Is ‘blockchain’ the wrong term to use when describing distributed ledger technology (DLT)? Alistair Milne, Professor in Financial Economics, at the School of Business and Economics, Loughborough University, certainly thinks so. DLT is the name associated with crypto-currencies such as bitcoin, while blockchain refers to the computer records. Similar technologies are being applied by many financial services companies, however, they are still a long way from the original bitcoin implementations.
According to Professor Milne, it is easy to be overawed by the technology. “I think the biggest mistake, and I see this everywhere in fintech, is to get obsessed with the technology per se, without thinking about what functions it provides.” When considering DLT, we need to ask what business, social or financial problem it solves.
The use of distributed ledgers is about the sharing of data and trust to drive efficiency. Cross-industry cooperation is critical in this respect, as DLT will require common standards for communications and business processes. The cooperation of regulators is also required in order to achieve the maximum benefits, and this may be several years away.
DLT is just one example of a much broader, step-by-step digital transformation that’s already happening. The industry is automating manual processes at scale, transitioning to universal standards for business processes (especially with ISO 20022), and replacing legacy systems in a move toward digitisation.
There is potential for DLT to augment the financial services industry over time, but its immediate applications are limited. Milne suggests, “Perhaps one of the radical reforms might be a digital currency for everyone, which would play the same kind of role as notes and coins do in our pocket at the moment.” Some central banks, and one big corporation, have considered the idea of a centrally issued digital currency. Milne, however, stresses caution. “Let’s go one step at a time. Let’s try and make finance today work better.”
We are in the midst of a long transformation. Eventually digital technologies will be fully employed in every aspect of financial services, including payments, credit, trade finance, compliance and capital markets.
We should not be distracted by the technical implementation details. Individual organisations, and our industry generally, must focus on the key issue: Do we need to share data? If so, do we want to achieve this via shared software rather than a centralised entity or function? If the answer to both is ‘yes’, then DLT may be the answer. But this is far from a given.
Organisations need to be clear about what they want to get out of DLT, as it will be costly to invest in and develop. Digital transformation is the overarching goal, which can, and probably will, be achieved in other ways.
You can listen to Professor Milne discuss DLT in this podcast. Milne and his colleague Anil Kavuri are in the midst of researching DLT in financial services on behalf of the SWIFT Institute. Their research paper will be published here on our website in the coming months, so make sure you register for updates to be notified when it’s available. You can get a sneak peak, however, as Milne and Kavuri will be presenting their research at Sibos London on Tuesday 24 September in a session entitled – Blockchain – a distraction on the road to digital transformation.