Blockchain technology: Is the banking sector ready for FinTech?
30 November 2016
This blog was first published on Reuters for their subscriber base.
The world has changed almost unrecognisably from the one where automated teller machines (ATMs) were seen as innovative, but how do banks harness the power of blockchain and fintech in a responsible way – but also without getting left behind? This first in a series of articles debating how fintech is shaping the financial services industry, covers the path to production for blockchains in UK banks, setting out where we are currently at before exploring some of the high level challenges faced by the banks.
PwC has worked on nearly a dozen blockchain proof of concepts (PoCs) with our clients over the past year and as with any emerging technology there have been known issues, some hiccups and some learnings. Whilst ultimately they have all been successful in proving certain hypotheses there are still challenges to be overcome before a solution is ready to be shipped to production.
Before we start, the best laid plans can be scuppered by events such hack, which also contribute to uncertainty. It doesn't matter if it is just a poorly written smart contract or a security flaw at an exchange (and not an issue with the underlying protocols); these events still cause concern in the wider market and end up delaying projects.
To understand the intricacies at play here, it's important to look at the tools being used, the talent pool available to use those tools and the tricky questions that are left unanswered.
Most of the development we have seen has been in one way or another based on the Bitcoin or Ethereum blockchains. Although perhaps not familiar to the man or woman in the street, Monax Industries and MultiChain are very popular in the market and more recently Clearmatics have garnered some interest. We are yet to see anything built on Hyperledger or Corda. Ripple is another name to mention that is garnering some interest among banks. Bitcoin and Ethereum have been in production for seven years and 18 months respectively but the public 'chains' don't yet appear to be where financial institutions want to play because of concerns around know your customer, pseudonymous or anonymous transactions, and transactions being verified by and broadcast to unknown groups.
What all of this means is that there are only a handful of early stage tools for banks to use and none of them have been battle hardened in their own right in a production environment. Things move fast in the blockchain space though and the advances seen over the past 12 months on both the public and private blockchain implementations is impressive, so it bodes well for the future. Furthermore, it's likely we'll start to see some of the big tech players rolling out blockchain fabrics and solutions in the next 12 months or so….
Assuming the tooling advances to a stage where banks are comfortable deploying them in production there is still a question mark about whether their staff have the right level of experience to operate and maintain them effectively. Blockchain engineers are commanding a premium wage at the moment for this very reason. Experienced engineers and business staff who understand the tech are scarce.
The clients we work with have talented staff and they have gone up the learning curve quickly with the help of engineers and subject matter experts but legacy database experience doesn't necessarily help as blockchains demand a new way of thinking about business models. At present there simply aren't enough skilled people to go around all of the banks that are experimenting with blockchains. This will change but it is a potential inhibitor to widespread production implementations in the short term.
The unanswered questions
The tech and the talent is developing rapidly but there are still a few important areas that don't have answers yet. Some of these questions may be dealt with by technical solutions, but others are going to need input from regulators, security experts, auditors and other key stakeholders.
At the top of the list are questions around security, key management, data privacy, anti-money laundering and reporting. Given that to date most banks have been focused on PoCs, these topics have not taken centre stage but as we move out of the lab toward production they are areas that need to be fully understood by a banks CIO, CTO, head of compliance, internal audit and others from both inside and outside the bank. The next article will do a deeper dive into these questions and suggest where the answers might be found.
PoC fatigue is setting in, tech and talent is rapidly improving but questions still need to be addressed across a number of vital areas. The next wave of blockchain projects need a more structured approach with a focus on delivering a production ready product.