Reimagining Financial Services with Blockchain

(This article is also published in Computerworld Hong Kong on December 14, 2016)

ibm_blockchain_panel

Blockchain is finally getting the attention it deserves. From left to right: Sheila Lam (Computerworld Hong Kong), Larry Campbell (KPMG China), Bob Crozier (AIA Edge), and Ian Mitchell (IBM).

Often confused with bitcoin, a cryptocurrency based on blockchain technology, blockchain itself offers more promises than digital currency. It is also changing the fundamentals of finance.

Understanding the blockchain promise

Before blockchain, most technological advances improved or streamlined transactions and interactions. But they still follow traditional business rules and practices. For example, most companies keep their ledgers for protection against fraud and tampering.

Although well founded, it has traditionally made asset ownership and transfer inefficient. However, this solution worked in a world where trust was not a commodity.

Blockchain aims to change this; it makes trust a commodity leveraging cryptographic technology, transparency and business networks. It does this by encapsulating trust in a shared ledger that is transparent to every participant, and permanently recording all transactions in chronological order.

In a recent panel discussion organized by IBM, industry experts and observers noted that this makes blockchain a potential industry game changer.

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Rebooting trusted business networks

Trust, security and transparency are the key attributes that drive blockchain demand. Together, these help a blockchain to disrupt asset ownership and transfer.

“And it is going to cross many traditional boundaries between companies involved in a [business] network, because in a lot of these cases, they do not have an effective way to integrate the consumer experience,” said Ian Mitchell, z Systems Transactional Middleware and Blockchain Architect at IBM.

For these attributes to work, no single entity will own a blockchain; instead, all participants will share it.

“That no one party should own it is the whole point with blockchain,” said Bob Crozier, Associate Director (AIA Edge), Digital Health Intrapreneur, Blockchain, Machine Learning & AI, Enterprise Social Mentor.

“That is the only way we can get value out of it. It has to be a network effect; else it does not work,” he added.

Transparency drives trust

By making all transactions transparent, a blockchain commoditizes trust. All transactions are also recorded and cannot be amended, making a blockchain immutable.

Larry Campbell, Head of Financial Services Strategy, KPMG China, argued that this is necessary for financial services.

“Blockchains will help to remediate some of [the regulatory pressure]; it has a huge part to play in a supply chain,” he said.

While the benefits of blockchain for financial services are well published, Campbell stresses that blockchain benefits in encoding trust impacts all industries.

“The word I will use is empowerment,” said Campbell, adding that the ability for blockchains to help different parties make informed decisions without worrying about trust and immutability will shape the future of industries.

“The ideas around blockchain are as a catalyst to rethink the business networks that you have,” said Mitchell.

The network effect

The technologies that are part of blockchain are not new. Where it differs is how these technologies are now combined to encode trust. However, to be successful, a blockchain needs to go beyond technology and understand how industries and business networks work.

It is why IBM has initiated and joined various blockchain projects, said Mitchell, highlighting the company’s involvement in Ethereum and Hyperledger projects.

In addition, the company is also working with Everledger, which uses the blockchain for the diamond trade and use IBM LinuxONE to ensure high security.

“That is how we are aiming to provide a network effect and the foundation,” he added.

Through this network effect, blockchain proponents are looking to address age-old issues and questions. For example, Crozier sees blockchain becoming invaluable in dealing with double claims in insurance, resulting in overpaying of about “10-15%” of all claims.

“There is a massive prize there, but it involves having all the insurers getting together so that everyone will have a copy of the general ledger,” he said.

Campbell added that blockchain would also be beneficial in tax payment.

“As you move to digital cash, with some countries phasing out bank notes, think about the blockchain’s positive effects in allowing the taxman to track people’s finances.”

However, Mitchell noted that infrastructure plays a crucial element in enabling this network effect, highlighting the value of running a blockchain on an IBM LinuxONE platform.

The blockchain is inherently resistant to modification  – once recorded. This immutability feature is achieved in IBM LinuxONE via the IBM Secure Services Container with tamper-responsive hardware features such as CPACF (CP Assist for Cryptographic Functions) and CryptoExpress adapter certified to FIPs 140-2 Level 4.

Speed is another critical issue that digital businesses put a priority on. With built-in on-chip accelerators for encryption (hashing) and cryptography the IBM LinuxONE addresses a key worry among blockchain proponents of the impact on application speeds when working with several blockchains.

Collaboration is key

At AIA Edge, Crozier noted that while his company uses a strict selection process to invest in projects, they also rely on their network of partners like KPMG to learn together.

“We leverage each other to get ideas off the ground, and so it is co-creation from ground up,” he said, encouraging participants to leverage their current relationships with vendors like IBM and consultants like KPMG to explore the value that blockchain brings to their organizations.

“We rely on the Big Four consultants to talk to the industry, as they know the people to talk to in each of the businesses we want to or should work with,” he added.

“Blockchain requires collaboration, and it requires all the conversations,” said Campbell, advising companies to join consortiums, leverage consultants and work with vendors to explore blockchain from multiple points of view.

He noted that consultants can help companies and departments to cross traditional lines because a good blockchain implementation requires all parties to be onboard.

“It is often easier for banks to talk to us and through us rather than it is for them to talk directly to each other or third parties, which can even be true for departments within a bank,” he added.

Vendors are equally important, said Crozier.

“Where do our current systems reside? With our technology providers; we need that technological know-how to make a great idea real for our customers,” he said.

IBM understands this, and is already helping blockchain proponents to explore.

“You need to start thinking at the business network level as blockchain has great characteristics on security and transparency, and there is plenty of value to do some projects, for example, with our cloud-based IBM Bluemix portal and understand how it can improve business networks,” said Mitchell.

“Remember that all the ideas are great, but you need to plug them onto existing systems,” said Crozier.

Start now

Panelists concluded that financial services companies need to begin their blockchain journey today.

“You need to start reaching out to your partners, see how your business processes can be improved so that you can deliver to your customers’ or your customers’ customers’ expectations,” said Mitchell.

“You also need to find out what you need to rethink about service delivery and improving trust with a shared ledger and the transparency it brings, and to do that you need to start reaching out to partners and reinventing some of your processes,” said Mitchell.

Crozier added that blockchain offers a way for the financial services industry to “reimagine its future,” and companies need to gain a keen understanding of its role and how it will impact their current business.

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