2017 was an intoxicating moment for blockchain cheerleaders.
"It was as if you were going to walk your dog and make coffee by tomorrow," as a blockchain leader of a top-level bank said.
According to a report published by Accenture in 2017, blockchain could reduce infrastructure costs for eight of the world's 10 largest global investment banks by an average of 30%, translating the latter from $ 8 billion to $ 12 billion in savings annuals
. spending per blockchain, or distributed ledger technology, through the capital markets estimated at $ 1.7 billion, according to a recent report from Greenwich Associates, banks seem to take the potential seriously.
Yet it is difficult to reconcile this figure with the fact that many of the projects on capital markets announced in recent years have been postponed, put in limbo or shelved.
While supporters still see a limited role for blockchains in finance, the underlying technology of cryptocurrency like bitcoin and ethereum increasingly resemble the cryptocurrencies themselves – the remains of a bubble that exploded spectacularly.
Even the most anticipated blockchain projects are getting into trouble.
Since January 2016, Digital Asset, founded by former JPMorgan Blythe Masters executive, has worked with the Australian Stock Exchange to replace the central system that deals with clearing, settlement and other post-trading activities with a blockchain. According to ASX statements, the blockchain would reduce risk, costs and complexity through better record keeping. There would be less need for reconciliation between multiple databases, more timely transactions and better quality data.
ASX announced on 4 September that the project would be delayed for six months. In a consulting report it was stated: "While there was general support for this new feature, there was a common view in the answers that we were proposing too many new features to be implemented in a too short amount of time It was stated that this would result in increased complexity and risks in the project phases and implementation time. "
The Depository Trust & Clearing Corporation, the largest global financial transaction company, has also worked to a test project with Digital Asset using technology blockchain to improve the clearing and settlement of repurchase transactions or deposits.
This was abandoned. A DTCC spokesperson said: "After consulting with banks and other financial institutions, we found that the desired scope and business objectives of the initial repo project could be achieved using traditional technologies."
The DTCC has stated that it will continue to work on other blockchain projects with Digital Asset. He is also working on a new trading record system for the blockchain derivatives market, in partnership with IBM and fintech R3 and Axoni. A spokesperson for the DTCC stated in a statement that the project is "proceeding well".
NEX Group, owner of electronic trading venues for bonds and currencies, has rethought its blockchain project in the last nine months, according to a person familiar with the issue. The group was trying to build a distributed ledger that could be used for the entire life cycle of a business. NEX is now focusing the project on payments and settlements only, so banks should not be "forced to change the entire infrastructure," he said.
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Technology skeptics wonder if exploring the blockchain was money well spent. Industry experts said in 2017 that the best blockchain developers could earn between £ 250,000 and £ 500,000 a year. Peter Randall, the founder of startup blockchain Setl, said Financial News in June of that year that "it's hard to see how people make a return on that [investment]".
NEX refused to comment on whether any staff member was fired following a rethinking of his blockchain project, although the person familiar with the matter said "changed the composition of the team". Andrés Choussy, Traian's NEX CEO, said: "In order for banks to generate savings, they must be able to effectively optimize certain processes, reduce the number of employees, eliminate reconciliations, or make effective savings in operating costs. they can not do it, it's not just a worthwhile investment. "
Outside the chain
Theories abound on why finance so far has not been able, or unwanted, to make substantial use of blockchain technology. Among the most popular is the fact that, as banks are highly regulated and intrinsically conservative institutions, they are not ready to embrace the transparency that makes the blockchain potentially so powerful.
In theory, distributed ledger technology frees the community from using it as a reliable intermediary to stand between the two sides of a value exchange. If a person decides to send £ 10 to someone else, the sender will write a check drawing to an account at his bank and deliver it to the recipient so that he can exchange it at his bank for a £ 10 bill.
If the same transaction had been carried out using a cryptocurrency on a blockchain, the trade would have cut off the intermediaries and would have been executed directly between the two parties. It would then be recorded in the distributed ledger, a copy of which exists on thousands of computers and which is visible to the entire network.
For much of finance, the fact that blockchain participants can see each other's transactions has proven to be an obstacle. Faced with the prospect of revising their internal systems to participate in the blockchain processes, the banks chose instead to resort to the existing technology, questioning the value of the evidence.
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The colossus of currency settlements CLS initially intended to offer its members two ways to connect to its blockchain service , CLSNet – one direct and the other via Swift, a 45-year internal payment network that is used in all financial markets.
