Who Will Pay for the Blockchain Vogue?

05 June 2017
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Blockchain is in vogue in the corporate world. Although the prospect of a real change in the business landscape looks very remote, the distributed ledger technology is seen as nothing less than a new revolution. There is every reason for believing so, especially when we speak about infrastructure solutions  affecting the already existing network communities. But there are also serious doubts, especially about whether the current business models can be replaced quickly.

Since 2015, five out of ten Russian financial organisations and ten out of twenty international ones have announced the launch of their own proofs of concept or joined the existing consortiums. Although we increasingly frequently hear that their participants are leaving these expensive clubs. R3CEV, the largest and most well known consortium in the financial community, which, starting from 2015, was joined by eighty participants, saw the departure of Goldman Sachs and Banco Santander in late 2016, with JPMorgan Chase announcing its exit from the consortium this spring. As a rule, the leaving participants do not state the reasons for doing so.  It is very difficult to stop without losing face—even if you realise that, for your particular business or in your particular sector—the new technology is an expensive road that leads to nowhere. But the mass disappointment about costly blockchain projects is quite predictable and what is happening now is only the beginning.  There are lots of reasons for that.

First, up to now, there is no underlying platform in place needed for creating blockchain-based business solutions. Theoretically speaking, in order to make it possible to assemble a personal computer in a garage, it was first necessary for IBM to develop the IBM PC Compatible platform, having made multi-million investments in it.  In the case of blockchain, everyone rushed to create their own corporate "garages" for building their own "PCs", despite the fact that there is just no "platform".  The likelihood that an separate non-IT company will be a success is close to zero.  

One may argue that when such platform is created one should be prepared to tailor it for their specific needs.  After all, "the future will be here tomorrow". But, considering the lack of a ready-to-use platform, blockchain will not likely become a mass-scale technology in less than ten years.  Such assessment is most common among IT-executives who discussed this subject at the SIBOS, the world's largest forum of the financial services industry held by SWIFT in September 2016.

Shareholders and managers should honestly answer the question of what they are going to do with the new technology if, beyond expectations, they are able to create it or get it from someone else.  The answer is apparently clear.  In theory, the new platform should replace the existing ones.  But which ones? The most widely discussed business cases are "know-your-customer"/identification/loyalty programmes, payments and settlement, OTC transactions, and voting systems.   But, in a vast majority of cases, one would have to recognise the obsolescence of the solutions implemented over the past three to five years, which involved huge costs to develop and which serve as a basis for all business processes and resilience/security systems.  When the question of such replacement moves from the hypothetical to the practical, a sound analysis will show that it does not only spell huge costs, but also the need to implement massive-scale projects which will involve the whole company and which will necessitate a change of the entire business model. But this will take months, or even years, to implement and do the testing. Implementing a new platform will most certainly cost several times more than installing the proven solutions.  

Furthermore, very few people have considered the legal aspects of implementing new solutions.  There is one obvious, but still unanswered question: how do we cancel a transaction in a system which essentially does not envisage such cancellation? And what if the transaction still has to be cancelled?  Say, under a court order? As industry-scale platforms and solutions evolve, the list of such questions will be constantly extended.

Does this create doubt about the blockchain revolution? Certainly not.  The platforms will be created,  applications will be developed,  business processes will change.  Some markets will disappear and new ones will emerge.  The legislative framework will be updated to keep up with the evolution of technology and business practices.  

In that case, what should companies' directors and shareholders bear in mind in terms of practical steps?

First, one should set specific, achievable and measurable objectives.  One needs to have a strict stop loss— that is, how far you are prepared to go that way and in what circumstances you will stop. Second, one should not believe it is feasible to create a platform in one's garage and outstrip such IT sector giants as IBM and, in the financial industry, NASDAQ. It would be more appropriate to count on the emergence of a ready-to-use platform while working on certain aspects of implementing the solution in one's specific area. In preparing for the revolution, one should invest not so much in technology as in new industry standards and legislative framework.  

Third, you should not try and create a prototype if you do not have a network of corporate counterparties who are genuinely interested in greater transparency, reliability, and stability of such network.  Such companies as ours, or the regulator, which have this sort of network because of their infrastructural role, could implement the new platform quite quickly.   However, many projects which have been loudly announced over the past months, do not have such a network or are trying to create it from scratch.  For example, Ripple, the developer of a financial messaging protocol which may be used to build an innovative payment system. It is certainly an interesting idea, but it is not yet clear how it can be implemented without an already operational counterparty network.

Fourth, one should join efforts.  It is an expensive technology.  That is exactly why consortia are so popular—NSD is creating one for its specific needs together with other countries' CSDs.  However, fifth, it would be unwise to join efforts with those who have business and objectives incomparable in scale with yours. Of course, one could buy a ticket to a gathering of industry majors, but you will not be allowed to set the agenda and they will not share results with you for free. This upsets even major players, and I think that is why they have left R3CEV.

Before deciding on the scale and form of investments in the new technology fad, shareholders and executives in whatever region, sector and of whatever scale of operations, should very strictly identify their own business objectives, assess the current status of the new technology and the cost of real leadership, see how the new platform could replace the existing solutions with reference to specific markets, and, above all, how and when the blockchain technologies will be able to generate real, not "paper" profit specifically for you.

Sergey Putyatinsky, IT Director, NSD

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