A Reality Test for Enterprise Blockchain Technology at Financial Institutions

Following is the text from a talk I gave April 2 at the International Blockchain Congress held in Chicago.

When it comes to blockchain projects for enterprise financial institutions, I’m sure I’m not alone in wondering, What’s real?

To be clear, I am not a naysayer. I understand the business possibilities for blockchain technology well enough to believe that it has significant use cases. Whether it will transform the centralized nature of enterprise financial systems remains to be seen.

As a qualifier, I’m lumping a good number of distinct technologies and techniques into this category of “blockchain technologies.” I am inaccurately and for the sake of simplicity making no distinctions between public, hybrid, and private blockchain technologies. I am making no distinctions between distributed ledger and blockchain technologies, even though there are and they matter.

I’m also limiting myself to enterprise financial institutions. Large banks, in other words. That’s where my experience lies. I grew up as a media and marketing and technical communications guy in large and middle-market corporate banking, treasury management specifically. Pre-internet. The technologies for corporate payments fascinated me. They still do.

So how do you know what’s real? First question, in software development terms, Is it in prod? The production system. For those of you who may not follow the software development cycle, prod, the production system, is where a bank’s real customer and compliance operating systems lie. It is or at least should be, a big deal for a regulated financial institution to move a system into prod. It doesn’t mean it’s a revolutionary technology, but it does mean it’s a significant operating technology.

A lesser version of real, again in software development terms, is UAT, the User Acceptance Test system. I count that as real because real users, internal or external, are testing to see if the system meets their needs and expectations.

If it’s in QA, quality assurance, or some flavor of a Development environment. Well, not so real. A QA system may be significant but not ready for prime time yet. In dev, we’re still messing around.

In any case, the business case behind the system is more critical than anything else. Will the system increase income or save costs? That leads to the ultimate reality testing question, Do you have a customer, and is the customer paying?

Then you look at how widespread adoption is, whether the system serves an external network of customers or internal business users. They all have other choices. And a blockchain-based system without widespread adoption across a wide network isn’t worth quite as much or, in this framework, is not quite as real.

And finally, the ultimate question for a financial enterprise, Do you have customers from other financial institutions on your system, which implies that you are no longer running the Big Bank Blockchain but are starting to run the Industry Niche Blockchain-Based thing. Which requires participation from other enterprise financial institutions. Which likely are loathe to hand their customers to another institution. Which is another reason why large-scale blockchain systems are difficult.

Now I’ll go over several enterprise financial institution blockchain systems that meet one or another criterion of mine for what qualifies as real.

  • Northern Trust Private Equity Blockchain. Northern Trust rolled this system out in 2017 and, late in 2018, completed the first live capital call using distributed-ledger technology for Emerald Cleantech Fund III LP. Its most recent addition is the ability to incorporate legal contracts using smart-contract code. This one is real, live in production. Its next test will be whether non-Northern customers join.
  • Ripple Network. Say what you will about Ripple and its attempts to replace SWIFT with a still centralized but less expensive crypto-token-based, cross-border payment facility, but it’s a production-grade system that uses blockchain technology. The network grows each month. It’s real, and I wonder how many banks are in prod.
  • National Bank of Canada – JP Morgan Chase Debt Issuance. JPMorgan Chase & Co tested a new blockchain platform for issuing financial instruments in parallel with the National Bank of Canada and other large firms in April 2018, seeking to streamline origination, settlement, interest-rate payments, and other processes. The key words are in parallel. It sounds more like UAT, so it’s less real.
  • Central Bank of Canada Project Jasper. This is one of my favorite enterprise financial institution blockchain technology tests. I’ve heard several presentations over the past three years and like the deliberate, almost UAT-type testing, with a clear focus on whether existing systems for interbank settlements would be improved with blockchain technologies. So far, they cannot. Existing enterprise financial systems tend to be fast, inexpensive, and easy to maintain, with a pool of knowledgable developers on call. Phase 3 focuses on trade settlement, in an attempt to see if the network effects of a larger set of participants make a difference in cost and efficiency.
  • Monetary Authority of Singapore Project Ubin. One of this projects many facets is to make cross-border payments less expensive and more efficient, as the Ripple Network is doing. It’s a good use case, and several other central banks are participating in that test. This project probably ranks more in the development stage but has generated a library of artifacts from the work of several global consulting firms.
  • Business Payments Directory Assn-NACHA – Discover B2B Payments Directory. This one is pure dev, but I like the use-case and the business methods behind it. They have been in development for many years and solve a real problem: how does one company get another company’s electronic payment credentials easily and securely. Software tends to work better and gain more traction when the business case is developed first. The first test systems are expected to be ready in the fall.

With the crash of crypto prices, whether related or not, I think we’re seeing increased pragmaticism in the enterprise financial blockchain arena. Financial institutions are still working and testing and, yes, deploying. We will see more, but keep in mind that enterprise financial institutions have a lot bigger fish to fry than blockchain technology.

Namely things like replacing and decommissioning legacy computer and database systems, moving applications to the cloud, creating digital onboarding systems, and automating processes with digital technologies. After that, they’re looking at data management combined with machine learning. Enterprise blockchain technology for financial institutions is becoming increasingly real, to be sure, it’s a long way before it becomes an operating reality.