As London contests the title for Fintech Capital of the World against Singapore, with New York, Hong Kong, Chicago and Silicon Valley hot on its heels, Fintech Week 2017 couldn’t come at a more exciting time in the city’s evolution. This year, London is anticipating to host up to 1,000 conference delegates a day from over 50 countries, with 5,000 Fintech enthusiasts participating in events throughout the week. With so much going on, it’s difficult to focus on just one thing we’re interested in! However, we suspect that for many attending events throughout the week, there will be one thought and one word on their mind.
The legend of blockchain
Blockchain: the disruptive technology that is promising to revolutionise the Fintech world and the financial industry as a whole. At a high level, blockchain is a decentralised, digital ledger of all transactions made in cryptocurrencies (e.g. bitcoin) across a peer-to-peer network. Sounds like jargon? Imagine that you need to pay your friend Ben back for that lovely meal you had last week. You log onto online banking, do what you need to do and off it goes. But Ben never receives the money, or at least that’s what he says. Perhaps it’s a mix-up at the bank, maybe the transaction never went through or maybe someone else has intervened halfway through. Either way, you have to get a third-party involved to verify exactly what went where, when and why. The beauty of blockchain is that the need for a third-party is obsolete. You and Ben can transfer as much cryptocurrency as you like by interacting directly with each other. A transaction record is created against each entry and disseminated across multiple computers using sophisticated cryptography, meaning that each time you pay Ben, or he pays you, both of you will be able to see it. If Ben then goes on to pay Julie with the cryptocurrency you paid him, that transaction will also be logged, and so on and so forth, creating a fully transparent, verified and logged history of every transaction ever made with that currency. Previous history can’t be changed, identifying information is encrypted and every transaction is made in complete visibility of both participants. It’s virtually impossible to hack, eliminates the opportunity for money laundering and is highly secure in terms of both data protection and data authenticity.
The stakes are revealed
Of course, when we’re talking about the excitement surrounding blockchain and cryptocurrencies, we’re not really talking about the value of you paying Ben or Ben paying Julie. We’re talking about multi-million pound cross-border, multi-party financial transactions. We’re talking about a game-changer for the finance industry.
Needless to say, there’s a lot of excitement around this new potential and nothing illustrates this hype better than the $1.4bn investment poured into the technology over a nine month period in 2016, or the $107m financing recently announced for R3, a blockchain consortium comprised of some of the largest financial services companies in the world. However, the technology still faces a lot of challenges before it can be successfully implemented. The financial sector is heavily regulated and this means that progress can be slow, particularly when the risk could be considerably high (imagine signing away your privacy and funds to an automated system with no regulatory body controlling it). There’s also the issue of scalability, with a maximum of 21 million bitcoins currently in circulation and a maximum volume of seven trades per second, a new cryptocurrency with greater flexing capability will need to be created to accommodate demand.
These challenges, and the opportunity behind them, have left a cavity for innovation and an arms race to crack blockchain. So who’s stepping up as the creator of this new world order? Well, on the one hand, you have large corporates putting their competition aside to create consortiums with the understanding that a shared ledger system will be beneficial for all financial organisations. On the other, you have disruptive start-ups hoping to side-line banks and overthrow the traditional order of capitalism. You then have venture capitalists and accelerators with the financial giants piggy-backing off the innovation of start-ups. Meanwhile, some of the industry leaders are attempting to forge the path alone, no doubt with Daffy Duck-like dollar signs in their eyes. Blockchain as a viable reality is within touching distance, but who will get there first, and at what cost?
The battle-lines are drawn
In the red corner, it’s the start-ups. Often hailed as the creative force behind many a tech breakthrough, the flexibility and independence inherent in any small business is giving corporates a run for their (metaphorical and literal) money. For a long time, blockchain was the domain of start-ups alone; it was considered too unpredictable and elusive for many of the big boys to take any notice. And the concept was a start-up’s dream: a middle finger to the man at the top by removing the need for a middle man to verify the transaction. Seller meets buyer directly, with no third party to pollute the transaction, the process run by nothing but simple, clean technology. Start-ups, fresh off their training wheels, were creating commotion and promising to marginalise some of the biggest names in Fintech. Well, that was never going to work.
In the blue corner, it’s the VCs. Corporates worn down by decades of red tape and bureaucracy started turning to start-ups to generate innovation within their own business. Start-ups are now being born like proverbial rabbits, nurtured by business angel networks, accelerators, venture capitalists, incubators and shared office spaces. In early 2016, more than $1.1bn total venture capitalists was invested it bitcoin and blockchain start-ups. For start-ups this also represents a unique opportunity, as 70% of blockchain start-ups are predicted to fail. With the financial backing, experience and knowledge of the corporates, chance of success is much higher, not to mention support in overcoming one of the biggest challenges they will face: trust. Start-ups will need to convince consumers that not only can they be trusted with their customer’s hard-earned cash, but that they can also trust a new, practically untested model for managing money. It’s a tough ask without a VC to fight your corner.
How about the green corner? Well, at the same time as launching VCs and accelerators, corporates are hoping to generate some independent thinking by joining forces across different world-leaders. Consortiums are all the rage. Take R3, for instance, and its c. 70-strong body of elite financial organisations, including HSBC, Intel and Bank of America. Just last month, seven of the major European banks – Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit – signed a memorandum of understanding to create Digital Trade Chain, which will use blockchain technology to simplify trade for European SMEs. The problem is that even uniting some of the industry’s greatest minds doesn’t forsake endless regulation. As companies blockade each other, innovation can become stifled and progression barely visible. And this is resulting in companies falling off the band wagon, such as Goldman Sachs, in a bid to go it alone and out-innovate SMEs, start-ups and corporates alike. Welcome to the yellow corner.
The biggest hurdle revealed
And underlying it all is one major risk: blockchain is built on open source technology, meaning that each breakthrough in the technology might actually belong to someone else. Cue the patents. Fintech patents have grown by 49 per cent over the last five years, reaching 9,545 globally in 2016. Organisations like Goldman Sachs, Accenture and Mastercard have quietly patented their blockchain findings, undermining what the start-ups, venture capitalists and consortiums had seen as a unifying exercise for the financial industry. Even some of the largest organisations have historically made their work on the blockchain public – Hyperledger (a venture led by IBM, Accenture and Intel) and R3’s Corda blockchain code is free for others to use and enhance. However, as the volume of patents creep up, this transparency might be subject to change. The tension between start-ups and the corporates would heighten – patents could be used to sue, shut down, and pinch ideas of rivals. If this happens, regulation won’t be the only thing slowing down progress.
The champion is crowned
So what’s the answer? Well, blockchain appears to be, almost incontrovertibly, the future of banking technology, and we expect to hear that acknowledged throughout Fintech 2017. As the blockchain arms race escalates, its core purpose is under threat. If we’re not careful, that uniting purpose – system interoperability – will be overridden on the way to the top. There will be competitors and copycats and dramatic, endless legal battles. We will have come full circle, back to the days of the squabbling heavyweight corps and the quashed start-ups. Call us optimists if you will, but we hope that doesn’t happen. We want blockchain to realise its full potential as part of a collaborative effort – it’s the quickest, most neutral and least risky way to approach it. We want innovation to come organically and through strength in numbers, not through throwing weight around or jealously guarding secrets. And most importantly, we want blockchain to succeed, to become the catalyst for a Fintech revolution that eclipses corruption in the money market as we know it.