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Blockchain Business Scenarios: Bank to Bank

These days, blockchain is a blockbuster at banks. Financial institutions are spending time and resources to find out how much business they can gain by adopting this new technology. This hype on the bank side might not correspond to similar interest from corporations. Nor it is clear whether it creates similar business opportunities for either side. My ongoing research investigates how large the (usual) gap is between banks and their corporate clients, assessing to what degree blockchain technology is part of corporate practitioners’ domain expertise. It looks like, however, banks and corporations are not the only ones involved.

The analysis of the initial results of my research suggests four possible scenarios, not necessarily mutually exclusive: bank to bank, bank to corporation, corporation to corporation, and machine to machine. There’s actually a fifth business scenario: bank to third party. This is when banks engage with third-party intermediaries to trade commodities or to operate in marketplaces of financial instruments (e.g., securities, bonds, investment asset classes). For simplicity—and regretfully to the dismay of “purists”— I opted to incorporate this business relationship in the bank-to-bank scenario, since no corporate relationship is contemplated.

The four scenarios will be covered in a series of four blog posts, beginning with this one.

In the bank-to-bank scenario, banks will use distributed-ledger-based solutions for interbank and intra-bank purposes, keeping it totally transparent to corporate business users.

Banks are subject to tight regulatory pressures for interest-based business (e.g., loans and trade finance). Noninterest income transaction banking is not subject to such overly tight regulatory constraints, so payments and cash management services have become a renewed focus for banks. Banks are improving their efforts on payment transactions (e.g., via real-time payments solutions) to regain control of a business too long subject to disintermediation. The banking industry also focuses heavily on innovations in payments and even faster payment systems, as banks are under stress to combat a significant threat from nonbanking financial intermediaries that wave the flag of innovation as their major competitive asset.

Blockchain and bitcoin are very often considered intertwined, and this de facto perception poses a problem to banks: bitcoin is based on the premise that exchange of currency does not require financial intermediaries. This threatens banks in the very same payments transactions space that they are trying so hard to conquer. The analysis tells us that banks are fighting against the adoption of bitcoin and are intentionally directing attention to the blockchain infrastructure, which they can better control. This control is made possible only if blockchains become private, so that the shared levels of trust ensured by proof of work are replaced by closed-group consensus of trusted parties—that is, the banks themselves.

In this scenario, the SWIFT network could become the distributed network of nodes that enables federated permission-based blockchain via the use of consensus algorithms. The sort of solution adopted by Ripple Labs, which, by coincidence (is it really?) is a blockchain-based network that exchanges fiat currencies (and not bitcoins), to the joy of financial institutions.

Such private blockchain projects are not even close to resembling a blockchain as designed for the bitcoin community. Once again, it will be subject to a centralized control by banks with little to no difference between a private blockchain and a centralized messaging network.