The debates over bitcoin and whether such cryptocurrencies can ever replace fiat money or gold as a reserve currency have only just begun. But there’s little doubt that blockchain, the underlying technology that powers cryptocurrencies, has enormous potential for the financial sector, which is only now being realised.
Blockchains are the databases on which cryptocurrencies, or digital money, are created and stored electronically. However, this “distributed ledger” technology has applications above and beyond that, because they offer a way for people who do not know or trust each other to create a record of who owns what that compels the assent of everyone concerned. Everything from land registries to stock markets are interested in applying the technology, and in September 2015 nine of the world's biggest banks, including Barclays, Credit Suisse and JPMorgan, threw their weight behind blockchain by forming a partnership to draw up industry standards and protocols for using blockchain in banking.
Utocat and its Blockchainiz platform is one such company that is already testing the waters in Europe by bringing the technology into the mainstream banking and insurance business.
Utocat, founded by Frenchman Clement Francomme, is like an internet access blockchain provider for banking and insurance, which enables public blockchain access through bitcoin and ethereum, another public blockchain-based distributed computing platform. “This is already used in prototype mode at BNP Parbas and Axa so they can go further in the discovery of the business opportunities the network provides. They can become a relevant member of the ecosystem with the acceleration provided by blockchainiz.io,” says Francomme.
What is driving this, explains Francomme, is the potential for banks and insurance companies to reduce the huge costs associated with running their back offices. “Our solution is designed to reduce the overall delays and frictions that exist in the back offices and reduce the costs and frictions in the regulatory sphere,” he says.
Blockchain achieves this because all users can certify in real time all operations within the system, while even the best back office systems today can never actually guarantee that the information inside the system can’t be modified by some user. “In public blockchains there’s simply no way to do it, so it’s more trustworthy,” he says.
The accountancy firm KPMG believes the technology could be the “perfect antidote” to the increased burdens that financial regulators have placed on its clients in the wake of the 2008 financial crisis. “From a perfect storm point of view, having suffered for years from regulation and overheads, this is potentially a light at the end of the tunnel that gives clients relief from costs,” Eamonn Maguire, managing director of financial management at KPMG, told CoinDesk in an interview in March.
KPMG, like the other “Big Four” accounting firms, believes blockchain has the potential to impact all three of its core businesses – advisory, tax and audit.
Blockchain technology will also help act as a huge reducer of fraud in banks’ back offices, where many of the largest frauds have occurred when rogue traders masked trades and hid open positions. Think of Nick Lesson, who caused the collapse Barings Bank in 1995, or Kweku Adoboli, whose $2bn fraud damaged UBS in 2011. “You cannot commit internal fraud with this technology, because if you modify anything, then every actor on the stem will be aware of that,” Francomme says. “It doesn’t mean you eliminate mistakes, but the mistake will be there forever for everyone to see.”
In fact, back offices are widely regarded as the weakest link in all corporations, big and small. According to Javelin’s “2016 Small Business Fraud Report”, small businesses are increasingly targeted by cyberthieves looking for easy prey and lost an average of more than $12,000 in 2015 because of back-office fraud. Yet because anti-fraud measures are often cumbersome and expensive to introduce, many small and medium-sized enterprises don’t bother with them. Blockchain technology, on the other hand, is attractive because of its relative simplicity and cost effectiveness.
Looking at his firm’s prospects, Clement says the anti-fraud aspect is proving very attractive for potential clients in the Middle East, while in Europe BNP Paribas and Axa have already understood the power of this technology and are pioneers in it. “They are going full steam in rolling out blockchain over the next few months or maybe a year, but other banks and insurers are not there yet,” he says.
Francomme concedes that one reason for the resistance by larger organizations is that using the technology means giving up some power in the process. “Because you don’t operate your own system, rather your system is shared with other participants in the world, the mentality of giving up this part of your power is difficult to accept for many in the banking and insurance world, especially the banks I’d say,” he says.
However, change is definitely in the air, and will come through one of two ways: either through ‘proselytizing’ by companies like Utocat, or through one of the larger banks or insurance companies insisting on one kind of operation using blockchain, which would oblige all the other players to adopt it or risk losing a huge advantage in the market.
“If we need to convince companies it will take maybe three to five more years; if it’s BNP or Axa driving this, then just one more year will be enough,” he concludes.