The Blockchain race

By Madhvi Mavadiya | 26 October 2016

Cash-strapped Europe could be falling behind in the development of products based on blockchain technology as US banks are now backing distributed ledgers to save costs and reduce settlement times.

According to Reuters, trade finance could become increasingly automated in the next few years as Wall Street banks are working towards minimising paper-based systems. 80% of the top banks in the world have launched blockchain experimentation projects, but what does that mean for the traditional sector?

The World Economic Forum described blockchain as the “beating heart” of the financial sector earlier this year, but we have yet to see blockchain enter the mass market through the banking sector.

IBM has predicted that 15% of the 200 top banks will have introduced commercial blockchain products by the end of next year, “but there is likely to be a transatlantic imbalance in bringing out such products, given the costs involved in developing new technology,” Reuters reported.

This imbalance has already been seen as US banks are moving quickly and have seen the importance of restructuring and recapitalising after the events of 2008. On the other hand, Reuters states that their European counterparts have found it difficult to cut costs and manage their balance sheets.

Simon Taylor, previous blockchain head at Barclays and now co-founder of new fintech consultancy 11:FS, explained this in more detail. “The European banks are cost-focused, where US banks like Goldman Sachs and JPMorgan are likely trying to generate revenue, because they’re in different market conditions,” Taylor said.

Reading between the lines, that says: ‘we want to profit from this, we want to build the thing,’” he said in reference to US banks. Reuters went on to say that total spending by banks on blockchain has been kept a secret on both sides of the Atlantic, which makes dedication to the technology a little harder. However, the WEF estimate that the total amount spent is around $1.5 billion at present, by all industries.

UBS’s blockchain head Alex Batlin sees this as a “Columbus mission – we go out and look for gold, we don’t know what’s going to happen, but if we do discover something it could be massive and therefore it’s worth investing in”. However, this is where the collaboration question comes in; should banks join with tech startups to build on their DLT or establish innovation labs where banks can experiment with blockchain themselves?

To use UBS as an example, they have their own incubator labs, but this bank and banks alike could be part of a consortia, like R3, where common standards are formed for all financial institutions to abide by when using blockchain.

CEO of San Francisco-based blockchain startup Chain, Adam Ludwin, has been working with firms like Citi and Nasdaq and believes that spending should be kept at a minimum at this stage of experimentation. “You could spend tens of millions but you’d probably be doing it wrong if you were spending hundreds of millions right now. The nature of new innovation and software development is that you invest incrementally,” Ludwin said.

Reuters explored how one particular bank, Goldman Sachs, has historically developed new technology, invested in new startups and most recently, filed a patent application for a platform for trading foreign exchange via blockchain. Charley Cooper, R3 managing director, said that banks like Goldman Sachs “recognise the future of banking as being more and more a question of technology”.

Despite this, Europe is attempting to keep up in the blockchain race and evidence of this has been shown earlier this year as ING bank cut 7,000 jobs so that it could invest 800 million euros into technology. In addition to this, Deutsche Bank announced its new digital factory that would be staffed by 800 specialists by 2018.

Bob Contri, Deloitte global financial services industry leader, spoke about this blockchain race and the importance of being in it. “We’re advising our clients that they would be frankly foolish not to be experimenting (in blockchain technology. If you’re not in the game and if you’re not experimenting then you’re falling behind.”

Business Insider stated that comparing the number of patents filed for blockchain products in the US and in Europe would not be an adequate measure of progress. “Arguably, European banks have been just as active in exploring blockchain-based products as their US peers, but they’ve taken a different approach to innovation – one based on collaboration rather than individual projects.”

Examples are made of Barclays, BBVA and Santander which have all partnered with fintech startups to create better, innovative products. However, Business Insider believes that the approach that US banks are taking might backfire.

Reuters is likely right to suggest that European banks are struggling to free up cash for individual innovation projects to a greater degree than their US counterparts. And this is probably the reason for the two different approaches – European and US banks have had to develop approaches to blockchain development that are suited to each region’s unique economic environment and hurdles.”

The report goes on to say that a different approach does not mean that Europe is lagging, but those banks that decide to work together with blockchain startups will be more successful. In turn, a common blockchain standard is more likely to be developed which will result in increased efficiency. “In taking a more siloed approach, US banks could end up back at square one if their individual, patented, blockchain systems cannot easily connect to one another,” it said.

According to Santander, blockchain could boom by 2022 and cut costs by up to $20 billion a year. This is because of its distributed ledger nature. As Business Insider explains, the ability to transfer and store data in a secure and easily accessible place is a game changer for the financial industry. 

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