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The big picture of radical decentralization

In a previous post I wrote about my belief that the world was ultimately moving to large-scale, public, decentralized technology models, and these would give rise to global, public, decentralized platforms for enterprises.

The impetus for that post was the announcement of the Enterprise Ethereum project, and my focus was on blockchain and the debate around permissionless or permissioned ledgers.

Blockchain, however, is only part of the picture. Today we are seeing a grand convergence of several technology mega trends that, working together, will make these future platforms extremely smart, fully autonomous, hyper-connected, fully decentralized, and very broad-based.

While it is the technologists who are building these platforms, it will fall to business decision makers to figure out how best to use them commercially. Certain industries are racing ahead in thinking about the radically new business models this future will bring. Others – including financial services – seem to me to be lagging.

I think that’s a mistake, as I intend to discuss in a later post. Here I would like to look at this convergence in some detail, as I think enterprises really need to understand the new environment they will eventually being doing business in.

 

All together now

 

Today, as people have recognized when for example talking about the fourth industrial revolution, we have at our disposal the various technological ingredients needed for radical automation and radical decentralization.

Most prominent among these, at least in a commercial context, are artificial intelligence (including, but not limited to, machine learning), big data, the Internet of Things (IoT), and edge computing.

Advances in each of these fields represent extremely interesting new technological capabilities in themselves. But to be truly useful for platform building, they need to work in tandem. That’s because they have a number of dependencies.

For example, thanks to artificial intelligence we can teach computers to think for themselves and make autonomous decisions orders of magnitude faster and, at some point, orders of magnitude better than we can.

But thinking machines first need to be educated – either by being fed a steady stream of information so they can learn on their own, or by being given robust enough models of the world to allow them to make intelligent choices without our help. The prerequisite for this is having enough information around in digital form with which to train our machines. This was impossible before big data.

Once our machines can “think”, we will want to “do”. To drive true large-scale automation, our AI decision makers will need to manipulate real-world devices outside of themselves. But this only works on devices that can receive messages, understand what they are being asked to do, and autonomously carry out their instructions. This was not possible before the IoT. And, as we are learning, for IoT-enabled devices to be able to react quickly, and so be useful in a decentralized world, they will not be able to wait for data and instruction from the cloud. Hence the current interest in developing edge computing, in which data and computation takes place on the devices themselves (the “edge” of the network) and not in central nodes. This prediction was described by Peter Levine, a partner at Andreessen Horowitz in his talk “Return to the Edge and The End of Cloud Computing”. In following video, Peter discusses the pressures that our pushing toward edge computing and away from the cloud:

 

 

Last but not least, no decentralized platform can be built if the nodes on the network, whether machine or human, can’t easily, securely, autonomously, transparently, traceably and quickly share data. Where can we look for a technology to allow them to do this? To the blockchain or other distributed ledgers, of course. For this reason, I think blockchain will play a key role in the coming convergence, as the communications, trust and auditing hub. But it is only a part of the picture.

 

New world, new model

 

There is no doubt that the radical decentralization and automation this will enable will have a radical effect on business models too. The new environment will just be too different for business as usual.

I expect that, thanks to far greater integration of value chains or between businesses and customers, business verticals will blur. The silos between industries will also come down.

Enterprise decision-makers will need to keep this in mind. In subsequent posts I will lay out in more detail how I think these new models will look, and how in my experience some industries seem to be doing a better job than others in preparing for the decentralized future.

 

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Brexit is not the death knell for UK FinTech

There is no doubt that Brexit was a shock to large parts of the UK business community. This is certainly the case in the financial technology, or FinTech, sector.

FinTech is a catch-all term used to describe the exploding number of technology companies – both startups and established firms – building products and services to improve and transform financial services. It has become a significant industry, attracting over 25 billion US dollars in investment globally in 2016. Since FinTech arrived on the scene the UK has been one of this nascent industry’s clear leaders.

After the referendum this position is no longer secure, and UK FinTechs are concerned. As someone who, through his work, has come to know the UK FinTech scene quite well, I can understand.

Here are what UK FinTechs are particularly worried about when considering their post-Brexit future:

Talent. By far the most pressing concern for UK FinTechs is the future of their workforce. Both finance and tech are highly globalized, internationally oriented industries, dependent on an international talent pool. In a report last fall Innovate Finance, the non-profit organization that represents UK FinTechs, noted that the founders of almost a third of its members were non-British. (It also noted that over 40% of workers in Silicon Valley are foreign born, underscoring just how global tech talent really is.) Anything that restricts access to skilled people will hurt UK FinTechs.

