The bursting of the cryptocurrency bubble and the deflation of industry hype around blockchain means distributed ledger technology has the time decouple from Bitcoin and find real industry use cases, according to market participants.
“I'm glad the hype and the bubble burst, because it put a lot of attention towards Bitcoin and then of course, blockchain,” says Maryanne Morrow, CEO and founder of blockchain-based FX firm 9th Gear Technologies. “It’s a nascent technology and sometimes it can seem like too much focus is place on things like Mt. Gox and hacks and the slimy underbelly of the sector.”
Mt. Gox, at one time the largest cryptocurrency exchange in the world, suffered a set of damaging hacks in 2011 and 2014, leading the irrevocable loss of $350m.
“You can still Google the term blockchain and you will see somebody with a hoodie surrounded by hacker code. It would be great if that image wasn’t the first thing that popped up. We need people to realize that these technologies exist and are successful, and not just in finance.”
Marjan Delatinne, global head of banking at Ripple, says that when people typically talk about blockchain, most still think about crypto. “Among general audiences they will still think that blockchain is the same as Bitcoin. But honestly what we see among banks and financial institutions that we are working with – and we have signed up with 14 in the past few weeks – is a decoupling of the concept of cryptoassets and what the underlying technology can bring.
“It very much depends on how you define blockchain. If you’re talking about speculation around Bitcoin and individual use cases, then people will probably laugh at the idea because it is still not clear. But if you’re really talking about cross-border payments, Ripple is leading in the space because of the approach that we have taken. We haven’t limited ourselves to the crypto use case, and that has helped banks and financial institutions embrace the technology.”
For Morrow, many in the industry need to interact with blockchain on more than just a surface level. “When you encounter things you’ve never heard of before and start to see them around it takes time to unpack and have the fog disappear. Sometimes the fog is lifted quickly. Other times with some people, well, they just can't see things that are right in front of them because it's new, and they need to separate things in their head.
“I think that for blockchain, you have to have a business use case as well as the technology and they have to be in concert with each other. I see so many solutions where they’re completely incongruent. If you have the right use case for blockchain technology, it proves to be a wonderful technology.
“There are different categories of institutions [regarding blockchain adoption]. You have ones that are on the high end of digital transformation, and then you have ones that are laggards, who will get left behind. People in the back office are expensive. There’s always pressure for costs to go down and profits to go up yet costs continually rise every year. Blockchain is a technology that can reduce those costs by as much as 80% in the back office.
“You have companies out there like JP Morgan and Goldman Sachs who are really positioning themselves as technology companies which dabble in finance. They’re at the forefront of moving things forward. It’s so altruistic that they took Quorum, developed it and then released it as an open source platform. Then you get some companies which come to meetings with their arms crossed.”
Going to the experts
Delatinne believes that it’s natural that people have gone slightly cold on blockchain technology. “As soon as the hype starts to die down there will naturally be less people talking about it. Then it becomes a matter for the experts. A few years ago, I was at Sibos and everybody was talking about blockchain. Back then, and in some cases still today, people did not really know what it was.
“Blockchain will not solve all the problems of the world. It has now gone to the experts and the use cases for which it can make a difference. The closer you get to a working system and the more it becomes serious, the less hype you will have around it and the less noise will surround things.
“When I speak to people working on artificial intelligence it is exactly the same story. AI is going through the same hype cycle right now, and people still need to identify the use cases. They will have the exact same challenges in the AI field going forward. As soon as you move from the hype to getting into the details, people stop listening.”
Morrow says that it usually takes between two and three minutes for someone in the FX industry to understand the potential of a blockchain system. “When they do, their eyes go as wide as saucers. Even with our own staff it was the same. When I first talked to our chief strategist before he came on board, he argued with me for over an hour about why this couldn’t be done.” The key to avoiding people’s blockchain preconceptions, she adds, is to avoid talking about wholesale system replacement and focus on the benefits.”
“I never go in and talk about the technology, it’s all about what it actually does. A lot of people are concentrating on replacing SWIFT or recreating it. It was a great technology when it was created in 1973, but it’s not the best technology now. That’s still not the problem, and T+2 is not the problem. It’s the need for on demand payment liquidity. Payment liquidity is what is holding things up. Banks just don’t have that money sitting around waiting for you to waltz in and do a $100m trade.”
JP Morgan’s third annual e-trading survey, released in March, found that 9% of FX traders believed that blockchain technology would affect the future of industry. 40% of those asked said that availability of liquidity was their biggest daily challenge.
Delatinne agrees that liquidity management is where blockchain can make an impact: “This is where you will come face to face with the limitations of a piece of technology which has been in use for 40 years, and you will need something new. Liquidity management is really where the cost lies for banks, because now that some of the oldest markets in the world are moving to real-time. Of course, that is for small-ticket amounts, but as soon as your system and processes adapted to that, you can move to the large ticket amounts.
“When that occurs, I think there will be a convergence towards new technology and the banks will experience it. Experts in liquidity management are realizing now just how far this new technology can bring them. After all, payments start with liquidity and end with liquidity.”