There is a frenetic and rather exciting energy amongst many financial services institutions. Boardroom debates and conference agendas are quickly morphing from staid conversations on risk management and regulation to fintech, the internet of things and most noteworthy the potential disruption by blockchain technology. As with all new and exciting innovations, there is somewhat of a dichotomy between the technology visionaries and the Luddites of the industry. However, one thing is certain, those operating in the financial markets cannot maintain their current status quo and need to embrace new thinking which is in line with the exciting changes that lie ahead.
No article on blockchain seems complete without describing it as the distributed ledger technology that underpins Bitcoin. Yet industry debates in recent months have matured far beyond this definition to focus on the additional applications of this technology.
At a high level, a blockchain is a single distributed ledger that anyone can view, with the option of no single participant or authority in control. It is collectively kept up-to-date and transactions are immutably recorded and cryptographically stored. The technology has the potential to provide credibility and trust to the ecosystem with built-in smart logic and high levels of automation.
The problem today is that many organisations seem to be trapped in the hype of analysing the intricacies of the technology, conducting due diligences on thousands of fintech start-ups and generally focusing on how to protect their legacy business. While some of these are necessary evils, there is a lot to be said for taking a step back to look at the principles (See diagram 1) behind blockchain technology and how those can be applied to optimise, innovate, challenge and grow one’s business for the benefits of the customer.
The question that comes to mind is how the financial services industry can apply the principles of blockchain technology to an industry that has become increasingly complex and overly cumbersome. This is not the time to just be substituting existing operating models and systems with blockchain technology but rather realising that there is a completely new paradigm of thinking – one which fundamentally alters the way in which our industry and society hangs together in an entirely new, different and better way.
As a short-term reprieve, the reality is that regulators are not going to allow blockchain technology and fintech start-up to ‘take-over’ the financial markets overnight. This is the most highly regulated industry – the fabric upon which the world’s economy operates. However, they are also not going to sit back and protect legacy businesses when there is real value and benefits to be found. A number of regulators are already showing a strong interest in blockchain technology and the industry is moving at an unprecedented rate that one cannot depend on regulatory protection indefinitely.
It is through truly understanding and applying the principles of what blockchain offers that the industry can begin to have a completely different and rewarding conversation around the future of financial services. Without this, regulation will catch up and fintechs will continue to legitimately offer new and better services to customers – profoundly shifting the balance of power away from established business. Innovative thinking around blockchain’s principles needs to be harnessed for an organisation to thrive and not just survive.
Author: Tanya Knowles, Executive Director of Fractal Solutions, a Division of Strate (South Africa’s Central Securities Depository).