Now we can get to work. Blockchain has been the future for so long that it has become the present. We’re used to it. We know its strengths and weaknesses and we can start to use it for what it is. And frankly – disruption it ain’t. “Blockchain didn’t just turn up last year; it has been around since the mid-2000s and there has been no silver bullet,” says Ramy Soliman, CEO, Stater Blockchain – see Q&A on page 86. No silver bullet yet, anyway. Fair comment? Satoshi published his white paper on 31st October 2008 and I’m still paying for my bagels in fiat currency. Fair comment.
That said, FX back-office processes are evolving. CLS Group, which has been working with a number of banks to build a DLT-based payment-netting service for the FX industry (discussed in detail in e-Forex Q1 2017 and it’s also worth reading the CLSNet write-up at cls-group.com), announced at end-May 2018 that it had made a “strategic investment” in R3, to explore the efficiencies achievable through the deployment of R3’s Corda enterprise-blockchain platform. “We look forward to working in collaboration with other members to explore how CLS can provide transformative blockchain-based solutions,” said Alan Marquard, chief strategy and development officer at CLS.
That transformation, Marquand went on to suggest, would feature the delivery of “efficiencies and risk mitigation for a diverse range of market participants.” In another recent (May 2018) development, Singapore Exchange (SGX) has made a “strategic investment” in Cobalt, the FX post-trade processing network. The familiar but conspicuously recurring term “strategic investment” is variously defined online, variously used by fintech backers, the common feature being that it’s all about long-term goals. “Our platform addresses pain points faced by almost every institution that trades FX,” says Adrian Patten, Co-Founder and Chairman of Cobalt. Strategic investment is a route to innovation.
Elsewhere in the FX market, there’s interesting work being done on risk and compliance with smart contracts, for example (again, see the Q&A), and to put it mildly, there’s entertainment to be had from watching developments in the crypto-retail space. The conclusions we might draw are, first, that we do know what blockchain could do for us, and secondly, that we are working together to achieve a more efficient and less risky future. Blockchain’s first achievement is collaboration and we’re “strategically directing” our resources towards innovation.
But if the smart money (in the old sense) is now chasing/driving innovation, it’s also fair to say that we haven’t achieved everything we thought we could achieve over the past decade. Far from disrupting the system, blockchain has become part of the system. It isn’t exactly one more tool in the toolset, because mostly we just take it out to demonstrate how it would work more efficiently if we did use it – before putting it back and reverting to the infrastructures and solutions that we’ve always used. We build on it, yes, but blockchain is still the exception.
Which is strange. We’ve talked the talk, after all, and attended the conferences. Is that it? Blockchain’s just the thing we talk about and demonstrate while we do business as normal? No. Quite the opposite, in fact. There’s a two-part argument to suggest that blockchain’s pattern of development to date indicates a more stable future for the techology – a more stable future in FX – than even immediate widespead adoption might have achieved.
How does that work?
Not the novelty option now
First, the familiarity of blockchain is itself a strength. “People need to get their heads around being comfortable with the technology itself,” says Soliman, and that’s beginning to happen. But also, more importantly – blockchain is no longer alone. It’s no longer new, and it has what we might as well call strength in numbers. Blockchain is no longer the only new-tech option on a “menu” of otherwise traditional, older-generation methodologies. The choice is no longer, so to speak, blockchain or legacy, innovation or comfort zone.
In the circulated translation of a recent speech (see Blockchain around the World), China’s President Xi Jinping said: “A new generation of technology represented by artificial intelligence, quantum information, mobile communications, internet of things and blockchain is accelerating breakthrough applications.”
China’s attitude to innovation (and to cryptocurrencies, and to ICOs) is important in itself, of course, but in Brian W Arthur’s phrase (see the box Innovations, combinations), this also raises the prospect of “combinatorial evolution”. The argument gaining traction is that we have moved away from a binary choice between gambling on a single new solution and staying with the familiar, to an environment in which the various available technologies have gained the ability to adapt (evolve) to what’s required. To adapt Xi Jinping’s conclusion, blockchain is now part of an innovation cluster that is accelerating a breakthrough.
This is the reasoning whereby a silver bullet on its own is just a desk ornament. The second part of the overall argument is that blockchain development has become flexible; in effect, blockchains don’t have to be just blockchains. This is the continuation of a trend that began with a 2016 blog post by R3’s Richard Gendal Brown, announcing Corda. Brown wrote: “Corda is a distributed ledger platform designed from the ground up to record, manage and synchronise financial agreements between regulated financial institutions. It is heavily inspired by and captures the benefits of blockchain systems, without the design choices that make blockchains inappropriate for many banking scenarios.” You may remember the debate that followed: was Corda a blockchain or not? Conclusion; not exactly, but never mind.
If we don’t have to worry about whether the thing we’re building is a blockchain or not, we can focus on the spirit of the idea, not the letter. If our innovators are working on “a new generation of technology” rather than (to be unfair) on resizing our challenges to fit a blockchain solution, we can, in the best sense, make the future up as we go along. We can build our solutions as we want them to be.
