Blockchain Grows Up — The Days of Experimentation Are Over
The last six months have ushered in a sea-change in the blockchain community. In short, the days of experimentation are over. Blockchain is being implemented to work at scale in our global financial institutions and no one will be left untouched by its tidal force. In 2017 we can expect to see an impressive portion of post-trade communities across the financial services industry launching distributed ledger solutions, with banks and asset managers beginning to consume, and offer services through blockchain technology. When the industry begins to reap return on investment in greater operational efficiency and delivery of higher value services, non-adopting companies may risk a fatal fall behind in cost and value.
Those at the forefront of blockchain technology are already beginning to talk about the immense cost savings potential as a given, and radical simplification as the next wave of benefit. But with board level expertise low, and expectations and investments in the evolving technology growing, the pressure to get blockchain right, mounts. Failure to implement blockchain initiatives intelligently, as part of an enterprise-wide strategy, will cost crucial time and resources in the race for financial services success. What will it take for the financial services industry to realize the possibilities of this nascent technology, and make it an integral part of their technology strategy?
Blockchain is being implemented to work at scale in our global financial institutions and no one will be left unaffected by its tidal force.
From Possibility to Reality
The financial services industry has moved quicker than anyone expected to adopt blockchain. When financial service providers move to blockchain, they take their customers with them accelerating the adoption cycle. Distributed ledger solutions are beginning to be deployed for critical industry use cases, and will quickly expand to consolidate and replace traditional ledgers as they’re optimized for volume, speed, and complexity. Use cases so far have been varied but powerful, ranging from complex networks of external participants, to purely internal. Here are some of the biggest implementations to date.
The Depository Trust and Clearing Company in partnership with IBM began deploying a distributed ledger for credit derivatives. This solution will eventually replace DTCC’s ‘Trade Information Warehouse’ with an initial migration of up to $11 trillion credit derivatives to a distributed ledger in which all major broker-dealers and buy-side firms will participate. The ledger will handle all post-trade processes including credit events and payment calculations.
IBM and Northern Trust partnered to build what may be the world’s first commercially-deployed blockchain for private equity. Private Equity is a complex ecosystem with many partners, investors, vendors, and regulators. Northern Trust’s blockchain-powered platform shares information rapidly and securely with stakeholders. With the features of the blockchain, the solution will accelerate launching new funds, selling shares among investors, and managing capital calls and distributions.
Continuous Linked Settlement (CLS)
CLS Group launched a distributed ledger for netting payment of FX trades settled outside of the CLS network. Many leading banks have already committed to using the service choosing either to submit FX instructions to CLS or to participate in the network by setting up a node. The solution will help standardize the process for all participants and reduce their intra-day liquidity demands.
IBM Global Finance (IGF) deployed a distributed ledger solution for 4,000 partners and suppliers to resolve transaction disputes among a pool of 4 million transactions annually. The ledger will streamline transaction data normally managed by a complex network of IBM, partner, and supplier finance applications: and has already reduced the time to resolve a dispute from 44 to less than 10 days.
How to Get From Here to There:
Blockchain is here, but how does an organization ensure success implementing the technology? According to Pramod Achanta, Partner, IBM Blockchain, “Based on our experience to date, there are three critical decisions in designing and implementing blockchain solutions: choosing the right use case, choosing the right platform, and choosing the right partner.”
Selecting the Right Use Case
Pick a use case that can deliver immediate value, sets the stage for a larger transformational play, and unlocks value for those participating in the network. Here’s how all production blockchain projects leverage this evolutionary model:
- Delivering immediate value: Tackling a specific business problem is the best starting point for identifying a use case. Targeting a tangible issue will help build momentum for the project internally, and can be a starting point for attracting various network participants. When we started building the solution for IBM Global Finance (IGF), our initial goal was to free up the more than $100m tied up in disputes between our partners and suppliers.
- Setting the stage for a larger transformational play: Combine your goal for immediate value with an overarching strategy. For IBM IGF, it allowed us to develop a transaction dispute resolution solution that can be commercialized and applied to any supply chain financing network facing a similar problem. For DTCC, the initial credit derivatives platform will be an enabler to expand to other asset classes, fundamentally transform post-trade operations, and launch value-added services.
- Unlocking value for all participants: Your solution should incentivize participants to join by simplifying their processes and reducing operational burdens. Blockchain brings the most value to transaction processes where multiple parties manipulate the same data or where there are labor intensive record-keeping and reconciliation functions. Look for areas of your business model where you can radically reduce manual processes or standardize an incoherent process. CLS use case is a great example of this. Before the distributed ledger solution, netting out-of-network FX trades represented a manual-intensive pain point, with long settlement cycles, for both CLS and their clients.
