R3’s recent announcements warn banks to carefully watch blockchain as long as the technology remains immature. This comes at a time when blockchain-based initiatives see financial institutions taking the driver’s seat. The path to blockchain maturity demands the guiding role of bank industry independent associations, exactly what R3 is. This article takes the perspective of corporate banks.
R3 consortium’s recent announcement that participating banks are concentrating on alternative distributed ledger technologies and “don’t want blockchain because they don’t need one” opens interesting scenarios. Similarly, SWIFT—the cooperative representing more than 11,000 financial institutions in more than 200 countries—has launched its Global Payment Initiative (GPI) solution to improve cross-border payments – one of the pieces de resistance of blockchain proponents—officially declaring that to deliver tangible and concrete benefits to corporations and banks it will leverage existing rails and not yet rely on blockchain, since “blockchain is not ready for wholesale payments yet.”
When two communities representing almost the entirety of global banks declare that financial institutions can operate bank-to-bank transactions without blockchain, this is an indisputable fact.
As a consequence, corporate banks seem to be left with the following options:
- Use blockchain only for their internal transactions
- Use blockchain to transact with their corporate clients
- Stop using blockchain (or at least keep a very low profile)
Signs that banks are using blockchain internally come from China’s central bank, which is developing its own digital currency, or from JPMorgan, which is testing a version of Ethereum (a blockchain-based platform) to move money between international branches. Mizuho Bank has completed a test to send transactions, denominated in a newly created digital currency, between its subsidiaries.
Apparently banks are testing blockchain independently or in controlled closed circles to keep the momentum and not lose the investments already made, maybe leveraging the knowledge and expertise they’ve acquired from participating in wider consortia (e.g., R3?).
With the second option, banks run corporate transaction services with the foundational characteristics of blockchain—traceability, authenticity, and trust—offering cash management and treasury services. Banks are also engaged in blockchain proofs of concept to transact digitized documents, particularly letters of credit, bills of lading, and invoices. ING and Société Générale have run a paperless oil trade on a blockchain platform. A group of global enterprises, including British Petroleum, JPMorgan, and Microsoft have formed the Enterprise Ethereum Alliance to track data and financial contracts. Rabobank, Deutsche Bank, HSBC, KBC, Natixis, Société Générale, and UniCredit are developing a shared cross-border trade finance platform for small and midsize enterprises. The bank-to-corporate opportunity comes, however, at a cost: If corporate involvement is necessary, more time must be dedicated to understanding what the technology can bring to corporations.
The third option, to put blockchain in the backseat, is not advisable. Although blockchain technology is still in its infancy, problems are not insurmountable and should be the key focus area of bank consortia. (Back to this later.)
A fact that banks should carefully consider before sidelining their blockchain investigations is application programming interface (API). API is a technology for modernizing transaction integration with banks’ internal and external systems. When the initial resistance to opening applications and data sets to external parties vanishes, banks will eventually focus on how to best prioritize the development of APIs for the corporate user. With APIs exposing the banks’ back-office systems—and specifically—bank-to-bank business processes, soon corporations will expect visibility, transparency, and analytical capabilities across multiple banks and multiple geographies.
Can banks afford super-efficient blockchain-based internal operations and document management processing while lacking the same efficiency when transacting with their banking peers? Since belief in the likelihood that APIs will be soon be created to run blockchain-based applications is not naïve, how could banks ensure the same level of traceability, authenticity, and trust that their corporate clients will have had already granted with APIs for bank-to-corporation blockchain-based applications?
Banks will be forced to reconsider blockchain to run bank-to-bank transactions. Bank consortia should stand up as the voice of all financial institutions to provide standard rules, clear guidelines, and technical specifications about what data and what workflows blockchain applications should contain and handle. Attempts to build software will push banking consortia into a corner and make them succumb against more robust and capable software providers.