Blockchain Short Story 005: Competitive Differentiation and Shared Utilities
Did you ever consider that IT systems in your bank have many sisters and brothers out there having similar responsibilities and problems? Moreover, often these systems have to “talk” to each other and that again requires other IT systems hosted by trusted third parties, which again have lot of sisters and brothers world wide. For example, many banks manage a dedicated instance for securities custody and settlement. For each bank, it will work slightly different, however the essential features will always be the same, namely custody and settlement.
An interesting point about this is: large parts of these systems are not relevant for the competitive differentiation. To a large extent, they can be viewed as a common utility, nevertheless, every bank is paying the costs for running a proprietary instance and for synchronizing and reconciling the state with its counterparties.
With blockchain this can be changed, because blockchain allows us to pull parts in common, which are now redundantly scattered across different institutions, to a logically centralized transaction model that is operated as a decentralized network. In other words, it feels like transacting in a single centralized, multi-entity system, but without the need for a trusted intermediary hosting and protecting the integrity of this system. The participants stay independent and in control of own data and processes.
In a blockchain/DLT network, participants can collaborate in logically centralized transaction model, but at the same time stay independent and in control of their data and processes.
Looking again on securities custody and settlement, this means that instead of having a fragmented network of individual custody and settlement systems, now, with the help of the blockchain technology, we can build a shared transaction network and eliminate the need for reconciliation to a large degree. On top of this, every bank still can have proprietary data and processes that are relevant for their competitive differentiation.
Not having to give up the independence and competitive differentiation in a blockchain/DLT network facilitates the growth of the network. Moreover, when new participants join, they have a common technological ground to collaborate on, which at the same time also facilitates the creation of common standards.
In the long term, I am expecting to see more and more of the banking infrastructure to become a shared utility that is based on open standards and operated in blockchain/DLT networks — eventually developed and maintained as open source. This shared foundation will help banks to free up resources bound to building and maintaining shared utilities, and more focus on building and maintaining systems that are contributing to their competitive differentiation.