Selecting the Right Platform
Choose a platform that won’t force you to compromise on functionality. Remember that while early blockchain buzz focused on platforms that were built with cryptocurrency in mind, the technology has evolved to meet the challenges of serving a permissioned business network. Here are some platform features we think are key.
- Look for Longevity: When choosing a blockchain platform, look for one with significant development momentum. It’s important that the platform is backed by technology leaders with active participation from the developer community. The right platform will have a clear mission statement and a transparent, open governance model. It will also publish a clear roadmap for the future releases with additional functionality.
- An Ode to Chain-Code: Chain-code, or smart contracts, allows you to write self-executing business logic onto the ledger. Chain-code is a key enabler for implementing simplified end-to-end processes on the ledger. Look for a platform that not only supports chain-code, but lets you write chain-code in multiple languages without programming limitations, and sets you up with the correct tools.
- Reach Consensus on Consensus: To create a block (post a new set of transactions to the ledger) participants of the ledger (or a subset of participants) must agree on the authenticity of the block’s contents. This is known as reaching consensus and there are many different methodologies for doing this. Unfortunately, the consensus methodologies used to move crypto-currencies are not always suitable for private/ permissioned networks. Be sure to select a platform that provides a pluggable approach to alternative consensus algorithms. Platforms that allow the user to leverage embedded enterprise-ready consensus methodologies, such as practical byzantine fault tolerance (PBFT) or RAFT are advisable, but also be sure that your platform of choice sets you up with the tools to customize any innovative methodologies that may arise in the future.
- Make Sure You Have Permission: Remember that a “permission-less” blockchain network means everyone is welcome. While these protocols served as a proving ground for some core concepts employed in distributed ledgers today, regulated industries are leaning towards using the ‘Permissioned Business Network’ model, where only certain partners come together to host a ledger. In a business blockchain network, different users have different needs, such as the ability to host and authenticate the entire blockchain, only submit transactions, or simply view encrypted entries. Platforms with roots in the public-blockchain/crypto-currency world may not come pre-built with the capabilities you need to support these different user classes, which could cause problems customizing consensus and privacy preferences. Be sure to choose a platform that gives you the most tools to build different participant ‘nodes’ based on that particular users’ responsibilities.
- The Pleasure of Privacy: Data privacy is key for a permissioned blockchain network. A suitable platform will allow various participants in the network to execute transactions, while only allowing rest of the participants to see activity only on a need-to-know basis.
Selecting the right partner, Think Big
Success of your blockchain project will be based on gathering the right people and fielding the right mixture of expertise. Choose a partner that has deep blockchain expertise, an understanding of enterprise complexity, and experience launching and building consortiums.
1. Deep blockchain expertise: This paper touched on some of the complexity involved in selecting a platform, but we’ve only scratched the surface. Make sure your network of partners has deep blockchain expertise to help you pick the technology that’s correct for your use case, identify hidden limitations, and has the skills to work from business idea to solution architecture and all the way down to code and deployment.
2. Enterprise understanding: Distributed ledgers must co-exist with enterprise architecture. They interact with legacy systems to ingest data, use smart contracts to trigger business events throughout your architecture, and store immutable data that will be used by your larger infrastructure. Depending on your use case, you may even need to create new services to send data and process events related to your ledger. Distributed ledgers have the potential to profoundly alter an enterprise architecture. A partner that understands enterprise-grade architecture and can help you orchestrate systems touching all parts of your business model is a must.
3. Experience launching services and building consortiums: Launching a new solution in the market requires a specific expertise profile. Collaborating with partners who have experience bringing new services and solutions to market will help jump-start the ‘monetize’ phase of your use case. Such a partner will help drive adoption, consensus, and identify value in your network of consortium members. Look for a partner that can bring senior leadership, and complex program management and technology skills required to convene a diverse network of consortium members and tailor a solution to their needs.
The Blockchain Race Is On:
Working with blockchain is about more than just technology adoption. blockchain is a disruptive data solution and its true power is to transform operations with radical simplification. This year will bring droves of new blockchain solutions to the market, but the astoundingly successful initiatives will be those that have the vision to use blockchain as a tool to re-imagine operations for their industry. Now is a critical time to rethink your industry’s business challenges within the context of this new tool. Make no mistake about it, the blockchain race is on.