Is the blockchain emperor wearing no clothes?

By Steve Young | 25 July 2017

The hype around technology, such as blockchain and Artificial Intelligence (AI), shows no sign of abating; it is currently riding an impressive wave of publicity. The trade press and thought leadership portals are filled with articles on how these technologies will disrupt the industry. Is this interest, however, sustainable? Or even correct?

It is clear that stakeholders fuel much of this ‘noise’ with a strong self-interest in promoting themselves and their vision, but in the majority of cases their opinions are without any real, viable operational focus.

It is rare to attend an investment management industry event without at least one session covering disruptive technology. In almost every case the presentation starts with the speaker(s) showing off their technical knowledge, with a healthy dose of buzzwords and software phrases, followed by a list of areas where the technology will/may have a disrupted influence.

In my view this is a lazy (and reasonably pointless) approach. The truth is, the asset management industry has never been, and never will be, transformed by a single technology in isolation. The industry will be disrupted, but it will be by those who have the vision to bring specific new business models and processes. These new approaches will be driven and underpinned by the technology, but the technology alone will not achieve anything. I would also counter that those looking at the technology first are fundamentally wrong in their approach. Those who design new ways to operate and then - and only then - identify the best technology to deliver this change will change the industry.

It is often said that the industry is ripe for ‘uberisation’. This in itself is an interesting comment. The reality is that Uber disrupted the taxi industry not through technology, but by presenting a new way of working (with a focus on the needs of the consumer) and presenting a greatly enhanced user experience. The strength of Uber is in its ability to change the model and bring a new mode of operation. The same can be said of AirBnB and every other disruptor.

In asset management, when evaluating the technology behind the cryptocurrency Bitcoin, some observers are making predictions of wholesale changes to the industry and the emergence of point-to-point business chains, removing the need for the ‘middle men’ and intermediaries such as clearing houses and brokers. There are many initiatives looking at using blockchain to disrupt transactional business processes in this way.

The point the industry is missing is that taking several deeply experienced people with in-depth knowledge of current processes, with a brief to evolve it to a blockchain model, will only result in a new version of the same business model. This is not disruption. Disruption will come from taking a root and branch review of the business, potentially across several processes, and designing new and better ways of working. Clearly the available technology will be an influence, but it should only be secondary. Any initiative where the technology is the first item on the agenda will not be a disruptor; it will merely be an upgrade to existing methods.

Blockchain is interesting to me because many of the major banks are making significant investments in building expertise while seeking to collaborate to improve their business models. It is not hard to see that for these organisations, anything that eliminates any middle layer (and associated cost) and delivers a faster, more secure and automated method of transacting business will bring significant benefits, and further embeds their position in the industry.

 Whilst I acknowledge the fact that blockchain has the potential to improve many current processes in the financial services industry, in its purest form blockchain is an open source technology. A lot of the current blockchain initiatives have commercial owners through consortia. Apart from the fact that consortia do not have a great track record for delivering innovation (true invention is generally better served by firms with a sole focus and small decision-making teams), they are (quite understandably) looking to make the software more bespoke and owned. The value of open source is huge for the industry but the people leading the initiatives are looking to create a commercial proposition that is in conflict with the ethos of open source technology.

Blockchain itself, however, is not the answer to anything; it is about how you utilise the blockchain technology to find a business solution to a problem. For this reason I think the volume of debate surrounding blockchain will dissipate over time, as people realise that it cannot possibly deliver even half of what its proponents have been claiming. It needs to start delivering tangible benefits and begin transforming businesses.

Blockchain has been a major part of a disruptor in one area of financial services – Bitcoin. In this instance the disruption was caused by the very idea of having a crypto currency, outside the control of governments, to disrupt many areas where currencies are used. It was the vision and business model developed that was the disruptor, not the technology. I would also counter that this approach was fundamental in driving blockchain, and forcing it to be the technology it is today. Functional vision drives technology forward; it is rare that it happens in reverse.

Asset managers are facing many challenges and have a desire to drive down costs, whilst improving efficiency and agility. It is in this environment that the thirst for these technologies is being encouraged.

Many firms still have little idea how these new technologies will change their business. Perhaps they need to take a step back, disengage with those pushing the technology first and start a process looking at the business model first.

The asset management industry seems desperate to find a technology that will disrupt the entire business. It is not going to be the technology itself that will be the disruptor, but rather how a firm deploys the technology that will cause the disruption.