Access. Brexit represents a break with the UK’s largest trading partner – a significant market of over 500 million people. As part of the EU, UK FinTechs requiring a financial license enjoyed easy access to this market through a process known as passporting, by which a UK-based license is generally enough to do business in other EU countries. The UK government has said it will ensure full access to the EU post Brexit, but the Europeans have been more reticent on the subject. Any loss or increased difficulty of access will be a blow.

Investment. While global investment in FinTech has been rising, it has slowed down in the UK lately, mostly due to Brexit-fueled uncertainty. It’s too early to say if this a long-term trend. Yet there is no doubt that if confidence in UK FinTech is eroded, that would make it less attractive for foreign investors. An exit from the EU also likely means the loss of EU-based seed funding for VCs and startups, which has been a useful source of support for innovation in the past.

 

Time to act

 

What can the UK and its FinTech community do? There are several things.

First of all, the government should ensure the country remains open to tech talent and tech entrepreneurs no matter where they hail from – for example by relaxing visa requirements for skilled workers. It can also do more to nurture home-grown tech talent through education and skills policy.

Though it will be easier said than done, during the Brexit negotiations the UK government should do its best to assure its financial services companies, including FinTechs, maintain access to the European market. Failing that, the government should concentrate on making it as easy as possible for UK FinTechs to enter from the outside. One way is to harmonize UK financial services data standards with those coming into force in Europe.

The UK government should also do what it can to ensure UK FinTech startups have access to VC and other early stage funding, particularly if EU-based sources, like those currently supplied by the European Investment Fund (EIF), dry up. It can do this through tax and other policy, including strengthening the role of the British Business Bank (BBB).

 

The road ahead

 

To be clear, I am not saying that Brexit has sounded the death knell for UK FinTech. Quite the contrary: there will doubtless be opportunities as well as challenges.

Outside the larger EU framework, the UK government might have more room to introduce FinTech-friendly regulation or pursue policy to make it easier for these firms to find financing. It would also find it easier enter into bilateral agreements with other countries. If the UK can for instance get closer to the US administration on the FinTech topic, bringing each country’s FinTechs and investors closer together, UK FinTechs would no doubt profit.

The shock may also prove to be a catalyst, pushing UK-based entrepreneurs and tech talent to work harder to produce the increased efficiencies and lower costs that FinTech promises.

But there is no doubt that Brexit has upended the apple cart. As long as the current uncertainty remains, concern is more than warranted.

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Mr. Trump, Don’t Miss The FinTech Boat

This blog post first appeared in Nasdaq.

While every new US administration promises change, the Trump administration has been touting more radical doses of it than most. This includes a promise to increase the competitiveness of American industry by rethinking many of the laws and regulations that currently govern it.

From what it has said so far, the administration seems particularly focused on manufacturing. There are other areas however where the US has a chance – through forward-looking policy – to make significant gains in competitiveness. One of the most promising in my opinion is financial services technology, or FinTech.

For those not familiar with it, the term FinTech is used to describe the digital revolution currently taking place in financial services. As with similar revolutions in other sectors like music, this one is characterized by fundamental disruption caused by technology companies from outside the industry.

Products like Apple Pay or Google Wallet are only the most obvious examples of tech companies trying to take a bite out of banking. Other technology mainstays, like Microsoft, IBM and even Facebook, have set their sights on financial services as well. We have also seen an explosion of FinTech startups around the globe along with significant venture capital investment.

The rise has been meteoric. In the seven years from the financial crisis to the end of 2015 the value of the FinTech industry grew from virtually nothing to close to 20 billion US dollars. According to Business Insider, FinTech grew by another 15 billion dollars in the first six months of 2016 alone.

It is a very exciting time. Thanks to the disruptive new technologies these firms are working on, we can expect a financial industry that is far more efficient, safer and more client friendly than the one we have now. Among other things, prices for banking services will drop, while bank customers gain many more options and better tools for managing their money.

Banking regulators around the world have recognized this potential. Many are going out of their way to harness it. They are working with FinTechs to understand the new technologies and so craft sensible regulations for them. Many are taking a proactive business development role by supporting FinTech ecosystems in their jurisdictions.

While banking regulators in the UK and Singapore have been in the vanguard, this is a global phenomenon – observable from Sydney to Moscow and Beijing to Bern, Switzerland. Unfortunately, even though American Fintechs as well as banks are themselves very active, regulators in the US lag behind.

It’s not that they haven’t been paying attention. The Federal Reserve and the SEC have both been researching an important new technology called blockchain, one of the key innovations in the FinTech space. The Office of the Comptroller is considering introducing a special FinTech license to smaller companies to help foster innovation. But compared to what it is going on elsewhere, this is too little and it is moving too slowly.

