William Mougayar is a Toronto-based entrepreneur, investor and independent scholar. He is the General Partner at Virtual Capital Ventures.
Here, he discusses insights gained from interactions with industry participants including banks, venture capital firms and startups across North America and Europe.
Banks didn’t plan for the blockchain. It just happened in front of them in 2015. But, they have been thinking a lot about its implications.
2015 was the year that banks started to wonder about their blockchain strategy. Banks that didn't have such a strategy were considered laggards.
But despite its revolutionary prognosis, the blockchain doesn't signal the end of banking, because the banks aren’t going to use it to disrupt or obsolete themselves.
Rather, they will guide it to live within the regulated constraints of their world.
The good news is blockchain implementations help banks strengthen and defend their positions. But here's the footnote: Innovation must permeate faster than the Internet infiltrated banking from 1995 to 2000.
In 2015, banks became interested in blockchain startups, fueled by their larger interest in FinTech activity.
Some banks invested in startups, including startup accelerators (eg Barclays' work with TechStars), but that only gives them a spectator seat, not a player one. The jury is still out pertaining to the direct benefits they'll gain, besides marketing visibility.
Blockchain and old constructs, such as clearing houses and private exchange networks (eg SWIFT, CCP, FIX, DTCC) are like oil and water: They will not mix well because one is based on centrally trusted intermediaries, and the other is based on exchanging intermediaries for peer-to-peer trust.
It is easier to start implementing blockchain solutions in new segments, without internal integrations.
So, here’s a thought: why not start with no baggage, and earn new customers that want to try something new?
Having the blockchain without bitcoin is like having your cake and wanting to eat it too.
Banks rejected bitcoin as a knee-jerk reaction, rooted by regulatory compliance requirements, and fears they would lose control of the financial system. Both are valid concerns in the short term.
But bitcoin is a rich blockchain laboratory. Bypassing it results in a steeper learning curve.
Proofs-of-concept (PoCs) are timid experiments that don’t show commitments. They won’t always allow banks to see the potential benefits, so it’s better to implement smaller projects end-to-end, where results can be more visible. That said, POCs can be used to narrow down the portfolio of committed projects.
Venture capital may not be attracted to private blockchains because the banks are spending money on it. But many startups are going after the capital markets space, and most of them are getting funded by banks or private equity. That’s not a necessarily good sign.
Implementing the blockchain is 80% business process, 20% technology. Not the other way around.
The biggest risks lie in seeing banks not directly getting their hands dirty with the new technology. Banks need to learn how to write smart contracts, and they should not outsource these tasks. Otherwise, they would be outsourcing their education.
Few people understand the blockchain within the average large bank, and while some entities have internal innovation groups that are leading the way, the question is whether their work will permeate the rest of the bank. Banks should take a page from the reengineering craze days, when a "Reengineering Czar" was a required person.
Appoint a Blockchain Czar position, especially if the CIO is not yet a blockchain enthusiast. (That person’s role is outlined the SlideShare below).
As far as anti-money laundering (AML) and know your customer (KYC) practices, network-wide analytics are now possible, across institutions, providing an opportunity to reduce KYC requirements, while increasing monitoring and analysis.
But questions remain whether law enforcement authorities, financial institutions and regulators will embrace this paradigm shift by seeing its potential benefits.
Don't ask: What problems is the blockchain solving. Rather, think what opportunities does it create? (That’s a tough one to answer).
As for my thoughts on the year ahead, some might be controversial, but here they are:
- Compliance will move to intelligence. Regulation will show signs of reinvention. That's because you can monitor better with blockchain analysis software, and across institutions; something you can't do well with AML monitoring. (see slide #61)
- Companies will use the blockchain like having a website. That's an analogy I made in a long essay here – Why Blockchain is the New Website.
- $1.5bn in non-currency assets will be transacted on blockchains. Already Overstock announced that $500m will be pegged to the blockchain. That number will get big quick.
- VC investments in blockchain related startups will exceed $2.5bn. This doesn't include what the banks will spend from their operating budgets, but it's not the same metric. Banks fund implementations, with large overhead costs.
- Some FinTech companies will be challenged by blockchain contenders. Surprise! The blockchain also competes with traditional FinTech companies.
- Some consortia will start delivering. But it’s not a panacea for everything. Banks were driven to consortia for fear of missing out, but they will have limitations that prohibit them from truly capitalizing on the tech.
- Some blockchain startups will start to fail (visibly). This is good for the ecosystem, because we learn from failures, and it means we have pushed the envelope in order to figure out what the real boundaries are.
- Bitcoin as a digital currency will enter online banking. All it will take is one bank to take the lead, and the rest will follow. It's not a technical issue, but a regulatory one that is holding them up.
In closing, the blockchain is not a lethal threat to banks, but it presents challenges and signals turbulent times for technology adoption.
It might be the last chance for banks to ride a significant technology-based innovation cycle. If the banking sector fails to embrace the blockchain, the field of "alternative financial services" (aka FinTech) will accelerate its growth even more, meaning that banks will have a smaller share of the overall financial services market.
To view Mougayar's full report, download the PDF or view it the SlideShare below:
Want to share your opinion on bitcoin or blockchain in 2015, or a prediction for the year ahead? Send ideas to email@example.com to learn how you can join the conversation.
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