Blockchain, After The Hype
Blockchains & smart contracts for RegTech
Herd mentality is a fact of human life. Whether it’s in the financial markets, within academia, medicine or any other profession the fear of missing out is a part of our make-up. The hype that surrounded blockchain projects a few years ago (you can see Blockchain reaching the apex of Gartner’s well-regarded “Hype Cycle” in 2016, below) and the “Initial Coin Offering” (ICO) vortex that followed has brought a degree of ignominy on the space. However that early promise, away from the bright lights of being ‘the next big thing’, may now be primed to deliver.
Beyond coins, organisation
The promise of blockchain technology has seen incredible support from investors — Andreesen Horowitz recently announced their second dedicated blockchain fund and the reasons to be confident about the space extend far beyond tokens having value in the Fiat Money world.
One view on the potential of the technology is that it is an incredibly powerful technology to organise and coordinate. That power is magnified when smart contracts (snippets of code that can self-execute) are brought into the picture. Crudely put, a blockchain + smart contracts has vast potential to simplify business processes.
With that lens, you can see why there is so much venture money waiting in the wings for these projects. For decades now, VCs have been investing in software businesses with that precise aim: to deliver efficiency to enterprises and corporates.
Zero-ing in on a particular area, it seems to me that KYC — know your customers — and AML — anti-money laundering — are ripe for some efficiency gains. Being responsible on KYC/AML is a necessary cost of doing business for businesses that handle money, but a cost nonetheless. Indeed KYC/AML requirements tend to get more stringent over time, alongside generally increasing economic complexity. In 2018, for just the US, financial services firms spent ~$25 billion to manage money laundering risk. This is to say nothing about the cost of ignorance or breaches: you can see the impact and trend relating to that for financial institutions in the graph below.
Source: McKinsey
This is a huge market and without efficiency gains, the proportion of cost allocated to compliance here will rise as a percentage of any transaction/interaction. Contrast that to a world where counterparty credentials are uploaded to a digital wallet once and any given actor in a transaction controls access to their own credentials with a massive relative reduction in friction.
Why now?
There’s a couple of tail-winds that make this an attractive area for us at the moment. Firstly, we’ve seen financing for “regtech” increase over the years and that reflects the increasing complexity and requisite regulatory requirements. You can see that trend in the chart below.
Secondly, I believe that we’re moving in a direction that will nullify the ‘cold-start’ problem that many trust networks face (i/e/ you need someone/some actors to go first, for there to be enough value in that network for others to join and adopt standards).
In the consumer markets, increasing tech penetration and functionality has laid the path for more-and-more vertical social networks (TikTok, Strava, NextDoor…even LinkedIn). In these examples, people interested in a fairly specific use case have ‘opted in’ to a network with established rules and protocols. Often trends in the b2c markets are a good lead indicator for changes in the b2b markets. On that note, we’ve also recently seen Reddit introduce coins into a couple of their Subreddits of late which provides more support for this move.
Lastly, I think that it’s likely that regulation will need to become more counterparty driven. Earlier in the post I mentioned that the business environment was rapidly changing, and it’s more than possible that our regulator-driven approach won’t deliver outcomes that protect stakeholders in any given transaction.
The stage is set. If you’re working on an idea in this space, I’d love to hear from you. Get in contact with us here.
