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Blockchain adoption in banks coming, but slower than expected

Clint Boulton | Nov. 15, 2016
Banks will likely take 24 months or longer to push blockchain software systems into commercial production, says the man who championed the digital ledger technology at UBS.

Recent headlines suggest that blockchain technology is revolutionizing financial services. JP Morgan Chase, Barclays, Commonwealth Bank, Wells Fargo and several other leading banks are using the digital ledger technology to conduct equity swaps, cross-border trades, and other transactions.

You might think that blockchain has gone mainstream. Not so fast, says former UBS CIO Oliver Bussmann, who claims it may take banks two years to run blockchain in production due to regulatory hurdles, a lack of standards and other stumbling blocks. “This is real, this will come but in a very regulated environment. We will go through a lot of validation,” says Bussmann, who jumpstarted blockchain efforts when he was leading IT at the Swiss bank last year.

Former UBS CIO Oliver Bussmann
Former UBS CIO Oliver Bussmann.

A web-based digital ledger, blockchain makes copies of data for all of the relevant stakeholders in a transaction, using cryptography to secure data and ensure trust. Its decentralized architecture and encryption makes it difficult to crack so it is viewed as a credible tool to facilitate the exchange of monies or verify the provenance of goods moving through a supply chain. Blockain's authentication capabilities also make it a potential cornerstone technology for the internet of things, in which everyday machines are subject to influence and control by malicious code.

Hark, the contrarian speaks

Bussmann is bullish on the technology, comparing the blockchain’s arrival to the emergence of the internet itself more than two decades ago. He says banks can use the technology to slash processing and infrastructure costs while accelerating transaction processing. He says that blockchain transactions could reduce time and costs for cross-border trades from days and $25 each to minutes for as little as $1 each. "This will disrupt the financial services industry,” Bussmann says.

However, Bussmann is also a pragmatist, citing recent IBM research which found that 15 percent of 200 banks – or just 30 out of 200 expect to launch blockchain solutions into commercial production in 2017. Bussmann says the lack of messaging and business standards as well as formats for shared data, business processes, roles and responsibilities to address complex financial transactions will hinder adoption in the near term. "Blockchain is not only a technology play, it is also a change of business process and business logic, which involve multiple parties," Bussmann says.

Banks will also need to wait for regulatory approval for collecting, storing and sharing customer data. Cross-border trades will prove particularly challenging, as they will require approval between regulators from different countries, few of which are aligned on the nascent technology. For instance, Bussmann notes that regulators in U.K. and Singapore and other countries are farther along in their understanding and acceptance of blockchain than the United States. Bussmann says legal firms in the U.S. don’t anticipate production blockchain solutions in the country until 2018.

 

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