On the campaign trail President Trump touted his strong business focus. To keep up, his administration should take a cue from jurisdictions like the UK and Singapore and adopt policies to further support and develop the FinTech ecosystem in the United States.

What can US regulators do? Plenty.

They can set up regulatory “sandboxes” where innovative companies can try out new technologies and products in ways that are safe both for them and the system. They can relax rules for financial innovators. US regulators can invest in in-house teams focusing on digital financial innovation, and appoint Innovation Officers to give industry a clear point of contact and support. They can open, or support the opening of, Fintech laboratory or innovation spaces, like the now-famous Level39 in London or the new LATTICE80 in Singapore. They can also look to more closely cooperate with other regulators through bilateral agreements, as many of their foreign peers have already done.

There is much to be gained. The US remains the world’s largest financial services market as well as the global leader in digital technologies and innovation. Yet its position cannot be taken for granted. Particularly in the heavily regulated banking industry, governments have an important role to play in either hindering or fostering progress.

We already have a negative example of how this can work. The bitlicense introduced by New York State, meant to control cryptocurrencies, arguably put a damper on innovation in New York in the key blockchain technology mentioned above. (Blockchain is the technology behind bitcoin and other cryptocurrencies; it has very significant, and absolutely legitimate, potential uses in banking and many other areas.)

The federal government would do well to consider this when it looks at other relevant areas of FinTech. Take artificial intelligence, or AI. From automated trading platforms to so-called robo-advisors, AI is set to profoundly transform financial services (as much else in our world). That makes it one of the most important technologies in the FinTech toolkit.

The US has a clear advantage here: American companies already invest billions in AI, and US universities remain on the cutting edge of research in the field. With the right regulatory and legal support, I think the US could become the world’s leading hub for AI in banking. That would go a long way to cementing the US’s role as a leader in FinTech in general.

This will have the advantage not only of creating a supportive, forward-looking FinTech environment in the US. It will also create new, forward-looking jobs as bank tellers are transformed into data scientists and high-end software developers.

This last point is very important. We must keep in mind that automation will bring structural change to most if not all service industries, and to a great deal of manufacturing as well. This is a process that will be hard if impossible to stop. If the current administration can shift labor capacity and skills from the old world of banking into the new, it will go a long way to ensuring a continued leading role for the American financial services industry. That can only be to the advantage of those who work in it.

Artificially protecting old jobs, on the other hand, removes the pressure on industries to digitize and modernize. In banking, this would be a boon to those other jurisdictions that are currently supporting their FinTech communities, and give them great leverage in the current technology race. This cannot be in the administration’s, or the country’s, interest.

The winds of change are blowing through financial services. The new administration should trim its sails accordingly, and not miss the boat when it comes to the future of FinTech in America.

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A public or private blockchain? New Ethereum project could mean both

This blog post first appeared in American Banker.

A fierce battle is underway to define the future of blockchain, with multiple types of public and private networks all competing. So when I read about industry efforts to build a corporate version of Ethereum — which is more commonly thought of as a public blockchain platform — I am intrigued.

Development is in the early stages, but if a viable enterprise Ethereum emerges, it could be a strong contender for that blockchain standard crown.

An enterprise version of Ethereum could be used almost immediately to build robust, large-scale private blockchain implementations in almost any industry or for almost any purpose. More importantly, because of Ethereum’s roots as an open-source, public blockchain, an enterprise Ethereum would be equally well suited to eventually building global, freely-accessible and consumer-oriented business platforms.

Public versus private

I strongly believe the future lies in such open, decentralized platforms, and that Ethereum is an excellent candidate to make that future a reality.

As has been pointed out elsewhere, Ethereum is a highly attractive blockchain implementation for business and has already garnered a great deal of enterprise interest. This is because Ethereum is readily available, easy to learn and use, and also fully programmable — or, as it is known, Turing complete. Therefore, developers can adapt the technology for any business purpose. Individuals, companies, consortia or even whole industries can easily build their own platforms on top of the public protocol.

To date, adapting the public-network technology for corporate platforms has however been slow. Execution has not yet been possible for a number of mostly technical reasons. To understand why a viable enterprise Ethereum would be so compelling, we need to look at those reasons in some detail.

One of the fundamental distinctions in the blockchain world is that between permissionless and permissioned chains. A permissionless blockchain, like the original one for bitcoin, is an open platform. Anyone can join. Permissioned blockchains, meanwhile, are restrictive. Some authority must grant access.

When bitcoin burst onto the scene, the enterprise community quickly understood the potential of its underlying blockchain technology. But it also quickly saw the limits in the business environment of the kind of public, permissionless distributed ledgers the bitcoin blockchain represented. Such limitations related to speed, security, privacy, cost, lack of programmability in the original bitcoin blockchain. The list goes on. Many of these issues are a result of the functionalities needed to make a public blockchain viable (for example, the consensus mechanisms that prohibit cheating).

