Case for blockchain in financial services dented by failures


Several high-profile blockchain experiments in banking and finance have failed this year, undermining the case for the future of technology in financial services.

The biggest mistake came from the Australian Stock Exchange, which in November abandoned a plan announced seven years ago to upgrade stock clearing and settlement to a blockchain-based platform. The exchange booked a charge of A$250mn ($168mn) and apologized after admitting it needed to start the project over from scratch.

Other initiatives in insurance, banking and shipping have also collapsed, suggesting that shared digital ledgers may fail to reform cumbersome operations. Even tech advocates warn that adopters need to be prepared for multiple failures.

“We always come up with new ideas and kill them if they’re not appropriate,” said David Newns, a director at the Six Digital Exchange, which issued the first digital bond on a distributed ledger in November. “We’re in the invention space, so we have to think of new things with the expectation that a lot of those ideas will fail.”

In July B3i, a consortium of 15 insurance and reinsurance companies, ceased its activities and filed for bankruptcy. The project was aimed at reducing inefficiency in premium and claims settlement, and placing contracts on blockchains.

we trade, other block chain a consortium of 12 banks focused on trade finance also filed for insolvency in June. The project had included Deutsche Bank, HSBC, Santander, Société Générale and UBS.

Most recently, Maersk and IBM announced in late November that they would be discontinuing TradeLens, a supply chain blockchain solution for the shipping industry, saying it had not “reached the level of commercial viability necessary to continue working and meet financial expectations.” .

The failures have come alongside the crisis that has engulfed many of the crypto companies that tried to build their businesses by trading and lending digital tokens like bitcoin. That culminated in the collapse in November FTXthe cryptocurrency exchange, a flaw that has undermined the case for buying tokens in the hope of making a profit.

Still, some banks remain committed to blockchain technology. “There is a lot of negative sentiment around cryptocurrencies, most recently due to FTX,” said Mathew McDermott, global head of digital assets at Goldman Sachs’ global markets division. “That has nothing to do with the underlying technology.”

Goldman, rivals like JPMorgan and other financial institutions continue to open to blockchain technology, citing its potential to increase efficiency and save costs. JPMorgan has touted its Onyx digital asset platform, which links to other banks and financial institutions such as Visa, and handles payments tied to around $1 billion of assets a day in currencies and bonds.

But even some of those groups that have gone further with blockchain are cautious about its ultimate potential. In November, the European Investment Bank issued its second digital bond using the technology: a two-year, €100 million deal arranged by Goldman Sachs, Santander and Société Générale.

The use of technology can potentially help streamline issues around documentation and payments, but Xavier Leroy, senior financing officer at the EIB’s non-core currencies and special transactions division, said the benefits were limited so far. “Since we are in the initial stages, right now there are not many [benefits] — it’s mostly about the potential for the future,” he said.

Some blockchain-related projects also rely heavily on existing systems rather than replacing them, particularly so-called distributed ledgers that allow a select group of players, such as banks, to share information in an immutable ledger.

This activity is related to blockchains and crypto assets, but does not involve the creation and verification of transactions in exchange for token rewards, a crucial difference from the blockchain on which bitcoin and other tokens are based.

HSBC, for example, describes the FX Everywhere system it uses to settle currencies with Wells Fargo, which has handled more than $200 billion of five currencies, as “blockchain-based.” Even so, its distributed ledger technology (DLT) relies on Traiana, a well-established market infrastructure, to act as the first step in the system.

“There is an element of definition. Even though we say DLT, people hear blockchain, blockchain, blockchain,” said Mark Williamson, global head of FX partnerships and propositions at HSBC.

FX Everywhere uses consensus algorithms, cryptographic signature, and other cryptography-related processes. But “it doesn’t require a blockchain,” Williamson said. It also represents a small proportion of the overall business that HSBC and Wells Fargo conduct in their currency trading operations.

A group of tech experts in June told US lawmakers that such “aggregate-only” digital databases were not new. “They have been known and used since the 1980s for fairly limited functions,” they said.

Shareholder responsibilities and regulation may also prevent banks from using the types of blockchains that support tokens like bitcoin.

These blockchains typically require the maintenance of computer networks that use vast amounts of power, in a controversial process called “proof-of-work,” but shareholders and regulators are pushing companies to invest in more user-friendly projects. with the environment.

Banks are equally aware that they would have to navigate the different ways in which jurisdictions recognize tokenized investment products. In December, another Swiss stock exchange, BX Swiss, said it had completed a trial operation of tokenized assets on a distributed public blockchain. However, it conceded that it would require a separate market license from the Swiss regulator to proceed.

“The challenge is when a set of institutions come together and individual shareholders have to commit to the journey,” said Keith Bear, a fellow at the Cambridge Center for Alternative Finance. “If the priorities change and the objectives are not achieved, the projects fail.”