Mercator has long recognized the value of blockchain technology, but has stated two key issues: 1) The new non-Bitcoin trust models have not been proven mathematically sound. 2) Much tighter controls must be established to manage the software platform to avoid issues such as those that occurred recently with Ethereum. 3) Current Blockchain implementations are not well aligned with the needs of the highly regulated US payment marketplace. The regulatory issue is discussed by Olver Bussmann and Nick Williamson in this Coindesk article:
“As part of one of the most highly regulated sectors in the world, banks will need to wait for regulatory certainty on any number of issues before they can release blockchain-based platforms. Stringent rules regarding collecting, storing and sharing customer data add layers of rigorous validation, verification and internal sign-off on top of the regulatory approval.
Even though many regulators are actively supporting banks in exploring blockchain, this is simply not an environment geared to early adoption in the wild.
The fact that banks are coping with dwindling IT budgets, as well as heavy legacy IT investment, is an obstacle as well. As to an extent are legacy mindsets: The financial industry is heavily invested in centralized models; blockchain represents the opposite worldview.”
This issue does not apply to all aspects of banking, as some areas of a banks operation are less regulated than the payments infrastructure. For example Blockchain might be deployed internally to document and manage funds transfers across divisions that span geographic boarders or in the purchasing department:
“At Credits, Nick has been observing this trend closely too. The company has been exploring a number of use cases outside of financial services, such as proof of identity, procurement processes, and interdepartmental payments. It recently worked with a client on a corporate identity blockchain solution.
Credits has also been very active in e-government, where blockchain has the potential to inject trust and accountability into many processes. This includes providing means to share sensitive personal data between departments that prevents data leaks while still allowing for data integrity checks.
The good news for banks is that many of the non-financial use cases also provide compelling first customers for the eventual financial ones. If we can solve supply chain management, for example, than we are not far from solving supply chain finance.”
Utilizing Blockchains internally reduces risks associated with potential errors in the trust model implementation or in the runtime environment because the entire operation of the Blockchain is accomplished by the bank’s own IT organization in a permissioned environment, and several banks have already begun to deploy Blockchain technologies in these much more controlled environments.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group
