Blockchain: from hubris to realism
Laurent Coulon, Partner, Theano Advisors
Lolita de Linares, Senior Consultant, Theano Advisors
Is Blockchain the new standard for transactions? At Theano Advisors we estimate it will take 2-5 years before the real impact can be measured, once the security, regulatory and legal issues can be solved.
On one side, banks’ supply chain finance departments have seen their market shares decrease because of new regulations following the 2008 crisis. This traditionally lucrative industry seems to have become less profitable, however financing companies in their international exchanges remains paramount for banks looking to keep them as clients.
In order to remain profitable and competitive, banks involved in trade finance should find new sources of savings. Automation of manual activities is one of them. That’s probably why blockchain technology started emerging and now represents a strategic issue for banks today. The technology is supposed to save up to $20bn in the banking industry before 2022.
On the other side, blockchain technology can be seen as the ‘new’ standard to interoperate banks’ transactions in a decentralised way. However, private blockchains are also an issue for interoperability and standardisation. It’s not just a common market tool any more.
Nevertheless, blockchain technology remains a ‘buzz’ word in 2017: initiatives are more numerous, more ambitious, which shows that the banking industry is mature enough to go further. It’s a truly game changing technology that can improve client services through reduction of delays in the goods transfer and quicker initiation of payments & funds release, therefore improving a company’s cash positions.
More recently, KBC & Cegeka launched the Digital Trade Chain, an initiative joined by six other European banks recently to help SMEs manage their commercial transactions. Prior to that the R3 consortium created in 2014 now groups more than 70 banks to promote and develop applications based on distributed ledgers.
At the beginning of October 2016, the ICICI Banks and Emirates IBD announced the creation of a blockchain platform to electronically exchange documents essential to letters of credit. The first cotton plant transaction using blockchain has been closed by Wells Fargo and Commonwealth banks of Australia, as of the end of 2016.
The appetite is there but the path towards a fully digitalised supply chain finance industry is still long. Banks still lack a clear roadmap on digitisation to help them draw their future business models. Using blockchain efficiently requires this digitisation to be consistent in order to open the door to the future promising digital innovations.
Financial institutions thus face a dilemma: investing massively despite uncertainty, or staying out of the game until the regulatory issues are mostly solved and in the process - leaving a $50Bn revenue-per- year market to actors more willing to take the risk.
The answer to that dilemma is personal to each bank’s strategy.
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