Blockchain has graduated from an emergent technology that suffered from a fair amount of industry hype 14 years ago, to a mainstream tool banks can use to create operational efficiencies and solve legacy problems, but the technology is still a distant threat to well established systems such as Swift, said experts during the Crypto and Digital Assets Summit organised by the Financial Times and The Banker in London today.
“Clients don’t care whether it’s blockchain or not — they just want to solve capital management problems, manage liquidity and risk — and that’s where we’re seeing a drive in blockchain adoption”, said Justin Chapman, global head of digital assets and financial markets at Northern Trust.
Easing the challenges related to wholesale cross-border payments is often cited as a real-world use case for blockchain. Currently, moving money around the world — in both the retail and wholesale sense — often relies on fragmented and complicated legacy systems.
In the wholesale space, this complexity is what is driving the current ISO 20022 migration led by messaging network Swift to create standards and ease efficiencies for the financial messages that underpin money movements.
However, Swift’s multi-year efforts have not won universal favour. Markus Infanger, senior vice-president of Ripple’s RippleX platform, compared the 51-year-old bank-membership organisation to postmen who still work despite the availability of email and other forms of digital communication.
When asked “Why is Swift still here?” Infanger conceded that blockchain solutions would complement, rather than replace, existing networks and systems, such as Swift, depending on the nature of the use case. Email was first developed in the 1970s but “we still have postmen”, he added.
In the short to medium term, Infanger said that banks will be working with the current system rather than fully migrating to new alternatives.
“Departing from Swift is a very different technological proposition; it will be here for some time still; you cannot replace something which has been established over decades,” said Philippe Meyer, head of digital and blockchain solutions at BBVA.
Joey Garcia, head of public affairs, policy and regulatory affairs at Xapo Bank, highlighted that banks will need to have integrated systems to be able to continue to transact. “If the Bank of England issues a digital pound — that won’t function without banks having integrated systems, but we are slowly seeing that evolution happen,” he said.
Other areas of the financial markets that are suited to blockchain solutions include repurchase agreements, or repos, used for the short-term borrowing of securities, added Meyer.
The repo market is “looking to blockchain because there’s no existing infrastructure to replace — this is where its adoption is moving quickest,” he said.
The challenges arise, said Meyer, when there is a need to replace complex legacy systems, and when doing so disrupts existing procedures and change well-established habits.
Chapman agreed that the repo market is one of the areas where the existing infrastructure is fragmented, inefficient and ripe for blockchain to step in and solve business problems such as capital being locked up during existing transactions.
“Liquidity risk management is definitely one of the big use cases,” said Chapman. He added: “We need better ways to deliver that liquidity management and manage the capital across the organisation. It’s a problem that’s resolved by blockchain.”
Problems of provenance, trust and transparency can be managed by placing certain markets in the blockchain, said Chapman. Those include the carbon credit market, where companies purchase credits originating from environmental projects to offset their carbon emissions.
Chapman said that blockchain can deliver more confidence around the provenance of bank clients’ assets.
He said that the carbon credit market is “very tight” and that it’d function “much better in a tokenised environment on a trusted network than a collection of opaque databases … that’s where you start to get the real value proposition of blockchain — the underlying attribute clients are trying to achieve is insight, trust, and potentially velocity”.
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