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Any new technology represents both a threat and an opportunity. As we look at ways we can innovate in the financial services sector, I’m often asked: “Why are you looking at this? Isn’t this going to end the role of banks?”
My answer is always the same – innovation is an existential imperative for us. We can’t continue to do things the same, not when others are working on how to do it better.
We live in a rapidly changing world, and we need faster, cheaper, more reliable, more trustworthy ways of doing everything. Any business operating in this environment shouldn’t have to justify why we innovate. Your customers, clients or shareholders should be pressing you to justify why you’re not.
For anything we deliver to our customers, we’re constantly looking for ways to improve.
Looking at blockchain specifically, we want to understand this technology really well so we’re able to grasp the potential threats and opportunities it presents. The best way of doing this is to take a really collaborative approach, gathering information as we can from our customers and industry partners, and experimenting.
For some of the key experiments we’ve done to date, we started with a blank sheet of paper and, rather than try to embed ourselves as the intermediary, we’ve said, “Okay. What could this technology do if we were not a bank? How would we make this market operate more efficiently?”
An example from us, more recently, was our “cryptobond” experiment. We built a capital market issuance platform to facilitate the raising of capital through the issuance of bonds, and it was all done on blockchain.
We didn’t embed ourselves as an intermediary. Instead, we purposely looked at how this technology could facilitate a peer-to-peer capital raising where the investors are providing capital direct to the entity raising money – which in this instance was the Queensland Treasury Corporation.
Building a transaction model that removes the bank may seem incredibly disruptive to ourselves, but we learned a huge amount from this experiment. Most significantly, we learned that even when we built the technology to directly facilitate a transfer of money and bonds from investor to issuer, there were still various roles requiring an intermediary – not to stand in the middle for the distribution process, but to provide other services such as provision of smart contracts and the vetting of parties to the transaction. The reality of a completely disintermediated solution is much more nuanced than the theory.
The capital markets ecosystem that exists today is complicated, but not all of that complication is due to inefficiencies.
Some of it is due to the need for greater specialisation in some areas and roles. So, as is typical for these technologies, there are some roles that disappear, but there are new roles which didn’t exist before that are now required.
A new type of customer service
Transitioning both the business and the workforce towards new technologies and products isn’t something we can achieve overnight. You don’t move from the old world to the new world immediately. There is a hybrid period between old and new, where half the challenge will be adopting the new system, and the other half is keeping the business running on the old system.
When experimenting and prototyping, we address this business gap by ensuring the product or system is both future-proof and backwards compatible. For example, with quantum computing bringing computational power a million times that of computers today, we need to consider the security methods we rely on and ensure that the cryptography we’re using is quantum-proof, but we also need a ‘backwards compatible’ solution – which might be as simple as the ability to print a digital record to fit our customers’ current processes.
This is why it is critical to facilitate change that is driven by the needs of the customer first. Our customers, whether they’re retail mums and dads or some of the biggest corporations in the world, are demanding better products and systems that are faster, cheaper and more reliable.
In the retail space, customers are now accustomed to products and systems that are user-friendly, intuitive and accessible. There are two ways blockchain could facilitate this for customers. One is by providing a base level of detail about each party – a “current state of affairs” – in a very simple way, which removes a lot of the reconciliation tasks that waste time and money; “This is your position, and this is my position, we can agree on that straight away”. Two parties can create an agreement with a transparent and equal understanding of the other party’s position, as it relates to the transaction.
The second is that this is the first technology which allows the customer to transfer value. The internet can transfer data in the form of emails or documents, but blockchain transfers value peer to peer, without requiring a third party needing to facilitate that transfer. This ‘value’ could be a licence, frequent flyer points or money – but it is tokenised into digital form and then made transferrable peer-to-peer.
However, while both of these features have the potential to cut out the middleman, they’ve also created new roles. Blockchain relies on the user having a public key and a private key which allow you to encrypt and decrypt information. Unfortunately, if you lose your private key, you can no longer access the digital assets on that account. This is not a good customer experience. People are required to remember passwords for everything now, and many password-protected accounts demand increasingly complex passwords which also need to be regularly updated. While this protects the customer’s data to an extent, it’s a demand on the customer that can be inconvenient. One of the new roles we envision is a customer service that specialises in private key safekeeping or key retrieval.
