By Joseph Neu | September 16, 2016
Blockchain will not just recede back to the “dark web” soon, as I tried to convince my expert panel.
The panelists for a debate I moderated this week at the Cash and Liquidity Optimization USA conference in New York provided some valuable insight on blockchain that I wanted to share. First, they agree with the key findings of the recent World Economic Forum (WEF) paper, The future of financial infrastructure, An ambitious look at how blockchain can reshape financial services, including that blockchain, or distributed ledger technology (DLT) will be world changing. Despite my best efforts to spark debate by taking contrary positions, including my suggestion that blockchain will stay more popular with denizens of the dark web than with public company treasurers, all the panelists remained bullish on the burgeoning technology and agreed with the key takeaways below:
- Blockchain is a friend to corporates by bringing efficiency, risk reduction and innovation.
- Of the major use cases, while payments may be the biggest, trade finance/supply chain finance solutions may come be adopted sooner, to be followed by identity management and even collateral management.
- 2017 to 2020 is when blockchain offerings will start to be realized, nothing tangible will happen this year or next.
- Banks (and shadow banks) will be needed to make blockchain solutions work, since they will remain the principal low-cost sources of capital.
- To overcome banks’ tendency to issue press releases over rolling out real solutions, corporates are to be encouraged to press them for blockchain-enabled products and services.
- Whether they press banks or not, the efficiencies to be won from blockchain/DLT, plus the competitive dynamics of VC and bank-backed FinTech companies, will see banks introducing DLT on the back end of services where they make sense. As a result, unless you press the point, you as corporates may end up benefiting from DLT without even knowing it.
The panel changed my view that payments is the gateway opportunity for FinTech firms using blockchain. Their argument is that payments already work pretty well on the rails that they currently travel on and banks have the trust factor and ability to make clients whole when or if systems fail. Getting all the players on board to make a blockchain-based payment platform viable will take time. This is consistent with this WEF finding:
- The most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation.
Among the reasons cited for not moving away from banks was the “wallet” provided by payment processing that offsets banks’ credit support.
This then brings us to the last takeaway regarding how blockchain/DLT might get implemented behind the scenes, and as part of a mix of new financial technologies. This too is consistent with the WEF finding:
- DLT is not a panacea; instead it should be viewed as one of many technologies that will form the foundation of next-generation financial services infrastructure.
Given that a key driver for banks will be the simplicity and efficiency benefits, along with better compliance-related processes, it also will be a big part of their cost reduction and margin protection efforts. Treasurers that strive to understand in detail the profitability of their relationship to their banks should therefore monitor all technology being implemented by their banks, including DLT, and try to assess the impact this will have on the cost of delivery and margin over time. This is about the only negative for corporates the panel was willing to admit to regarding Blockchain: It will allow banks to provide superior service in some areas at a lower cost to the bank. As a result, this may enable some banks to keep or even raise pricing to improve margins to offset losses from regulation and lower-for-longer rates across other lines of business. But this is easy to describe as a win-win, as well. And this is especially the case, given the reluctance on the part of the majority of corporate treasury professionals to move wallet away from banks that provide them with credit support.
Meanwhile, the disappointing news is that world-changing technology solutions enabled by DLT are still a few years away. And it may be a few years more before you even realize it is there. By then, you as corporate treasurers might not even care what sort of game-changing technology banks have invested in to support you. Just like so many critics of the iPhone 7, we want more than significant improvements on amazing and we want it today.