would like to see it adopted in other European countries and then globally. The infrastructure they have in place creates the basis for launching other technologies that can really impact their bottom line.”
One bitcoin on a European banknote.
Alain Pitton | NurPhoto via Getty Images
For some large banks, the focus has increasingly turned to understanding how they can actually make money off the blockchain. JPMorgan Chase, for example, recently revealed that its in-house digital currency JPM Coin was first released with a large tech client.
Digital currencies
The coronavirus pandemic could have a role to play in encouraging banks to launch commercially viable blockchain products, according to Lex Sokolin, co-head of fintech at blockchain firm ConsenSys.
“Being forced into digital transformation as their primary way of working certainly helps banks focus on digital payment platforms,” he told CNBC via email.
Sokolin added that even banks and other financial institutions are now less reluctant to experiment with digital currencies as they once were. With cash usage on the decline in many developed economies, especially in the midst of the pandemic, central banks are now exploring the launch of their own virtual money, while brokers like Fidelity now allow their clients to invest in cryptocurrencies.
The People’s Bank of China is already testing a digital version of the yuan, while other central banks have set a framework for how such virtual currencies could work in practice. ConsenSys, led by Ethereum co-founder Joseph Lubin, is working on central bank digital currency projects in Hong Kong, Australia, France and Thailand.
“Our view is that this adoption and transformation will be incremental in most countries but drastic in some individual geographic areas,” Sokolin said. “Payment systems don’t tend to completely replace each other, but rather rely on binaries incrementally.”
R3’s Rutter said more commercial banks in Europe could look to blockchain technology to improve their profitability.
“It’s a difficult journey to adopt blockchain technologies because it’s industry-wide computing,” he said. “Once you get over that bit of pain, you have a great foundation for implementing other applications much easier.”
He added that central banks are more focused on digital currencies than ever. According to Accenture, cash consumption is set to drop dramatically in some countries – up to 28% in the UK – this year amid Covid-19. The Bank of England is one of the central banks evaluating the prospect of issuing digital currency.
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