Another new role is vetting and onboarding new parties to a newly established permissioned blockchain.
For most purposes we’re not looking at open blockchains where anyone can join; many of the blockchains that we imagine will exist in the future will be private and permissioned. Business transactions often rely on trust they’ve built with stakeholders. An incredibly important role in the future will exist for a third party to check that new users on a blockchain are properly credentialed. This is something the Commonwealth Bank can enable through the relationships we’ve established with our clients and customers over a very long period of time, and is something our corporate clients and partners are already turning to us for.
The new advisory role
While blockchain has the potential to replace some transaction models, there are actually a myriad of support services that both institutional and retail customers have come to demand day-to-day that aren’t included on blockchain. In the capital markets example mentioned above, even though we built a peer-to-peer platform, it became evident that it was still necessary for someone to provide hedging for risk management purposes This is an existing role that blockchain enabled transactions still require.
There are also advisory roles required before two parties enter into a transaction that are still valued, even if the two parties can transact peer-to-peer. Specialised roles that provide the parties with a better understanding of the market will always be important for corporate transactions, and at the retail level, there will always be customers that want to ask a real person for help, especially as we operate within this hybrid period.
The rule of thumb we use is that a new product or service needs to be 10 times better before people can be bothered adopting it over what they’re comfortable with. To create the network effect, you need mass adoption, and it has to be as simple as possible. The new system needs to be future-proof, but the advisers need to understand how to meet the needs of their customers and clients now, as they transition, and into the future.
Smart contracts will always need smart writers
Another key application of blockchain technology is its use of smart contracts. Many people have predicted artificial intelligence and automation will obviate the need for junior lawyers to do due diligence and basic analysis. As the use of smart contracts – built on a blockchain – has become more commonly accepted as part of the legal industry’s future, concerns have been raised again about the impact on jobs.
However, this is another area where the technology can create as many jobs as it has the potential to replace. Again, the reality is more nuanced than the theory. To give a generic example, a smart contract allows two parties to prepare a self-executing agreement based on agreed terms and conditions. The contract, when finalised, is then automated and should execute faultlessly base on pre-agreed events – which, in theory, should also result in less disagreements that end up in court.
However, smart contracts actually provide two new avenues for lawyers. The first, which is more of a pivot, is in the coding – directing how the smart contracts are built on blockchain. Lawyers are best placed to be the architects of smart contract templates, and should still play important advisory roles during the hybrid period and beyond. Some Australian law firms are already offering internal beginner coding courses for junior staff, so they are better equipped to advise programmers on how smart contracts should be built and executed.
The second role for lawyers will be in the actual writing of the terms and conditions to be reflected in the smart contracts. While it is very easy to write code that is automated and self-executing on a black and white set of conditions, the law is rarely as straightforward.
Coding is mathematical. The law is a vast tapestry based on historical interpretations and subtleties of the English language. Though it might seem that, by design, they are almost completely opposite, they both follow very strict principles of logic. However not all law can or should be codified due to the requirement for subjective judgement. Because of this, smart contracts built on blockchain technology require the input of humans.
Lawyers will also be needed to design the governance structure and policies that protect both parties in the event that something goes wrong, and to advise people on what can and cannot be digitised. Blockchain is designed to be collaborative, but collaboration requires transparency and equality to be successful.
There have been some well-known instances where code didn’t perform as expected. The Decentralised Autonomous Organisation (‘The DAO), for example, was an attempt to build a completely autonomous corporation using smart contracts to govern its activities. However, there were bugs in the code which inadvertently allowed the draining of funds from The DAO. We can learn two things from this; firstly, it is essential to undertake code verification and this is particularly the case where actions are automated, and secondly, we need to establish a governance structure that protects the needs of each party and can deal with unexpected consequences.
These are some of the new roles we have identified through our experiments as being required in a blockchain-enabled business world. Many people are rightly excited about the potential of blockchain. None should be more so than those building the foundation skills for this work in the future.
Sophie Gilder is the Head of Blockchain at Commonwealth Bank.