Professional services in industries such as Law, Finance and Insurance are increasingly looking at Blockchain technology to simplify business processes and enable them to focus on delivering the services requiring their expertise.
Blockchain technology has now evolved from simple digital currency to a range of powerful distributed computing protocols, allowing users to deploy vast ranges of applications within a shared computing, networking, storage and identification environment relying on the use of Public/Private key cryptography. The main advantage of this type of protocol is that it combines a standardized set of tools to communicate and exchange information between people, organisations and their physical, digital and financial assets.
Blockchain technology will enable counterparts within markets to share relevant business data from its point of creation. Over time, this will allow them to eliminate inconsistencies that arise in the process of conducting and recording their business activities and transactions.
This new technology now represents both a threat and opportunity. Existing economic actors must now rethink and adapt their business models to counter the threat of a distributed economic system. More specifically, business models relying on acting as a gatekeeper to specific functions (ie. clearing) or data-sets are being thrown into question as market participants can now form direct relationships with each other within the market and share data as they see fit to.
As barriers to entry decrease, new participants are entering previously closely held markets. One example is the range of challenger, digital-first banks that have arisen in the UK.
The response from incumbent institutions has consisted mainly in teaming up with counterparts and investing in this technology to reduce their costs and gain efficiency in their activities. So far, we have seen examples such as letters of credit, bond issuance and coupon payments, international remittances and trading of shares.
On the longer term, this will have the knock-on effect of providing market participants with a range of tools that will allow them to share information and move money and assets through a trusted medium, even if they do not trust each other. One example of companies affected could be clearing houses, which provide the current medium for forming business relationships and settling transactions which subsequently flow from these. Another example is notaries, who would certify the state a document was in at a certain date when this can be replaced by a timestamped hash posted on a public network.
Blockchain technology-based systems will allow businesses to operate their processes and conduct transactions at lower expense. One example is international remittances. Whereas the global average cost stands at 7.4%, commercial, Blockchain-based services exist that allow users to perform the same transactions for less than half the cost. As such solutions continue to spread in various forms throughout markets over the next 5 years, companies will be able to simply elect to capitalise on membership in such systems.
However, such industry systems will be led by groups of companies pooling their collective high subject matter expertise and leveraging this opportunity to take leadership in implementing the industry standards.
Existing projects all show the potential capabilities of Blockchain technology but are limited by the fact that few have made it production. One major issue that will preclude the realisation of the full potential of Blockchain technology is ensuring the adoption of shared standards between self-regulating market participants rather than another new set of information silos. Additionally, it is not enough for this technology to replicate existing business functions at a lower cost. For a successful and effective deployment that leverages its innate potential, Blockchain instances will still need to remain compliant with consumer regulations and varying layers of legislation.
The demonstrated governance problems to improve and adapt Bitcoin to diverse ranges of needs represents an opportunity for new and established industries to come together and establish their own industry-level protocols.
Aside from the fabric layer of data exchange, similar to the Internet, we also require standardized contract libraries. Smart contracts, of which the promises have been so widely disclaimed, will only be relevant if they are well tested, deployed in an environment where all relevant counterparts can interact with them and audited to ensure they have performed as expected.
In one example scenario, future participants in complex institutional markets such as reinsurance swaps, would be able to refer to a common registry of smart contract templates approved by a governmental or market regulator. Use of these Blockchain-based smart contracts in a live setting would however still require sign-off from the client, their legal team, compliance professionals and engineers to confirm security implementations.
Technology, in bringing increased efficiency will remove a number of human resource requirements. However, the companies of tomorrow will still require an investment banker to assist them with large deals, a lawyer to advise on the transaction, support to ensure all necessary elements are tended to and engineers to improve and help build the underlying technology.
Blockchain technology will make work easier for all of these individuals. However, until it becomes widespread, it is those organisations amongst the first to fully leverage it that will gain a competitive advantage.
Mohamad El Boudi
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