The recent collapse in Bitcoin values (and questions concerning other cryptocurrencies) may be causing banks and other financial services companies to question the value of investing in distributed ledger technologies like Blockchain. The good news is that distributed ledgers are still a good solution for a variety of problems that financial institutions and others must solve. Digital ledgers can reduce costs and operational risk by providing banks, and others, with a path to secure transactions. These technologies may even help companies drive revenue. But to capitalize on the potential, organizations must first understand what distributed ledgers are, and how to use them.
In simple terms, a distributed ledger like the blockchain is a way to record transactions between multiple parties in a secure, decentralized way. Secure, because distributed ledgers are designed to be tamper-proof, and because they use cryptography to establish and confirm identity. Decentralized because the distributed ledger is shared across many computers, preventing a single entity from gaining control and undermining the security promises. The blockchain, the first large-scale distributed ledger, was initially used to track Bitcoin transactions, but because the concept has so much promise, venture capitalists have invested more than $1 billion in firms that are building distributed ledger capabilities.
As the global economy moves toward digital transactions, distributed ledger technologies have the potential to significantly disrupt existing business models. As transaction processes and sharing of information become more trusted, transparent, and scalable, financial services organizations will realize the value of adopting the technology. For example, banks could benefit by a blockchain’s ability to help reduce money laundering by independently verifying client information for Know Your Customer (KYC) regulatory commitments. The standardizing and sharing of account opening information on a blockchain could demonstrate compliance with AML regulations by creating a single KYC record that can’t be changed. Other benefits to similar organizations will include everything from collaboration and enhanced customer delivery to speeding-up and simplifying cross-border payments.
However, getting there won’t be easy. Complications include a rapidly evolving range of technologies, existing infrastructure limitations, capital investment needs, and information security. Regulatory compliance may also be an issue for financial services institutions.
As distributed ledgers reshape management of financial transactions and other records, financial services companies that embrace this disruption can reap benefits including lower costs, higher customer satisfaction, and new business opportunities. Those that are already experimenting with distributed ledger technology are learning the lessons that will give them a competitive advantage. Understanding the technology, and how it can affect organization goals and strategies, is a critical aspect of adapting to the world that distributed ledgers will create.
The Impact
Distributed ledgers can offer unrivaled privacy protection for transactions, making them attractive to consumers as well as businesses. As the general population demands more access to financial services through the internet, there will be an escalating need to manage, move and store transaction information in an efficient and secure way. Distributed ledgers offer a way to do that, with many advantages for both financial service providers and their customers. Understanding the possibilities of distributed ledger technology, and creating a plan around its arrival, will be important for every organization, no matter what industry you’re in.
How can you decide if your organization is ready to pursue distributed ledger initiatives? By following these guidelines.
- First determine whether you are ready. Conduct a firm readiness assessment and identify opportunities to use distributed ledger technology.
- Support strategic execution. Provide leadership for managing projects aimed at developing a distributed ledger footprint.
- Lead transformation efforts. Plan and oversee the transformation program, which may include change management, new business processes and procedures, and operational changes.
Despite the turmoil in cryptocurrencies, the underlying distributed ledger technologies will continue to be an important element in providing financial services to customers who prefer internet access. It’s important to make sure you understand these technologies, so that you are ready to be a leader in this new market.
About the authors:
Jim Kearney and Alex Stockdale are principals with Point B, an integrated management consulting, venture investment, and real estate development firm.