Blockchain Is Part of the Solution, but It's Not the Whole Solution

| FinReg

By Leda Glyptis, Sapient

Originally published on Tabb Forum

Even the coolest technology is not a story unto itself, and blockchain is no exception. The blockchain is part of how we can re-imagine the entire value chain. But simply rebuilding familiar processes on the blockchain is not useful.

It turns out there is such a thing as a dumb question. Literally “dumb,” as in moot and unanswerable. And a large number of smart, busy people are spending precious time trying to answer it.

“What are you doing with the blockchain?” is the technology equivalent of: “Hammers are cool – what are you doing with hammers?” The concomitant of which is an inordinate amount of time spent looking for nail-shaped objects to hit with said hammer. But in DIY, only the simplest and least life-changing of projects can be tackled with a single tool, no matter how cool. And that truth holds in financial services as well: Even the coolest technology is not a story unto itself.

Why does that matter?

Because the set of capabilities we bundle under the umbrella term “blockchain” is powerful, exciting and potentially radically transformative, and going around trying to find “something to do with it” is the equivalent of using a magnificent fire breathing dragon to light cigarettes.

Every journey starts with a single step, and every prototype, every pilot and every POC has been essential on the road to building the confidence that this technology is real. Each successful laboratory experiment has built the base of the pyramid a little stronger, a little wider. It is essential and I don’t mean to dismiss it. But how many times do we need to confirm that it works before we start putting it to real-life uses?

But that is only half the reason why I can’t get excited about experiments in the post-trade and settlement world. The other is even more fundamental: what we call “the markets,” in all the complexity of a mature and layered eco-system, evolved over a couple hundred years to serve a series of needs and requirements with the best technology available at each juncture.

With every passing year, advances in communications and mathematics permitted for the creation of derivative functions. Regulation, secondary markets and leaps in information technology accelerated the evolution of what is now an extremely complex animal that employs millions of people, generates trillions of dollars and – in all its convoluted abstraction – has a real day-to-day impact on real lives at a micro and macro level: from the milk in your fridge to your mortgage and credit card, to financing national infrastructure and global initiatives, money is locked into a cycle of value and inter-connected activity.

The need for value exchanges, credit, liquidity and risk hedging has not diminished during the course of this journey; on the contrary. The way those needs have been interpreted and serviced, however, has been evolutionary, reactive to circumstances and constrained by the technology available which, for most of this journey, has been minimal.

That is no longer the case.

We have entered a period of immense technical and technological creativity, a golden age of civilizational acceleration. The advent of the digital era allowed technology to power human experience in a way that feels unmediated.

Simply put, a lot of what we used to do to get from A to B is no longer needed. The blockchain is part of how we can re-imagine the entire value chain. It is also why rebuilding familiar processes on the blockchain is comforting but not useful.

We have gone through a learning phase as an industry, starting from a place of fear: Could this technology totally disintermediate us? Experiments were carried out to prove whether it could, and the debate now is on the tipping point and scale needed for “blockchain to take over” as if it were an active agent of change in itself. Endless committees, panels, industry consortia and internal working groups. An uneconomical number of talented people are tinkering around the edges, doing interesting things and learning a lot.

A whole library of white papers has been produced, visualizing various versions of a future whereby blockchain rules all and whoever commissioned the paper has a position of continued relevance. Not all of those visions can be true.

So what do we do next?

We drop the dumb question and ask the hard ones.

We need to separate the value chain conversation from the service conversation. How we used to make money will change. The way the financial markets work will change. This technology will be part of the change. Let’s focus on purpose and re-assert our relevance to an emerging value chain. As I said, I am a huge fan of the capabilities. This is why I would like to see a focus on business outcomes and the right tool to solve business challenges and power business opportunities.

We live in complex economies. That means specialization and composite systems where each part (human and non-human) contributes something different. Treat what we summarize under the blockchain banner as a set of technical capabilities. Focus on the business problems, then design the best solution to suit your needs. And if you can’t do that, you may need to solve for a talent challenge rather than a technical one.

Banking provides a series of services that remain essential for individual and commercial activities. The way those services are currently provided is tied to the specific conditions – regulatory and technological – that prevailed when each department, pricing structure and service line was set up. Those realities have changed and although the functions of banking, writ large, are still needed the way they are carried out is not.

That is a hard question to tackle. No matter how creative we get in the lab, executives remain responsible to shareholders, who want to see a dramatic shift in operating costs to go along with the new lower revenue post-crisis paradigm. This framework doesn’t make for pleasant conversations or for wholesale institutional alignment behind the unsung hero that is the banking innovator, swimming upstream day after day, asking the hard question: How do we remain relevant in a world that renders the way we do things – but not the things themselves – irrelevant.

If you sit in a part of a bank that provides agency services (no longer needed in a world that allows for trust-less transactions on the blockchain) or reporting services (rapidly replaced by API connectivity), that’s grim news; but if you are a customer, retail or institutional, the news is great. If you are the banking executive, you have time for neither because you have a responsibility to your customer, employees and shareholders to focus on the big question: In a world that may no longer need every aspect of my activity but still needs my services, how can I use the amazing wealth of new technical capabilities to reassert my value proposition, serve my customers’ needs and equip my people to deliver?

The blockchain is part of the answer, but not the whole answer. As ever, answering the real question is hard, but unless there is a clear line to business relevance, then the best experiments will not move the needle. In redefining business relevance, we will figure out what to do with blockchain. And it will be valuable. It will also be new.

Tags: FinReg, Blog , Regulation