Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.
Blockchain -- the "B"-word -- is in vogue among bankers.
UBS CEO Sergio Ermotti said this month the technology could disrupt the current financial system. JPMorgan and Citigroup were among several banks to pour over $50 million into Blythe Masters' blockchain startup, Digital Asset Holdings, in January. A group of 40 banks is trialing the use of distributed ledger in the commercial paper market.
But, beneath the surface, there's some reticence. While most financial executives recognize blockchain's importance, most are still unsure about or unlikely to respond to it, according to a survey by PricewaterhouseCoopers this month.
That reluctance makes sense. In the back of bankers' minds is the "Kodak moment" -- when a new product destroys existing streams of revenue rather than adding to them.
Conceptually, blockchain and banking should be perfect partners: A decentralized database would theoretically allow transactions like buying stocks or bonds to take place in near-real-time -- with no middleman or clearing-house needed -- and be recorded on an unbreakable chain of verified transactions.
Cumbersome processing costs, long settlement times and risk of human error would be swept away -- again in theory. Precious capital and collateral tied up at clearing-houses in the name of protecting against the risk of a default would be set free.
Blockchain start-up SETL reckons the total cost of clearing and settling trades is as much as $80 billion per year -- cutting that even by one-third would surely be welcomed by banking CEOs under pressure to boost returns after the financial crisis.
But there are potentially unbridgeable gaps to cross before theory becomes reality. How do you get clearing-houses, exchanges and brokers to agree to a new system that would sweep away the one that is currently generating their profits? Will regulators want to wipe the slate clean on a financial market structure that has been tested by crisis after crisis and (in theory) strengthened as a result? Banks themselves employ plenty of middle-men, whether mortgage brokers or sales traders; how would they survive in a world of direct transactions?
All these questions make it less attractive for banks to pay for a parallel system with the increased processing power and transaction speeds that blockchain requires. Small wonder UBS described the technology as a "double-edged sword" in a January white paper.
For now, executives are content to pay for experiments in niche trading areas such as trade finance or allocating shares before initial public offerings. That's far from throwing open their doors to a revolution, and -- worse still -- that could lead to 1,001 blockchains run by different institutions, struggling to gain traction, according to Leda Glyptis, a director at Sapient Global Markets, a consulting firm.
To expect the current crop of bank CEOs to fund, create and pioneer a technology what could potentially lead to their own demise looks like wishful thinking on the part of tech evangelists. Banks have little incentive to be the first to this party -- unlike the demise of traditional photography this revolution will be regulated, and will take years to develop.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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