By controlling access to only allow trusted users onto the platform, developers can sidestep many of these problems. As a result, we have seen Ethereum used for various kinds of private, permissioned chains in any number of individual projects or in larger consortia like R3 CEV or Hyperledger Project.

But while permissioned chains make sense from a security and confidence perspective today, the picture looks different down the line.

Going with the flow

For one thing, private chains are not as scalable as public ones, which can be a major limitation. Take a use case like trade finance or a global loyalty points scheme. You don’t want to limit these to an inner circle of members. Rather, you want to make it as easy as possible for the largest number of entities or users to connect. Public chains — open to all — are more flexible in this regard.

A privately owned chain is also reliant on the skill, expertise and continued investment of its owners. That means cost and effort to build. It also means potential risk for clients of being tied to the decisions — and perhaps the mistakes — of the developer. Private chains also generally mean private standards; therefore, they may not be as interoperable as public ones.

The enterprise Ethereum project seems to be a serious effort to deal with these issues by bringing the public, open consumer side of the equation together with the business side. In doing so, a community of some 10,000 Ethereum developers around the world — a group with profound experience developing the platform as well as working in a decentralized environment — could unite with the traditional business/enterprise development community. This would be a powerful mix, and would correspond with other broader important trends in the blockchain community.

I believe distributed ledgers will tear down information silos. As a result, the line between what is enterprise and what is consumer will fade, as will the lines between different industries. We get a hint of this today with the weakening of the information silos separating supply chain management and trade finance.

Centrally managed platforms dedicated to a single sector will struggle to cater to such environments. Open platforms are more flexible; therefore, they are better able to handle and facilitate cross-industry usage of information and services as well as integration of different types of entities and users.

As the Internet of Things matures and billions of devices come online, we will see an explosion in the sheer numbers of entities needing to interact. Private, permissioned platforms will have problems handling such large-scale hyper-connectivity. Open platforms that are easily accessible and extensible by the community are more suited to this kind of world.

The sky is the limit

Increasingly, I believe that a decentralized model is the only way to manage and transact in a highly distributed world of the kind taking shape today – and that we will end up with some kind of public cloud environment for enterprise blockchains, as for much else. It won’t happen overnight, but the signs point that way.

If this seems farfetched, remember that there were similar discussions in the early days of the internet. Back then, some said AOL should be the global platform precisely because it was private, more secure, and so on. But the open standard won out in the end.

We will have to wait and see what comes out of an enterprise Ethereum project, if anything. But I think it’s something to keep a close eye on. If it can be made to work, enterprise Ethereum has a real shot to become an open, global blockchain standard.

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2017: the year we get real?

There is no doubt that 2016 has been a tumultuous year.

From Brexit to Trump and the Ukraine to Syria, we have seen many upheavals on the geopolitical front. A lot has happened in Fintech, too, although here the upheaval has in my opinion been almost all positive. Today FinTech is firmly established as one of the biggest sectors in all technology.

What will next year bring?

We can look forward to more tumult I think. If there is one overarching FinTech trend, I would say that several things that were only “potentials” in 2016 will become much more concrete. That could make 2017 the “year of getting real” on a number of fronts.

Here are some of my thoughts.

The year ahead: Predictions for 2017

  • The year of the pilot. 2017 will be the “year of the pilot” for blockchain in financial services, as it moves from proof-of-concept into production. We should see this in particular in cross-border payments and trade finance. Overall however blockchain will still be restricted to the “low hanging fruit” in banking. I remain convinced that broad-based application of DLTs will happen more quickly outside of financial services.
  • The year of the standard. We may see significant progress in blockchain standards during the year. If so, it will be driven by small groups working on specific use cases as opposed to large, complex consortia. Indeed, I expect we will see consolidation in the blockchain consortia area.
  • The year of the platform. On the back of increased standards and interoperability, we should see broad-based platforms and ecosystems continue to emerge, driving banking as a service and the creation of new business models. Look for this particularly in the robo-advisory and lending businesses.
  • The year of the attack. The number of cyber-attacks on organizations will increase significantly, and we can expect a steady stream of revelations about hacks. Denial of service is becoming much more threatening and dangerous for banks and in 2017 banks and others will be called on to toughen their defenses. This will be reflected in cyber-security spends, which among wholesale banks will increase from 5% of total tech budgets to 7-8%.

Eye on the prizes: Trends to watch in 2017

Along with the above “predictions”, here are some of the trends I think worth keeping an eye on in the coming year.

