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For those in financial services, with at least a basic understanding of the basics of blockchain, it can be difficult to understand why it is still not a part of their business, even though many claim it will revolutionize their industry.
This column addresses how it all happened, how it could, and why it will.
When the first computer network, known as ARPANET, was successfully launched in the early 1960s, many experts and observers viewed its potential as being limited to a niche of military users and scientists. Yet its emergence ultimately demonstrated that the electric power grid, networking technology and telecommunications could be brought to a level beyond any single firm or country. These pioneers clearly foresaw the impact blockchain could have on the financial services industry.
As late as the late 1990s, the consensus among insiders in the financial services industry was that blockchain would eventually become an effective way of moving assets electronically, but it would probably never reach the masses. Even in 2000, at the dawn of the internet age, there were estimates that the technology could become a big part of trading in the years to come, but the bulk of the market was not expected to use it.
Arguably, blockchain's value proposition and implementation have been clouded by the focus of the market on bitcoin, a form of digital currency. Bitcoin and other digital currencies allowed users to conduct all sorts of transactions without the need for a central institution or third party. Bitcoin and other cryptocurrencies have made the world's most powerful global institutions uneasy, especially the International Monetary Fund (IMF), which issued a rare, blunt warning that digital currencies such as bitcoin pose a risk to financial stability and should not be used to bypass regulation.
But they are still a factor in the industry. Blockchain allows users to conduct their business securely without relying on a central authority. Bitcoin, the most popular form of digital currency, was initially conceived as a way to circumvent government controls, but the price of bitcoin has experienced huge volatility. And the existence of more than 800 cryptocurrencies has led to confusion about whether the market for them is still in its early stages or about to come of age.
A large part of the skepticism surrounding blockchain is due to a perception among many in the industry that it would be hard to successfully implement in its current form. In the case of bitcoin, the concept seemed physics: to defy coins and banks could not coexist. Such skepticism may well be justified. Today, there are legitimate reasons to doubt that bitcoin or other cryptocurrencies will prove their worth. But this misunderstanding highlights how blockchain's value proposition has yet to be fully realized in the industry.
Blockchain is the distributed database that is maintained by a network of computers in one or more locations, but the architecture behind blockchain has been evolving. It's often assumed that blockchain is just a database, but it is much more. To gain the full potential of blockchain, those in financial services need to understand it as a way to move assets and transactions into a transparent and traceable network with no need for a third party.
Even though the technology has been around for some time, its full potential has remained largely unexplored. Blockchain and cryptocurrency are very young in their development and, at first, they encountered some significant challenges that were not anticipated by those that first began exploring their potential. But that's a short-term hurdle for blockchain: The technology has now matured to the point where it's likely to have widespread use over the next few years, and adoption will likely accelerate over the next few years.
In the financial services industry, the lack of clarity about how blockchain technology will work and how it will be used has been most prominent. But even beyond finance, the business world is still trying to figure out the potential of blockchain. It could have a significant impact in the areas of telecommunications, retail, logistics and even the publishing industry. As such, it is essential that all stakeholders understand its benefits. In time, these misconceptions will likely be cleared up, and the full potential of blockchain will be unleashed.
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The term blockchain has been in the business lexicon for just over a decade. Originally, it was used to describe an open-source database developed by a group of researchers that aimed to address some of the central issues associated with the establishment of digital currencies, such as privacy, security and scalability. But it has recently evolved into the mainstream. Now, it's commonly used to describe the architecture underpinning digital currencies such as bitcoin and is now being applied to a variety of new verticals and industries, such as retail, supply chain, ecommerce and financial services.
If used correctly, the technology behind blockchain may hold the potential to transform industries and eliminate inefficiencies in those that process a lot of data. It could also transform entire business models, thus improving the customer experience. But, so far, adoption by businesses in the financial services sector has been slow and is only set to continue that trend.
Over the past few years, the challenges with blockchain technology have been frequently cited as barriers to adoption. For one thing, blockchain is often described as a network and, while that is technically true, the reality is that it is not actually a network in the true sense of the word. It's much more than just a network, as it involves the creation of a series of identical copies of digital data in a distributed network of computers, often referred to as a blockchain. These copies can then be distributed to numerous people, including the various stakeholders in the financial services industry. That means that any business that requires a traceable and transparent system for exchanging data and transactions would need to understand how to create a blockchain, which involves a lot of technical knowledge.
There is also another, more basic issue that is rarely mentioned when describing why blockchain adoption in the financial services industry has been slow: There's little need for it at the moment.
To illustrate, consider a hypothetical example. A group of bankers is contemplating starting a new business that offers a new service. As part of the decision-making process, they decide to ask their head of sales, who is responsible for getting new clients to them, to do some research and report back with a recommendation about what product and pricing would be best.
The problem is that the nature of the product and the service will be wholly different from the banking model that they have worked in for the past 30 years. The ramifications of such a change will likely be quite significant. The role of the head of sales will likely have to change as the role is now being recognized as more of a sales representative than the traditional title of the role suggests.
The same is true for the customers that the business is trying to attract. The technology and the service being offered will not be the same as that offered by the bank, which is no different than in the context of today's financial services sector. By comparison, in a retail environment, the opposite would be true.
But the fact that blockchain's features and benefits aren't currently required is something that is often overlooked. The technology has the potential to enable far more efficient processes across an industry that has been plagued by sluggish innovation. It could bring significant benefits to firms in the financial services industry in terms of increased speed, security and transparency of information. But those benefits will only be realized if the transition to blockchain is undertaken with adequate planning and forethought.
The common perception of blockchain in the financial services industry is that it is only suitable for big-data, big-transaction applications. In fact, blockchain is so much more than just that. The technology has the potential to create a next-generation database that has the capacity to radically change the way business is done across every industry.
Of course, it would not be unreasonable to expect these benefits to be realized over time, as those who have come up with the technology and have gone through the requisite trials and errors in the creation of the blockchain ecosystem mature. But they need to be achieved at the outset of the project, otherwise adoption is going to be slow and costly.
To that end, the question remains: How will blockchain benefit a typical financial services firm? There's no single answer to that question. It's quite possible that most firms would not benefit from blockchain due to the nature of the business that they are in. But, for those firms in the more disruptive end of the industry, blockchain's potential is truly remarkable.
And while those who have the most to gain from adopting blockchain today are going to be in the more innovative end of the industry, the technology still holds significant appeal across a wide range of business types.
So what do you think? If you are in a business that is currently heavily reliant on legacy technology, what impact will blockchain have on your industry? What should be done to introduce blockchain to your organization? Share your thoughts with me by tweeting me @zackjdupree or leaving a comment below.
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Zack DuPree is CEO & Founder of DuPree Consulting, LLC. DuPree Consulting is an independent business consultancy based in Columbia, South Carolina, specializing in marketing, sales, and business development.