Before blockchain can change the world of financial services – from remittance, trade finance, securities trading and insurance – it will have to overcome six key challenges.
A report by Roland Berger says that blockchain is set to be adopted on a broad scale within three to five years. The study – Enabling centralized, digital and trusted transactions (Why blockchain will transform the financial services industry) – highlights how the technology is accelerating the creation of new business models, which can help financial service providers reduce costs. The first solutions are already on the market and banks and insurers should take steps to prepare themselves for blockchain and the possibilities it holds, according to the study. But there are several significant obstacles to overcome before we will start to see mainstream use of blockchain in financial services. Here are the six main challenges, according to Roland Berger:
1. Complexity and scale
Firstly, for widespread application of blockchain technology, the scalability of the underlying technological concept of a blockchain needs to be guaranteed in order to process hundreds of millions of transactions worldwide each day. Secondly, an enormous amount of computational power will be needed to run a massive blockchain and this would consume an unprecedented amount of energy. Finally, the technological architecture of any blockchain system needs to be able to support and reflect the complexities of today's transactions (e.g. when trades are leveraged).
Besides the technological demands of blockchain, regulatory, legal, and security issues also pose potential hurdles for widespread adoption. Currently, no legal framework exists that regulates the application of blockchain technology for processing financial transactions. Here, the question is not only how regulators will handle changes to transaction processes, but also how common and harmonised legal standards, and the enforcement of these, can be ensured on a global scale.
Different blockchain models, and a wide variety of different blockchain ledgers for tailor-made banking or insurance solutions, could be a further obstacle to a holistic blockchain ecosystem. Without a standardised approach to blockchain, the technology would be hard to scale up and may lose its potential. To ensure interoperability of individual distributed ledger networks, banks and other financial service providers would have to collaborate intensely. They may need standardised protocols, the same blockchain models, and/or a joint governance body to create common standards and foster collaboration.
Implementing blockchain requires significant changes to the technological architecture of the financial services sector. Thus, even enthusiastic advocates of blockchain question whether the benefits justify the investments required. In addition to the actual cost of implementation, companies would have to spend time filling a blockchain talent gap.
Implementing blockchain also requires a significant cultural change within the industry as a whole. Often, banks have risk-averse cultures and focus on incremental optimisation rather than embracing technological revolutions. To grasp the full disruptive potential of blockchain, they must be willing to take some risks even though short-term opportunities may not be apparent.
A primary concern of many financial services companies right now is making their existing processes digital. A breakthrough in blockchain technology, however, could make a complete overhaul of current processes fruitless if those processes were eliminated by blockchain anyway. Companies run the risk of pouring money down the drain and having sunk costs that keep them from moving on to blockchain applications. This scenario should be addressed when designing new IT systems today so that they are compatible with blockchain technology and do not become obsolete in the near future, when blockchain comes into widespread use.
CTMfile take: According to the study by Roland Berger, these six challenges are being tackled by the financial industry, which is “very much in a trial and experimentation phase”. It also says that full rollout of market-ready blockchain solutions is on the horizon.
Like this item? Get our Weekly Update newsletter. Subscribe today