  • PSD2 pushing partnerships between banks and FinTechs. Banks and other financial services players will have to spend 2017 preparing for the implementation of the revised EU payment services directive PSD2 in 2018. With the creation of open banking platforms, there will be opportunities for FinTechs to partner with banks to create more exciting customer experiences and provide increased transparency on performance and fee structures.
  • Competition among financial centers for FinTech innovation. 2016 was the year of regulatory sandboxes with the FCA and MAS Singapore leading the change by establishing themselves as business developers with a mandate to attract business to their respective jurisdictions. In 2017, leading regulators will strengthen their position with global collaboration and implementation of new policies and laws based on learnings from their “sandbox” environments in order to reduce uncertainty in the FinTech ecosystem.
  • The continued rise of smart machines. It’s no secret that there are great strides happening right now in artificial intelligence. Advances in machine learning and robotics will I think continue to sweep the business world. Startups will continue to get funding in the areas of risk assessment, research, investment management, trading and back office automation.
  • An intensified war for talent. Banks and FinTechs will be competing for people with the right skills. The key expertise in financial services will be in artificial intelligence, in particular robotics and machine learning, where the game will be to attract scientists with Masters Degrees and PhDs. There will also be a battle for domain and technicaly expertise in finance, distributed ledger technology, and cyber security.

A new road

Finally, 2016 was a very big year for me personally.

2016 was also the year of the launch of Bussmann Advisory, with the goal of helping companies stay ahead of the digital disruption curve.

The company has gotten off to excellent start, better than I could have imagined. For that I am grateful, to my new clients and all those who have collaborated with me and supported this move.

With that, I would like to wish everyone the best of the season and a happy and healthy new year. It promises to be an interesting one.

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Next FinTech hotspot? Look to the Bosporus

By Oliver Bussmann and Dr. Soner Canko

When people think of vibrant FinTech hubs, cities like London, Singapore or New York usually come to mind. Fewer would put Istanbul on their list of major centers for financial services innovation.

Unjustly, in our opinion.

The truth is, Turkey has been a hotbed of financial innovation for quite some time. Thanks to support from the government and the Turkish financial services industry, we think it has what it takes to soon be counted among world’s top FinTech locations.

Here’s why we think so.

 

Young, and plugged in

 

Turkey has a history of embracing new technologies, including mobile banking and peer-to-peer payments, ahead of other nations. Turkish banks, to take one example, were pioneers in the development of digital wallets allowing clients to make direct payments to vendors and each other. They have also championed innovations, like biometric authentication at ATMs, that are still rare in most other jurisdictions.

Part of this success in financial innovation can be put down to the country’s natural advantages. With half of its 80 million inhabitants under the age of 30 it is a nation of young people, many of whom are very well educated. Turkey also leads many other Western nations in terms of internet speed and smartphone penetration. This makes it a good environment for digital innovation in general and FinTech in particular. Under these conditions it’s no surprise that Turkish bank clients have shown such a keen appetite for adopting new technologies.

Turkey’s innovation track record is also a result of government policy. In 2009 the Turkish government launched the Istanbul Financial Center Initiative with the goal of making Istanbul a global financial center by 2023 (and of turning Turkey into the world’s first fully cashless society by the same date). Since then the government has passed laws to bring Turkish financial markets closer to their EU and US counterparts, merged its stock, gold and derivatives exchanges to form Borsa Istanbul, the largest exchange in the region, and built a Canary Wharf-style financial district on the Asian side of the Bosporus. The government has also announced plans to create a Finance Technopark in Istanbul in cooperation with the Turkish exchange and a leading university.

 

Fintech Istanbul: The next step on the road

 

The launch early this year of Fintech Istanbul, with which Oliver has been collaborating closely, is an important milestone on this journey.

Sponsored by BKM (Interbank Card Center) – the only company in Turkey providing switching, clearing and settlement for card transactions, as well as the operator of the National Digital Wallet, BKM Express, plus the national payment scheme TROY – the new organization aims to foster FinTech collaboration and help position Istanbul as an important FinTech hub through a number of different activities.

These include:

  • FinTech 101 trainings focusing on teaching local entrepreneurs the basics of Fintech as well as digital innovation.
  • FinTech meetups as a regular platform for all members of the ecosystem to meet and share their experience and expertise.
  • Information dissemination through posting the latest FinTech news and views on social media and the fintechistanbul.org website.
  • Cooperation with other FinTech hubs through developing its global network, including as a new member of the Global Fintech Hubs Federation (GFHF).

 

Collaboration as key to innovation

 

Fintech Istanbul is also keen to attract outside experts to the Bosporus to share their knowledge and so help the hub mature. That was why when BKM heard Oliver was regularly in Istanbul on an advisory project for one of Turkey’s larger banks, it invited him to give the keynote at the graduation ceremony for its first Fintech 101 class.

