Blockchain Short Story 002: On the Paths Between the Old and New World
Blockchain/DLT has opened the door to a new world. It brought us a new architectural paradigm, which allows us to build decentralized systems in which participants can directly transact with each other without having to rely on a trusted third party. The participants can collaborate frictionlessly in a shared data and process model, and at the same time maintain their sovereignty. (See also “Blockchain Short Story Episode 001 — Flattening the Hierarchy.”)
The new world is growing fast at the edge of the old world, and it is increasingly becoming interlinked with the latter at the business and technology level. This is especially true for the banking sector.
In this short story, I am sketching from the perspective of the banking sector a high-level map showing the possible paths between the two worlds. Of course, the reality is not simply black and white; wandering on more than one path is possible too. There is also no right or wrong — except for Path 1, which I’m clearly considering to be a bad decision. In any case, I find this map very useful for roughly sorting blockchain/DLT ideas, platforms, and products. I hope that it will be useful for you too.
Path 1: Stay in the Old, Ignore the New
On this path, you completely ignore what’s happening in the new world. The technology is not mature enough. The volumes are too low. The features are incomplete. Shared data and process models are difficult to agree on. The products and platforms rolled out so far are yet to deliver a return on investment. In fact, you’ve never heard of blockchain before; for you, the old world is good enough. After all, it has brought us this far already, so why shouldn’t it be enough to take us even further? You might one day experience the “oh-shit” moment when the disruption growth curve crosses the linear growth curve, but on the other hand, all this blockchain hype might also quietly disappear.
Path 2a: Integrate the New Into the Old
When you go on this path, you may say, “Hey, this new stuff looks like what we’ve already been doing for decades!” Give Bitcoin, Ethereum, Ripple, and others an ISIN; collect some master data; and your integration into your banking systems is halfway done. Want to trade cryptocurrencies? No problem — your stock exchange software can do that too! Technically, it doesn’t matter if it’s a share, bond, bitcoin, or apple … as long as you can quantify it and open an order book, it’s business as usual. Okay, so you’ll have to solve the problem with the crypto asset custody, and you’ll have to connect to the network, but then you’re done.
Path 2b: Integrate the Old Into the New
Here you may say, “I like the new stuff, but I want my old stuff there too!” You say that because the “serious” music is still playing in the old world. 100 trillion USD is more than 1 trillion USD. You need fiat and traditional securities in the new world. You start tokenizing the traditional assets. And then you start asking yourself whether your token has the same properties as the underlying.
Path 3: Migrate the Old Business to the New Tech
This one is typical for banks. Here you may say something like: “I like blockchain, but I don’t like Bitcoin or cryptocurrencies in general.” For you, book entries in your traditional custody software are already a perfect representation of the ownership of an asset. No need to tokenize traditional assets! What you only need is a way to frictionlessly transfer the title from one custodian to another. Blockchain! Whoosh — problem solved. Is the value chain of your financial product too long? Too many intermediaries? Transaction-relevant data fragmented? Blockchain! Speed up the processes and reduce the costs first; you can think about new, innovative products later.
Path 4: Join the New, Ignore the Old
You can sense the opportunity: Blockchain, the shiny new tech, is reshuffling the cards. It’s a new ball game! A completely new ecosystem has been created, and it’s growing fast. Doors to new possibilities are being opened. Even more new doors are waiting for you to open them. However, at some point you realize that not all services were bad in the old world and that you can not navigate around laws and regulations, if you want to reach the masses. So you start to build crypto-custody solutions and you start to write regulatory compliant prospectuses for your token offerings.
Which path(s) are you taking?
