When it announced its blockchain innovation lab earlier this year, UBS caused a ripple of excitement and trepidation.
It was a watershed moment: one of the world’s wealthiest investment banks was putting its money, and public image, behind blockchain technology. Not only that, but it would be experimenting deep in the financial heart of London.
The narrative around bitcoin has shifted since the cryptocurrency first gained notoriety via illegal activities and anti-bank sentiment. The finance world is now racing to test it – and other blockchain technologies – out in startups, research projects and in-house R&D teams.
Alex Batlin, the former engineer heading up the lab, told CoinDesk that while financial technologies like peer-to-peer lending and crowdfunding platforms are on the rise, it's blockchain technology that could be the biggest threat or opportunity for banks like UBS.
"In principle it's probably one of the biggest confluences of technology and business right now."
His mission over the next year is to figure out how best to "future proof" the bank and find a way for shareholders to profit from these rapid changes.
The ROI problem
Batlin describes the bank's innovation process as "robust", with business and technology departments engaging in a two-way conversation about potential threats and opportunities as they surface.
Typically, UBS will be able to assess the return on investment (ROI) for a new idea before it makes a commitment to explore it further. However, as blockchain technology is so new, and changing rapidly, the bank’s usual strategy has gone out the window.
"In this case to create the ROI, you have to spend so much money ... you need an ROI of an ROI," Batlin said.
For him, it's a chicken-and-egg situation – and one that UBS has a shot at cracking. It has assembled what he terms a "small, agile team" consisting of developers, business analysts and project managers inside Europe's biggest FinTech accelerator, Level39.
In 'back of the envelope' style, these members will sit together to work out if a business model could be improved or redefined by blockchain technology – and if its benefits outweigh the potential costs.
Really, the lab is a year-long experiment for UBS to reduce the unknowns around blockchain technology, of which there are many.
"We believe it's the best combination of making sure we don’t spend too much but also getting the most out of our learnings from that," he said.
Batlin says a lot of the team’s time is spent brainstorming and sketching out ideas in meeting rooms, coming up with whacky new business models and then testing them.
"We conduct experiments, which are different to proof-of-concepts, as we don't have a concept yet. We’re just saying, here's a hypothesis, let's figure out could it work at all," he continued.
Most of the projects UBS is building won't look anything like working solutions just yet.
"The technology is so nascent, it's important to have the right set of expectations," he added.
Back in March 2014, UBS wrote at length about how banks could co-opt bitcoin for traditional functions. Its undesired 'quirks' could be removed, while benefits could be absorbed to reduce duplication and bottlenecks in the current financial system, the report read.
Since then, a wave of new companies – alongside some existing bitcoin firms – have announced custom ledger systems that adapt blockchain technology for the world’s financial institutions.
As the space is highly intermediated, Batlin admits there is potential for a system that can remove complexity from the market and reduce the costs of participation. However, with multiple blockchain systems vying for market share, he warned that companies could be replacing one problem with another – reduced interoperability.
"If you are participating in over 100 blockchain networks, all you are doing is swapping one set of complicated technology for another."
Rather than multiple closed systems, similar to MSN and AOL, for him, the real cost savings come with a common standard, like the Internet, which he describes as a "multi-asset chain where I can trade securities, derivatives, cash all in the same platform".
While there are risks pegging financial services to one set of standards, there are precedents in recent history that support the idea that common standards can support this amount of risk, he said.
Though banks are not famed for collaboration, reports indicate there is some cross-market cooperation or coordination happening already. Batlin agrees that this is crucial for the technology to flourish, and for banks to get the most from it:
"This is a cross-market initiative. There is no point having a private road where you only drive in a circle on your own."
The UK – and London – are fast becoming a hub for companies at the intersection of finance and tech. The country accounted for 42% of Europe's FinTech investment last year, while the sector employs more than 135,000 people, many of which are in the capital.
Besides its mature FinTech ecosystem, London was an attractive home for the Swiss bank's project due to the UK government's open-minded stance on cryptocurrency regulation.
Level39's hub in Canary Wharf is close to Innovate Finance, the FinTech trade association with strong ties to government, and the FCA is just across the road. The Bank of England is also known to be a regular visitor.
"It's easy for people to come and meet here. You are not asking for people to come to UBS, you are asking for people to come to Level39," Batlin said. Alongside CIO Oliver Bussmann, he is a regular mentor to fledgling startups at Level39, including blockchain-based platform Tide Payments.
While some startups and VCs in the ecosystem, including Index's Ophelia Brown, have berated banks for denying bitcoin startups bank accounts and quelling innovation in the process, Batlin sees it differently.
"We have thousands of clients, globally, who depend on us to provide them with the advice, expertise and opportunities they need to protect and grow their wealth, so we naturally have to be a little more cautious and it would be irresponsible for us to take the risks they [startups] do."
Batlin went on to say that some problems could be too expensive for startups to solve.
"A team of 12 can accomplish brilliant things, for sure. But some challenges require a level of resource to overcome, which the likes of UBS can contribute and become a valuable partner in this new world," he said, concluding:
"I think the partnership between bigger companies and startups can work really well because we can complement each other."