We expect this collaboration to continue. As Oliver has written elsewhere, FinTech ecosystems and innovation management and orchestration, is required to be successful. With farsighted policy and its natural advantages, there is no reason to think that Turkey won’t continue on its path to the top leagues of FinTech.

We invite all those searching for the next great FinTech hotspot to learn more about Istanbul and Turkish FinTech. They may very well find what they are looking for here on the Digital Bosporus.

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Blockchain in 2017: From proof to pilot

By Oliver Bussmann and Nick Williamson

In September we – Oliver and Nick – published a joint blog post on why we didn’t think blockchain would be disrupting banks first. This caught some by surprise, since not only does blockchain seem predestined to disrupt financial services, but every day seems to bring new developments in this space.

On December 1 we had a chance to clarify our position at the Credits Blockchain and Bourbon fireside chat, where some 80 guests joined us at Level39 to quaff and question us about our views on the future of this tech – as well as share theirs.

We found the event interesting on two counts. One, it gave us a chance to clarify where we think blockchain is going in the immediate future. Second, it was a good sounding board for discussions on some of the larger blockchain trends we think will be of interest during the coming year.

Getting real

 

First, to our “predictions”.

  • From proof to pilot. 2017 will be the “year of the pilot” for blockchain in financial services, as it moves from a proof-of-concept technology into production, especially in the cross-border payment and trade finance areas.
  • From slow to fast. This will move more quickly than expected, and we could reach a “tipping point” over the next 12 months if enough players with enough financial capacity come together, as seems to be the case in several areas at present.
  • A better experience. Players have to prepare for the implementation of the revised EU payment services directive PSD2 in 2018. With the creation of open banking platforms, there will be opportunities for FinTechs to partner with banks to create more exciting customer experiences.
  • Fending off the attack. Cyber-attacks on organizations are on the rise, with denial of service becoming much more threatening and dangerous for banks. 2017 will be a year to strengthen defenses.
  • Banks still lagging. Financial services blockchain implementation will apply to the “low hanging fruit.” We stick with our main thesis that broad-based adoption of blockchains will happen more quickly outside of financial services – in areas like supply chain management, in e-government, or health care.

Racing ahead

 

Besides putting ourselves out on a limb with our concrete predictions for the coming year, we had a chance to discuss some longer-term trends and issues with our guests. Here are a few things we think worth keeping an eye on.

  • Breakthrough constellation. Technological breakthroughs usually happen at that moment when the five or six technologies needed to make a real change become cost-effective and convenient to use. With advances in secure hardware (IoT and smartphones) coupled with the improved algorithms in blockchains, we think the constellation is coming together for Distributed Ledger Technologies (DLT).
  • Race for innovation. In financial services we will see a ramping up of the already intense race between jurisdictions to push FinTech innovation, driven by regulators.
  • Setting the standard. We may see significant progress in blockchain standards during the year. If so, it will be driven by small groups working on specific use cases as opposed to large, complex consortia. We believe that attempts to establish standards before real-world, full-scale applications take off are likely to fail, and that it is always better to derive standards from successful implementations as opposed to the predictions of standards bodies.
  • DLT-enabled financial use cases resemble many of the broader FinTech use cases in that they enable the unbundling of previously combined functions. As FinTech unbundles specific services such as retail FX exchange, we can expect DLTs to be used to unbundle the on-boarding and trust relationships from the end execution in a wide number of sectors.

Great debates

 

One final thought. During the Q&A after our talk the broader societal implications of distributed ledgers was raised several times. The issues, while hardly new, can be thorny. Blockchains, for instance, are sure to intensify discussions about the balance between privacy and security.

We make no predictions here. But if we do start to see large-scale implementations of blockchains during the year, we wonder if these and other broader societal discussions might become more pronounced in government circles and potentially among the general public.

We would certainly welcome that. From the Silk Road to the DAO, DLTs suffer from bad press. As well as being a year of maturation for this technology, it could also be the year we begin to make a better case for it.

That would make for a good year indeed.

 

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Take heed FinTech: Singapore means business!

I recently had the privilege of being asked to be on the jury for the FinTech Awards held at the inaugural Singapore FinTech Festival, as well as take part in a blockchain panel at the event.  It was one of the largest FinTech events, if not the largest, ever organized, with over 12,000 participants across more than 50 countries.

 

singapore-fintech-festival-medium

 

I had a great time meeting all the innovative startups and helping to give away over USD 800,000 in prize money. But while the Festival was impressive, the real eye opener for me was the Singapore financial center itself.

