Will blockchains really change the finance industry?

There is a lot of talk about what impact blockchains will have on the finance industry and for FinTechs in particular. As “disruptive technology,” in 2015 blockchain now seems to be on the peak of its Hype Cycle. There are critical opinions about blockchain technology in the FinTech scene, such as from investor Sir Michael Moritz from Sequoia Capital who stated in a Keynote of the European FinTech Conference Money2020 in Copenhagen, “this technology solves no real problem”. And one of the FinTech representatives from Holvi, Johan Lorenzens expressed his doubt that blockchain Technology “is requested by the customers”. Other successful FinTech founders, like Patrik M. Bryne from Overstock, argues that everyone who understands blockchain, knows it as the next big wave of innovation, perhaps being more disruptive than the internet.  So who is right?

The lack of shared terminology and two additional reasons make it difficult to answer: first, Blockchain technology is not easily understood; And second blockchain is not a monolithic solution, but a sum of ledger functionalities in a state of continuous innovation. Today the only common aspect about different blockchain solutions is that they are digital ledgers to register transactions from business partners saved in blocks, which are continuously validated to assure their sequence, unchanged state and origin. All other technical aspects differ between the main blockchain versions.

Objectively looking at business potentials, it appears obvious that there will not be the same banking system five years from now, because blockchain has the ability to dramatically streamline processes in financial services, speed them up, and/or lower their costs. Some blockchain FinTechs are successful and initiatives of conventional financial service partners, like Hyperledger or R3 are proving blockchain technology in real world scenarios now, like the successful monthly real world test of blockchain processing credit default swaps for OTC derivatives between consortium partners reported from the DTCC last month. But these use cases are not productive yet. Duration and extent of blockchain adoption is unsure at the moment. Because of missing maturity and information imbalance among financial service participants, it is likely that some banks will not be able to adapt blockchain technology quickly enough. These might disappear because of low fees resulting from blockchain’s optimizing effects for competitors. But if this group will be the small community banks or the big financial service providers is still unclear. Small banks are often more agile because of organizational size and culture, like the example of Rabobank, while big banks might more easily invest in proof-of-concepts because of their size in capital and human resources. Probably bigger financial service partners will absorb some of the blockchain FinTechs with regard to market power, but initial cooperation among FinTech startups this year could slow this trend down.

Market behavior and adaption are also triggered through incentives, image and trends. It might be a good sign that big technology partners, like Microsoft, experienced in continuous technology innovation at large scale, join initiatives like the R3 consortium now, to empower the financial services blockchain change.


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