Blockchain deploiement

A very promising technology

As mentioned already a few times here, Blockchain is a very promising technology in particular for financial services. In a recent study the consulting firm Oliver Wyman suggests that using Blockchain, banks could save per year by 2020 between 15-20B$ in infrastructure costs.

In the recent finnovasia meeting Stephens from UBS confirmed that blockchain will bring a real disruption 

But some limitation factors
 
This will not be achieved without using the technology at its full scale: the less native is the implementation, the more effort will be needed to ensure consistency with the existing systems. But there are some factors limiting the full adoption: some ecosystems are pretty complex. Securities for example, involves a lot of actors working together (clearer, exchanges, custodians, brokers, ...) which means that a full native implementation requires an agreement among all these actors on one standard.

Those ecosystems have been incrementally built over decades if not centuries. As described in a previous post, banks will need to define an integration strategy to gradually expand the blockchain grip.

Not a global deployment but some starting points identified

If a global deployment of such disruptive technology is quite unlikely (also due to the blooming technology offerings), in the finnovasia session about blockchain, as reported by Coindesk some starting points have been identified :

• Stephens for UBS said that blockchain will replace several hundred of internal ledgers.

• Alex Edana form WIP Solutions CEO said : "Australia will be the first market on the blockchain in three to five years," he said. "There, you only have [a small number of] banks and a couple exchanges."

This reinforcing the idea that the smaller, the easier. Small eco systems like Australia with less legacy will adopt blockchain faster.

It also shows that there is a benefit for large organizations to adopt such a technology internally in order to rationalize their internal processes. Remember that large organization do a lot of trades internally in particular between sales and trading center. Those trades are booked in each branch and need to be reconciled all time.

 

Hype curve ?

Hype curve @Wikipedia

This phenomenon in technology adoption is very well known. Blockchain will make no exception: the hype will grow and as first implementations will be partial, returns will be disappointing and hype will drop massively. Then little by little the small scale projects will demonstrate returns and will grow incrementally.

"Rome was not built in one day"

Why nations fail ? ... and why companies fail ?

Why nations fail ?

In this very inspiring book, called why nations fail ?, Daron Acemoglu and James Robinson demonstrate with a number of in depth examples that disappeared civilizations have failed because they have not been able to incentivise their citizens in creating value. 



Extractive civilizations are the ones where the elites try to extract the larger value from the citizens without giving any thing back. Value is extracted not only through taxes but also in redirecting towards the elites all the possible value, controlling monopolies, not respecting property and in some cases not even respecting the human rights of their citizens. 

In such a context, why should citizens be motivated in putting huge efforts in generating value when this value will be captured by the elite ? 

Among the number of examples brought by the authors to illustrate this theory, one is  fascinating : the Venice republic. This small town has been able within a very short time to expand its influence to whole Mediterranean area and in an even shorter time, they have collapsed completely !

Why ?

The reason why Venice republic has been so successful is that they have invented an inclusive governance in which the citizens were paid back from the efforts they put for generating value. As an example, Venice republic invented the joined venture: a shared model between navigators and merchants was in place to incitivise navigators to explore and trade with remote countries. Back to Venice those successful explorers were getting a reasonable part of the cake and were gaining influence within the city as the governance model was open to new comers. 
This illustrates the creative destruction coined by Joseph Schumpeter. 
Of course, creative destruction comes at the expense of established players and this is the very reason why elites are getting increasingly reluctant to support such an approach. They have climbed the ladder and they don't want to be challenged or even worse to be replaced by new comers.
This is exactly why, after years of success Venice republic failed : governance changes stopped the inclusion of new comers establishing a status quo among the established players. This froze innovation and growth and lead extremely rapidly to the decline.

What about companies ?

A strong parallel can be made with companies which are somehow similar to states : they set up  a governance  model which can be more extractive or more inclusive. Normally when they are small, they favour initiative and growth and tend to be more inclusive. Later, being established, they become extractive, extracting the more value possible from their employees and keeping the status quo as much as possible making them becoming in the end irrelevant. 

This theory about inclusive vs extractive approaches also explains the success of transformational leadership which aims at developing employees instead of only extracting value from them.

Goldman Sachs patents blockchain technology for Securities

Securities settlement  is a rather cumbersome process coming from the old days when securities were still materialised. The whole process is still needing some days to complete (between 1 to 3) generating some credit risks in the meanwhile.

Streamlining this process is therefore not only important from an efficiency view point but also from a credit risk perspective. If delivery versus payment is processed immediately,  it will optimise the processing costs and reduce the credit risks.

This is why Goldman Sachs put some efforts and investments in that mater which lead to issuing a patent which has been recently validated.

The idea here is to create a new currency called SETLcoin which will represent any kind of securities (called PIC in the patent). These new coins will be exchanged against other coins like bitcoin.

The patent is describing a coordinator which will ensure the simultaneous completion of the two transaction legs (money against securities).

This reinforces the view BNP Securities has shared in a research paper earlier this year, the securities industry is going to be severely impacted by the blockchain technology. In this paper, BNP presents two possible scenarios : a complete disruption where the market participants trade directly without any central body or a more conservative one where the established actors will embrace blockchain technology.

This patent has been filled something like one year ago and demonstrates how much interest the established actors have for this technology.

Goldman recently confirmed its forecast regarding the disruption blockchain will introduce, this post also shows the amazing investments the blockchain technologies have attracted.