Where does this take us?
To the sandbox with SWIFT
In a recent (December 2017) Deloitte Insights article, flagging Deloitte’s Tech Trends 2018 report, we find this. “One final point to keep in mind: blockchain use cases do not necessarily need to be industry-specific or broadly scoped to have commercial potential. In the coming months, as the trend toward mass adoption progresses, expect to see more use cases emerge that focus on enterprise-specific applications that meet unique value-chain issues across organizations. If these use cases offer potential revenue opportunities down the road—think licensing, for example—all the better.”
Enterprise-specific applications that meet unique value-chain issues. Build yours to do what you want it to do. We might guess that SWIFT, for example, has taken this to heart. In March 2018, SWIFT published the final results for its DLT proof of concept for Nostro reconciliation. This involved 34 participating banks, each of which had its own node in SWIFT’s DLT sandbox (all built using Hyperledger Fabric 1.0). Significantly, the objective of the exercise was not only “to work with the technology in a ‘many-to-many’ setting addressing a real business issue, and to draw lessons for larger-scale implementations of the technology in the bank-to-bank payment area,” but also “to assess whether DLT, combined with SWIFT assets, would meet industry-level governance, security and data privacy requirements”.
Because that’s the real question now. SWIFT was also testing “whether DLT could bring concrete benefits over other architectures,” and checking whether DLT is a sufficiently mature technology “to serve as a production-grade application within a mission-critical global infrastructure”. Verdict: DLT can deliver. “The PoC went extremely well, proving the fantastic progress that has been made with DLT and the Hyperledger Fabric 1.0 in particular,” says Damien Vanderveken, head of research and development, SWIFT.
Significantly, DLT also “generated the data required to support regulatory reporting”. Vandervecken continues: “The DLT sandbox enabled us to control access, to define and enforce user privileges, to physically segregate confidential data and store it only with the relevant parties while supporting a strong identity framework by linking all participants to their BIC, and having all keys signed by a SWIFT certification authority”.
And all of that without mentioning blockchain. This successful PoC hasn’t triggered a wholesale migration of the entire SWIFT network onto a custom-built DLT structure, of course, and there is more work to be done – DLT did pass the test, but the PoC also “evidenced the considerable pre-requisites for industry adoption of such a solution – for instance, all account servicers would first need to migrate from batch to real-time liquidity reporting and processing, and back office applications would need to be upgraded to feed the platform with real-time updates”.
More work needed, but not so much on the solution, as on the industry: we may not need to resize our challenges, but there is work to be done on ... let’s call it compliance with the new. Echoing the point made earlier that today’s opportunity is to work on a new generation of technology rather than just blockchain, Stephen Gilderdale, chief platform officer, SWIFT, says: “It is a strategic priority for SWIFT to work with new technologies like DLT and incorporate them into key solutions like gpi.” [SWIFT’s global payments innovation (gpi; branded in the lower case) is a “comprehensive suite of financial crime compliance services” and “the new standard for cross-border payments”.]
Change is coming. Again.
What we’ve lost, and it’s a healthy development, is the excitement. Blockchain no longer stands out; it’s embedded in our thinking. If we’re all working on it, and the changes we need to make are on a par with, say, the demands of compliance, perhaps we can dispense with the standard paragraph about challenger banks not having legacy and therefore having an edge. The future, in a sense, is becoming “normalised” over time. It’s coming to all of us on equal terms.
Also, if we think of a “combinatorial” future, in which what matters is what works, then innovation becomes an enabling mechanism rather than an obligation. It becomes, if not quite exciting again, then at least do-able. Michell Zappa, “self-proclaimed futurist” and founder of Envisioning, says: “We tend to over-estimate the short-term effects of technology and under-estimate the long-term effects.” We’ve had blockchain in the short term; now let’s get into the long term.
Today’s innovators point to the current proliferation of new ideas – AI, IoT, DLT, for example – as evidence that we are entering a transformative phase in financial-sector (and wider) evolution. Their argument is that, in effect, innovation breeds innovation. The more innovation there is, the more there will be. Crudely, if innovation is seen to work, the more people will try it.
Central to these arguments is the concept of “combinatorial innovation,” first proposed by W Brian Arthur in his book The Nature of Technology: What it Is and How it Evolves (Free Press, 2009). Arthur suggests that technology evolves from earlier forms – but by combination rather than a Darwinian evolution. Thus, we might guess that the invention of the wheel, plus the invention of the headlight, plus the invention of the internal-combustion engine, led somebody to have the idea for the ignition key.
A variant on this concept is that innovations impact upon each other: a perceived flaw in blockchain, for example, might atttract a solution from elsewhere in the innovation ecosystem. If blockchain is too slow for FX-transactional use, for example, you might decide to stick with established systems – but you might also watch out for the unveiling of the new, high-speed blockchain 2.0 transactional solution.
For more on how innovation happens, you’ll find the Sibos 2016 presentation Emerging technologies for financial services by Michell Zappa, founder of Envisioning, on YouTube. Very interesting.