Here is what I mean.

Building momentum 

I have written before about how regulators around the world are finding new ways to support FinTech innovation in their jurisdictions. (The announcement of the new FinTech license in Switzerland is just the latest in a clear trend.)

The Monetary Authority of Singapore (MAS) has been among the most active and innovative regulatory bodies in this regard. Among other things it has been:

  • Promoting the use of cloud computing by Financial Institutions by publishing clear guidelines
  • Supporting innovation in payments by streamlining and simplifying payments licensing
  • Encouraging robo-advice by working on new proposals for the governance, supervision and management of algorithms used in digital advice platforms
  • Starting up a secure regulatory sandbox to safely test innovative new ideas
  • Streamlining compliance through setting up a national KYC utility for use by Singapore residents
  • Creating what it calls an API economy by encouraging financial institutions to develop and adopt APIs and publishing an “API Playbook”

And these are just the headlines. There are a lot of other things happening in the Singapore FinTech scene at the moment. But for me it took being on the ground to really get a sense of how strongly momentum is building.

While I was there, for instance, MAS announced a project to test the use of blockchain infrastructure for inter-bank payments, including cross-border. With such heavy hitters as the R3 consortium and banks like HSBC, Bank of America, JPMorgan and Credit Suisse involved, this is one of the most extensive such projects on at the moment – Singapore is shaping up to become the Blockchain Center of the World.

I also got a chance to tour LATTICE80, the island’s newly opened FinTech hub. The world’s largest FinTech innovation location – they call it a “FinTech innovation village” and it certainly has village-like dimensions – LATTICE80 may well become as important a center for financial services innovation in APAC as Level39 in London is for Europe.

Smart moves

I think this is significant, both for Singapore’s prospects as a financial center and for the industry. In my opinion few jurisdictions have a strategy that is as extensive and well thought through as MAS’s. Its “Smart Financial Centre” vision is based on two pillars:

  • Regulation for innovation: MAS has expressly said that regulation should not stifle innovation but instead run “alongside” it. That means keeping up with developments, assessing risk as new innovations arise and, once they are understood, keeping regulation proportional to the risk involved.
  • Infrastructure for an innovation ecosystem: MAS is keen on ensuring its infrastructure is also conducive to innovation, and has earmarked over USD 150 million for measures to support an innovation ecosystem. This includes opening a FinTech & Innovation Group, complete with the world’s first Chief FinTech Officer.

This vision is based on the belief, which I heartily share, that the best way to foster innovation is through collaboration.

MAS’s approach is sure to keep attracting FinTech businesses and brainpower to the city-state, and it provides I think the right environment for these businesses to succeed.

This will strengthen the already strong Singapore financial center today and, more importantly, help it prepare for tomorrow.

If the Smart Financial Centre vision becomes a reality, and I see no reason why it shouldn’t, Singapore will continue to be one of the world’s most innovative FinTech location (it is already considered number two).

I think other financial centers should take heed. When it comes to FinTech, Singapore clearly means business. Its strategy is one others may want to learn from.

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Blockchain: Swift enough?

Last month I had the honor of being invited by SWIFT to join its Distributed Ledger Technology (DLT) and Cyber Security sessions at SIBOS in Geneva – and to take part in the DLT session wrap-up. It was a fantastic experience, not least because of the excellent organization of my friend Peter Vander Auwera at Innotribe.

The experience confirmed for me two of my current working hypotheses regarding blockchain uptake in financial services:

  • Blockchain is indeed predestined to transform banking
  • Blockchain will not be going mainstream in financial services as fast as many think

I subsequently explained my reasons for believing the second point in both the Financial Times and my blog. So I won’t go into that here.

In this post, I would like instead to summarize some of my other insights from those sessions, as I think they really shed light on the status of blockchain in the industry at the moment, and the role organizations like SWIFT might play.

 

[vc_video link=’https://youtu.be/_dxC91pArvQ?list=PL8ucbgLbIE-vTn3RarhIAT-QRkO2QvBlr’]

 

Off to the races

First off, there is no doubt that blockchain is coming and that we’ve entered a race to get into production.

In a survey we did of session participants, 35% said they had serious proofs of concept in the works, 10% more than last year. They aren’t just working on their own: the R3 consortium has more than 40 proofs of concept in the works.

But right now most of the action – and a lot of the press – is in areas like cross-border payments and trade finance. As I wrote in the FT, these are low-hanging fruit.

The real question for banks is where else can this go? How can banks use blockchain’s promise of real time speed, reduced complexity, and reduced risk to improve current business or operating models. Or better yet, leverage those capabilities for completely new products and services – exploring the blue ocean of possibilities no one is yet focusing on.

