The Spring IIF event always brings together a collection of the highest-profile figures in financial services and cutting edge topics, and this year in Madrid has been no exception. With panels on ‘regtech’ and alternative lending, as well as the views of BBVA’s Chairman Francisco González and Executive Chairman of Santander Ana Botín, the event is very much the contemporary face of finance. For fans of distributed ledger technology, there was one highly anticipated panel - ‘Banking and Blockchain’ . Boasting a panel featuring some of Blockchain’s biggest names - Digital Asset Holdings’ Blythe Masters, UBS’s Axel Lehmann and BBVA’s Teppo Paavola, it was a packed conference room for a session on the potential of Blockchain in the banking industry . BBVA was lucky enough to sneak in at the back, and as the panel progressed, picked out the following points:
- As well as doing things more efficiently, Blockchain could be an answer to banks’ cost challenges
As well as helpfully setting out for the audience what Blockchain was - ‘mutualising data responsibility’ - Masters made a case for Blockchain which was remarkably similar to that made for digital financial technology generally.
Not only can it do things more efficiently - in Blockchain’s case, things such as contract settlement and identity verification - but as it is via shared databases, it can also do them in a more cost-effective way. Important, according to Masters, when banks are facing negative interest rates, increasing compliance costs and the requirement to hold more capital.
In Masters’ opinion, we are reaching the point with proprietary databases that ‘things that used to be points of competitive advantage or ‘special sauce’ are now being viewed as millstones.’
BBVA's Teppo Paavola.
- Open Source is the way forward in Blockchain standards
Blockchain is a network technology, meaning it needs multiple parties for verification and trust to be confirmed, and to this end needs common standards. In Paavola’s opinion, there’s only one way to go - Open Source.
“The old way of arriving at a common standard was to get a group of people in a room and after 5 years, they’d arrive at a protocol,” he said. “The Internet way is to give freedom for many to develop and then people follow the best one. In my mind, the building block needs to be Open Source’.
Masters concurred. “Open Source exposes your technology to a testing army that not even a government could mobilise, “ she said.
- Expanding use of Blockchain into traditional currencies and Central Banking is probably a political question
It’s no surprise that with the emergence of Bitcoin - again, helpfully described by Masters as a protocol designed to send money anonymously over the web with a computer network verifying the exchange - and Blockchain, there have been discussions about their role in the wider economy as opposed to simply between banks.
Lehmann shared one idea - which UBS has trialled, where Blockchain transactions are backed by real currency to bring additional security to the parties involved.
Masters went further, describing a hypothetical situation where Central Banks opened their databases to the general public and used Blockchain to take deposits and make loans, essentially nationalising the entire banking system. She added: “This is more a political than a technology question”
- Smart contracts are a misnomer.
According to Paavola, a lawyer friend of his has said that ‘smart contracts’ - one of the main use cases quoted for Blockchain - are wrongly named. "From a legal point of view, they are 'dumb' as they're performed by robots and they're not contracts as they lack a legal framework, " he explained.
Despite this, Paavola believes that smart contracts are actually a good use of Blockchain. He explained that whereas people assume that a smart contract is one which is smoothly settled by Blockchain, eg. a property sale or share transaction, they are in fact variable elements in a wider contract that are verified by Blockchain. For example, a contract for electricity could say that every time lights are activated in a particular street, the user will pay €0.20 an hour, authenticated via Blockchain. This is how smart contracts connect the programmable world (also known as the Internet of Things) to banking.
- Focus on the areas where you can make the biggest difference
An obvious point, perhaps, but Masters is asking for focus in an area where Blockchain use is applied to any number of cases. “Central market structure - like a stock exchange - is a good place to start. There’s an established network with a large number of players plugged in.” In January, Masters’ company won a contract from the Australian Stock Exchange to reduce settlement times from two days to two minutes.
An hour in the company of these three flew past. Perhaps with the introduction of Blockchain technology, the amount of time needed to impart this knowledge will be reduced to seconds.