Finance companies need to take a structured approach to their blockchain strategies to start delivering value in the short-term, according to advisors McKinsey.
In recently published analysis, it argues that blockchain does not have to be a disintermediator to generate value, as benefits from reductions in transaction complexity and cost, as well as improvements in transparency and fraud controls, can be captured by existing institutions using ‘permissioned blockchain’.
Permissioned blockchains are hosted on private computing networks, with controlled access and editing rights, so this can be more closely managed that public blockchain, where anyone is able to access networks, leading to rapid and less controlled change in business models.
Brant Carson, a partner in the Sydney office of McKinsey, explained: “Public blockchains, like Bitcoin, have no central authority and are regarded as enablers of total disruptive disintermediation. Permissioned blockchains are hosted on private computing networks, with controlled access and editing rights.
“Private, permissioned blockchain allows businesses both large and small to start extracting commercial value from blockchain implementations.
“Participants can get the value of securely sharing data while automating control of what is shared, with whom, and when.”
Current use cases include the Australian Securities Exchange, for which a blockchain system is being deployed for equities clearing to reduce back-office reconciliation work for its member brokers. IBM and Maersk Line, the world’s largest shipping company, are establishing a joint venture to bring to market a blockchain trade platform. The platform’s aim is to provide the users and actors involved in global shipping transactions with a secure, real-time exchange of supply-chain data and paperwork.
Carson added: “If industry players have already adapted their operating models to extract much of the value from blockchain and, crucially, passed on these benefits to their consumers, then the aperture for radical new entrants will be small. The degree to which incumbents adapt and integrate blockchain technology will be the determining factor on the scale of disintermediation in the long term.”
In the short-term, the strategic value in blockchain will be cost reduction, as it removes the need for intermediaries and the administrative effort of record keeping and transaction reconciliation.
McKinsey says this will benefit certain industries more than others, including financial services, as its core functions of verifying and transferring financial information and assets closely align with blockchain role.
Cross-border payments and trade finance will be an area which will particularly benefit.
Other benefits include post-trade settlement and regulatory reporting.
However, over time, the value of blockchain will shift from driving cost reduction to enabling entirely new business models and revenue streams.
McKinsey says one of the most promising is the creation of a distributed, secure digital identity - for both consumer identity and the commercial know-your-customer process - and the services associated with it.
A critical hurdle to extensive application of blockchain technology will be the introduction of common standards, which could be established with relative ease if a single dominant player emerges or international governments agree a common approach.
In addition, competitors need to cooperate to achieve this common approach to agree how to manage governance issues and achieve critical mass.
McKinsey has identified six potential use cases for industry across two major needs in its analysis.
Its research has identified the two major business needs as record keeping (storage of static information) and transactions (registry of tradable information).
Key categories of blockchain use
|Use case||Static registry||Identity||Smart contracts||Dynamic registry||Payments infrastructure||Other|
|Summary||Distributed database for storing reference data||
Distributed database with identity-related information.
|Set of conditions on a blockchain triggering automated, self-executing actions when pre-defined conditions are met.||Dynamic, distributed database that updates as assets are exchange on a digital platform||Dynamic distributed database that updates as payments are made among participants||Use cases involving several groups (or none)|
|Example||Land title; food safety and origin; patent||Identify fraud; civil registry and identify records; voting||Insurance claim payment, cash-equity trading, new music release||Frictionless investing; drug supply chain||Cross-border peer-to-peer payment, insurance claim||Initial coin offering; blockchain as a service|
The use cases cover static registry, identify storage, smart contracts, dynamics registry, payments infrastructure and other uses.
McKinsey say the market will be developed by four market groups, made up of leaders, conveners, followers and attackers.
Leaders will be early adopters who are already likely to be dominant players and are keen to protect their market position.
Conveners are organisations that may be dominant, but can’t single-handedly achieve their aims without cooperation, so they need to drive conversations and consortiums to achieve critical mass.
Followers will carefully consider how developments will change their business and get ready to adapt as the market develops.
Attackers are likely to be new market entrants who see the potential impact of transformative technologies such as blockchain. McKinsey says incumbents should deploy an attacker blockchain strategy in separate non-core digital businesses.
Carson added: “The insights from our analysis suggest that, beyond the hype, blockchain has strategic value for companies by enabling both cost reduction without disintermediation as well as, in the longer term, the creation of new business models.
“Assessing factors with pragmatic scepticism about the scale of impact and speed to market will reveal the correct strategic approach on where and how to compete to enable companies to start extracting value in the short term. Those dominant players who can establish their blockchain as the market solution should be making the moves - and making them now.”
Blockchain is a distributed ledger, or database, shared across a public or private computing network.
Each computer node in the network holds a copy of the ledger, so there is no single point of failure. Every piece of information is mathematically encrypted and added as a new “block” to the chain of historical records.
Various protocols validate every new block with other participants before it can be added to the chain.
This prevents fraud or double spending without requiring a central authority.
The ledger can also be programmed with “smart contracts,” a set of conditions recorded on the blockchain, so that transactions automatically trigger when the conditions are met.
McKinsey has identified several key blockchain myths and misconceptions about the technology and explained the reality behind them.
Blockchain myths and reality
|Myth||Blockchain is a Bitcoin||Blockchain is better than traditional databases||Blockchain is immutable or tamper-proof||Blockchain is 100% secure||Blockchain is a ‘true machine’|
Bitcoin is just one crypto-currency application of blockchain.
The technology can be used and configured for many other applications.
Blockchain’s advantages come with significant technical trade-offs that mean traditional databases still perform better.
Blockchain is particularly valuable in low-trust environments where participants can’t trade directly, or lack an intermediary.
|Blockchain data structure is append-only, so data can’t deleted. It can be tampered with if more than half the network is controlled and all previous transactions are rewritten.||Blockchain uses data structures such as cryptography, but system security depends on adjacent applications.||Blockchain can verify all transactions and data entirely contained on and native to the blockchain (eg. Bitcoin). It can’t assess whether an external input is accurate or truthful.|