Insanity is Doing the Same Thing Over and Over Again, but Expecting Different Results – Might Blockchain Technology Break the Pattern?

27 Jan

Insanity is Doing the Same Thing Over and Over Again, but Expecting Different Results – Might Blockchain Technology Break the Pattern?

Thomas Zink IDC

Thomas Zink
Associate Research Director, IDC Financial Insights

Read full bio  @ThomasZink5

IDC Lawrence Freeborn

Lawrence Freeborn
Research Manager, IDC Financial Insights

Read full bio  @IDCLawrence

While blockchain remains the hottest topic for the financial services industry, the first voices are already starting to predict a stagnation of initiatives by 2019, based on the fact that the industry hasn’t managed to move beyond POCs.

However, as with any transformative technology, traditional players have to work through a lot of steps to move from trial to production. Just think of the repercussions if a couple of banks rushed into an active blockchain environment only to realize that security, data privacy, performance, reliability, or any other key requirements are not up to the task. This is not the way banks have worked, and nor should they.

Having said that, IDC believes in the massive opportunity brought about by distributed ledger technology (DLT) for the financial services space as well as for other industries. Yet another POC announcement this week reinforces our latest FutureScape prediction that by 2019, 30% of European trade finance will incorporate blockchain/DLT.

Only this week, seven large European banks — Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale, and UniCredit — announced that they are collaborating on a blockchain-based trade finance and supply chain platform called Digital Trade Chain (DTC). DTC aims to facilitate trade for SMEs that depend on open account transactions by accelerating the order-to-settlement process and decreasing administrative paperwork significantly. The original POC underlying DTC seems to be built on Ethereum, indicating that smart contracts will play a critical role to smooth the process and increase trust between the different stakeholders.

Most of these banks are already exploring DLT either by themselves, in other small groups or in larger consortia such as R3CEV and Hyperledger — depending on what’s necessary. There are good reasons for working in smaller consortia, such as the ability to move fast, work focused, and bring together cross-industry expertise, to custom-build a blockchain to fit the particular needs of a use case and without the need to solve every problem in the first round. On the other hand, we have seen how quickly fragmentation can happen and how difficult it is to implement shared standards ex post.

Time to Break the Pattern

There are countless examples of fragmentation holding industries back — think of payment messaging standards, credit card interoperability, data formats, and many more. And we have seen over and over again how difficult it is to move to common standards. Take ISO20022 and its many regional variations, which have been in the making since 2005, as an example. So, given the many isolated initiatives we see around DLT today, it does make one wonder if Einstein’s famous definition of insanity still applies or if blockchain technology can allow us to expect a different outcome this time around.

We believe the former remains the case and while technology may mitigate some interoperability challenges, the question is why deliberately complicate things in the first place. It is no surprise that interoperability has already received a lot of attention from the larger consortia and platforms. In October 2016, we heard that R3’s Corda platform would become open source and that codes will be handed over to the Hyperledger project. Hyperledger generally is conceptualized as a foundation layer defining an open standard to ensure transparency, longevity, and interoperability. Likewise, Ethereum design studio ConsenSys has launched BTC Relay, an open source project that enables Ethereum-based networks to interoperate programmatically with the Bitcoin network and eventually other Ethereum and Bitcoin-based systems.

This understanding seems to be setting in also for smaller initiatives, such as DTC. According to Vivek Ramachandran, global head of product for HSBC’s trade finance business, DTC is keeping interoperability in mind but there seem to be no concrete plans to connect to other platforms — at least for the moment.

The success of blockchain technology boils down to the typical chicken and egg situation. The smaller the consortium and the more purpose-built, specialized, and targeted the initiative, the easier it will be to bring the trial to success. But what good is a successful trial that cannot connect to the networked world? Blockchain technology is all about creating a network effect in a decentralized network. The more participants that are active, the bigger the value. Without shared standards, interoperability, and a solid foundation, scale will always remain a challenge.

If you want to learn more about blockchain and other financial trends, please contact Thomas Zink or Lawrence Freeborn.

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