CLSNet has worked with IBM's technology giant on CLSNet, a payment service for currency payments including the Turkish lira, since 2016. Its among the supporters were Bank of America, Goldman Sachs, HSBC and JPMorgan, in a press release at the time.
The service is in the final test phase. CLS said it will be launched in approximately one month with about half of the 14 banks that supported the project that was due to register in the first few months. But many of its large banking members do not want to connect directly via blockchain, preferring to use Swift.
Alan Marquard, chief strategy and development officer at CLS stated FN that it was "a big question" for banks to integrate blockchain into their existing IT systems. "You're not just installing software – they need to build operational knowledge and know-how," adding that "it has security implications."
With banks reluctant to use the blockchain directly, Digital Asset allows companies to connect to their project through traditional messaging networks, Dan O & # 39; Prey, its marketing director, said, because it means that banks "must not change the way internal systems [their] work".
However, he admitted that if banks do not connect directly to the system by hosting a blockchain node, they will not be able to get all the benefits of the technology. Banks should still reconcile their books and local records because it is not in sync with their back office systems. Or, "Prey said," If a third party is holding your knot, you trust yourself to refer to that data, you may not feel comfortable in the fact that third-party data is the ultimate source of truth . "
Not connecting directly to the blockchain is less efficient, but given the alternative of potentially exposing transactions to the entire market, banks are treading lightly. The risk of mistreating customer data, which according to the general data protection regulation, could result in fines of up to 4% of annual turnover or that the senior management regime of the United Kingdom keeps executives is not helping major bankers personally responsible for more infractions.
Adrian Patten, president of the Cobalt blockchain group, said: "You can have an agreement between Deutsche [Bank] and JPMorgan but those institutions will not let this transaction sit on a node with UBS, because they are not part of it. "
A third way
Moiz Kohari, the head of technology architecture at State Street, said that too many people use the blockchain" just for the buzz factor ", and added that many of the current cases of blockchain use are only focused on sharing information, for which a blockchain is not really necessary. "The movement of information on a blockchain can be done in a better way," he said.
Ed Budd, the former head of the digital office at Deutsche Bank, which now operates Adhara, a blockchain venture for emerging markets, is on agreement. He said that initiatives that simply place information on the blockchain and do not make the payment through the ledger, or that connect through Swift, are not making the best use of the technology. "The starting point of the digital is that you try to move up to the initiation point to start working digitally or you will not change much."
Marcus Treacher, senior vice president of customer success at Ripple, said he does not expect traditional finance players to emerge as the winners of the new technology because it is difficult to renew the plumbing of their existing networks . "This is where Swift and CLS are likely to be challenged.There are not many airlines that belong to shipping companies because ships have never made the transition to air travel;
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Some initiatives have found a degree of success in finance using ledger technology distributed as a starting point for their innovation.The fintech company Ripple used aspects of blockchain technology in its platform , which the Spanish bank Santander now uses for its cross-border payments.
These payments reach their counterpart within one day, compared to three to five days on average on traditional wire transfers, said Ripple.Repple has over 100 customers around the world, 20 of which are in production.
Cobalt, which applies generalized accounting technology to alutari, adapted the blockchain to its needs and last year signed Citadel Securities and XTX Markets. It has about 20 customers in production and processes half a million transactions a day.
Although these small successes are real, they are not yet completely revolutionizing capital markets. HSBC has drawn up a letter of credit for the American agribusiness group Cargill to ING using Corda, a project of distributed ledger technology from the fintech R3 company. The project took two and a half years to get to that point, however, and the HSBC executive Vinay Mendonca admits it will take another five to ten years for technology to be adopted within the finance business. commercial bank.
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Finance has not completely given up on blockchain and blockchain technology, and some insinuate in private that eventually a critical point will come in which banks and others will realize great savings through its use. As long as these projects are not very close to the final result, however, the enthusiasm of banks for the blockchain – and the willingness to sink further billions in exploration – will be limited, according to Oliver Bussmann, founder of Bussmann Advisory and former CIO of UBS.  "The question that many banks are asking is:" Is there an emerging competition that goes after my market share? "He said. "As long as the banks are profitable there will be no changes in behavior, at the moment the level of threat is low because there is not enough competition, so why would you change your business model?"
To contact the author of this story with feedback or news, write to Yolanda Bobeldijk