Beware of mirages – Blockchain technology can help but cannot solve all Finserv problems

The blockchain or distributed ledger technology is fascinating because it questions how businesses have been conducted for decades (even centuries): Do we really need trusted intermediaries? What is trust? What is a contract? What is identity? Etc.

But regarding its application to Financial Services, what fascinates me the most is the hiatus between the concept and the practice.

The concept is simple and appealing:

  • “Why don’t we exchange everything (Securities, Derivatives, Loans, etc.) the same way we exchange Bitcoins?”
  • “Sending digital assets should be like sending emails!”
  • “Let’s get rid of intermediaries and save the billions of dollars spent in reconciliations!”

To the point that when all you have in mind is a blockchain, everything looks like a blockchain use-case.

But in practice, the Bitcoin Blockchain was a solution designed to solve one problem: the exchange of units of value in a P2P and trustless environment. Financial Institutions operate in a B2B/B2C, trusted and heavily regulated environment. It should be obvious that for a different problem, you need a different solution!

Banks and Insurances are experimenting many use-cases for asset issuance, clearing and settlement, trade finance, payments etc. Experimentation is good. After a lot of trials & errors some solutions will emerge. These solutions will probably re-use some features of the Blockchain, but they will be very different from the Bitcoin Blockchain. As a matter of fact, the banks’ blockchain consortium R3 is not building a blockchain …but a highly customized distributed ledger platform.

The blockchain technology is not the solution to every problem. But don’t get me wrong, distributed ledger solutions remain extremely useful and powerful for some specific use-cases (think peer-to-peer applications, storage of “proofs” outside the firewall, etc.).

Bottom line: Blockchain technology could be the right tool for Financial Services, but beware of mirages! Start with a business issue, only then consider if it could be the solution.

A summary of pundits’ opinions on blockchain based on their understanding of technology and finance:

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