I think the answer will depend on several fundamental factors. Among them:

  • Will the financial industry be able to recognize blockchain’s transformational nature as a broad-based, open source, decentralized platform, or will it continue to try and use it as a fancy new database to support the current setup?
  • Can we solve blockchain’s performance and scalability issues?
  • Can we deal with the complexity of multiple distributed ledgers and asset classes to get true interoperability?

 

Coming together

Another theme was collaboration. We naturally talked about the current supportive regulatory environment (the subject of a previous post as well).

We also talked about collaboration on business standards – a prerequisite for broad-based platforms. Will we need new standards, or will we be able to port existing ones – ISO 20022 messaging as recommend by SWIFT comes to mind – into the new arena? This is an interesting question, as well as a reminder that blockchain is by no means just a tech play.

We will also need leadership to drive and coordinate collaboration. We will likely see this from the small teams working in consortia or other cross-industry groups, or perhaps an existing entity like SWIFT, which can act as a kind of United Nations of banks.

 

Not so SWIFT?

Which brings me to the last main thread of the sessions: the role of SWIFT in a blockchain world.

There is no doubt that SWIFT faces a challenge from the blockchain. The best example is what is happening with Ripple, which offers banks real-time payment settlement and radically reduced costs, and will enable new types of high-volume, low value global transactions. SWIFT’s counter effort, its GPI initiative, is very interesting, but – despite garnering considerable support and momentum at Sibos – at the moment doesn’t match Ripple’s DLT capabilities.

Yet the SIBOS sessions underscored for me how organizations like SWIFT still may have a significant role to play.

Let’s not forget that SWIFT’s membership includes more than 11,000 financial institutions in over 200 countries. That’s an asset. So is its experience as a standards setter, and with such things as access control, identity management, structuring of Service Level Agreements and managing a high volume, global network. SWIFT could be a natural home for a permissioned distributed ledger, with the advantage of an established brand and trust.

It will be very interesting to come back to SIBOS next year and see how all this has played out.

Watch the full video of the DLT and Cybersecurity: SIBOS week wrap-up. 

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Why blockchain won’t disrupt banks first

By Oliver Bussmann and Nick Williamson

As two people who have been working closely with blockchain for a while now – Oliver as a FinTech advisor and former Group CIO of UBS, Nick as the CEO and Founder of Credits – we have no doubt about the technology’s potential to radically transform the financial industry.

A far better way to build and maintain interconnected ledgers – the heart of the financial system – it seems predestined for the job.

But while banks and FinTech companies around the world are busy developing blockchain-based solutions, we are likely to see blockchain “go live” in other industries first.

This is something of a paradox, and so we think worth a closer look.

Regulation, regulation, regulation

As Oliver can attest from his own experience, the main drag on implementing innovation in financial services is regulation.

As part of one of the most highly regulated sectors in the world, banks will need to wait for regulatory certainty on any number of issues before they can release blockchain-based platforms. Stringent rules regarding collecting, storing and sharing customer data add layers of rigorous validation, verification and internal signoff on top of the regulatory approval.

Even though many regulators are actively supporting banks in exploring blockchain, this is simply not an environment geared to early adoption in the wild.

The fact that banks are coping with dwindling IT budgets, as well as heavy legacy IT investment, is an obstacle as well. As to an extent are legacy mindsets: The financial industry is heavily invested in centralized models; blockchain represents the opposite worldview.

More fertile ground

We believe blockchain will be implemented first in more lightly regulated sectors, particularly those which face challenges in managing data access control and ensuring data integrity. This can be sensitive personally identifiable information (PII) such as health care records, competitive secrets or other internal corporate data. Or it could be intellectual property, as with managing copyright for music or art.

Areas poised for takeoff include e-government, supply chain management and finance, insurance, real estate and the Internet of Things. BHP Billiton’s announcement last week that it was using blockchain to improve its supply chain processes is a perfect example of how this is already happening.

Useful use cases for all

At Credits, Nick has been observing this trend closely too. The company has been exploring a number of use cases outside of financial services, such as proof of identity, procurement processes, and interdepartmental payments. It recently worked with a client on a corporate identity blockchain solution.

Credits has also been very active in e-government, where blockchain has the potential to inject trust and accountability into many processes. This includes providing means to share sensitive personal data between departments that prevents data leaks while still allowing for data integrity checks.

The good news for banks is that many of the non-financial use cases also provide compelling first customers for the eventual financial ones. If we can solve supply chain management, for example, then we are not far from solving supply chain finance.

So while we may not see distributed ledgers taking over in financial services right away, that shouldn’t be interpreted as meaning it will never happen.

When it comes to blockchain and banks, there is no escaping destiny.

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