What’s still in the testing stage but ultimately will bring foundational change to businesses? Last year, most treasury executives of nonfinancial corporates likely would have scoffed at the answer, “blockchain technology,” or plead ignorance about how the technology even works. At NeuGroup’s recent Treasurers’ Group of Thirty (T30) meeting, however, attitudes clearly had changed.
Hosted by Cognizant, blockchain experts from the Fortune 500 company presented T30 members with the professional-services company’s view on the technology, and the likelihood that it is here to stay.
“What the Internet did to information, blockchain will do to value transfer,” said Lata Varghese, head of blockchain and distributed-ledger-technology (DLT) consulting, Cognizant. The value transfers could include assets, currencies or data, over networks in a peer-to-peer manner that reduces the need to pay a “trusted party” intermediary. Blockchain is also referred to as distributed-ledger technology, particularly when used in the enterprise context, because an electronic ledger is shared across participants in a transaction, rather than sharing data with everyone in a public blockchain network.
After Ms. Varghese explained how the technology works and answered meeting participants’ questions, many appeared persuaded by its promise to reduce intermediaries and store data more securely and efficiently than today’s centralized systems. Ms. Varghese noted that financial services firms recognized early on the potential of blockchain, and that many of the services they offer, such as transferring funds and tracking goods throughout a firm’s supply chain, are likely to be dramatically transformed, potentially reducing or eliminating the role of intermediaries.
“Where there may be seven intermediaries in a transaction today, maybe two or three will be removed from the process, and those that remain will probably become more efficient using this technology,” Ms. Varghese said.
For that reason, financial-service consortiums such as R3 (which according to its website is a network of over 200 banks, financial institutions, regulators, trade associations, professional services firms and technology companies) have been formed to research and test the technology, and take it to production on an industry level. In parallel, major players including J.P. Morgan, UBS, Credit Suisse, Goldman Sachs and others are pursuing their own initiatives. Despite talk of the technology’s promise over the last several years, however, it largely remains in the testing and pilot stage, and the scale to make it commercially viable has yet to arrive.
“You can buy into a bunch of ideas and experiments now in the market, but it’s still not proven at scale in production,” Ms. Varghese said.
Most, however, appear to see the arrival of scale as inevitable. A Cognizant survey of 3,000 customers across a wide variety of industries—more than half banks—revealed that 85% foresaw blockchain technology impacting their companies. The technology has developed in a variety of forms, ranging from public blockchains in which participants needn’t trust one another to private versions that require a trusted central party similar to today’s systems but are more efficient and secure. Oracle’s and SAP’s blockchain platforms fit into the latter extreme, and give customers the ability to quickly establish blockchains without the operational headaches.
DLT initiative Ripple has publicly stated its intent to replace the SWIFT payment network. Ms. Varghese said she saw that outcome as unlikely, given SWIFT’s breadth and how deeply entrenched it is, but it appears to have been a factor in the network’s recent push to become more efficient.
Ms. Varghese said it remains difficult for corporate executives to make a business case for adopting DLT, given its benefits still appear to be years away. It is still unclear who the winners will be among today’s myriad initiatives, she said, but “initial adopters who have moved for strategic reasons will have a bigger influence on how [DLT] networks are formed and governance rules are written.”
A banker from Société Générale, which sponsored the T30 meeting, told meeting participants that the French bank has been working on DLT solutions in various parts of its business, including a commodity-finance solution that is not yet “industrialized.” Although the technology still holds enormous promise, he said, some of the bloom is off the rose.
From a general policy perspective, one or two years ago we probably thought DLT would do more for us than it actually will do,” he said. “And I think it is everyone’s general opinion that because of the nature of DLT, the security aspect of it does not really fit our higher-quality businesses,” particularly with transactional businesses that have privacy concerns.
Ms. Varghese said that organizations are now looking to use the technology in ways that’s best suited for their specific needs, and that as the technology develops it will likely spawn new business models.