The World Economic Forum (WEF) has concluded that blockchain technology “will fundamentally alter the way financial institutions do business around the world” after a year-long study of the emerging technology.
WEF’s “Future of Financial Infrastructure” report, published on Friday, said distributed ledger technology, more commonly known as blockchain, “has great potential to drive simplicity and efficiency” in financial services and “will redraw processes and call into question orthodoxies that are foundational to today’s business models.”
The influential non-profit believes blockchain will one day be as ingrained in financial services as past innovations like mainframes, messaging services, and electronic trading have become.
Giancarlo Bruno, Head of Financial Services Industries at WEF, says in an email announcing the report’s publication:
“Rather than to stay at the margins of the finance industry blockchain will become the beating heart of it. It will help build innovative solutions across the industry, becoming ever more integrated into the structure of financial services, as mainframes, messaging services, and electronic trading did before it.”
This is not a pie-in-the-sky prediction. WEF and collaborator Deloitte took 12 months to put the report together and talked to almost all of the world’s top investment banks, central banks around the world, and startups.
The research included input from Barclays, BlackRock, Lloyds, UBS, Deutsche Bank, Zurich Insurance, MasterCard, Visa, JPMorgan, Coinbase, Circle, the Bank of England, the Financial Conduct Authority, the European Central Bank, and the US Federal Reserve, among others.
From bitcoin to banking
Blockchain is a kind of database protocol first developed to underpin digital currency bitcoin. Instead of one central database of who owns what, blockchain allows for a network of identical, linked databases that talk to each other and are updated simultaneously.
Every time someone wants to make a change or add something onto the blockchain (the shared database), the majority of members of the network must sign off on it. This cuts out the need for middle men in transactions, because the fact that everyone signs off means trust is built into the system.
By cutting out middle men, cost is reduced. The process of the group signing off on transactions should also theoretically reduce error.
Bitcoin’s original blockchain is used to record bitcoin transactions — but the tech could theoretically be used to record just about anything that involves transactions. Applications are being developed for everything from share records to art and diamonds.
WEF says applications of the technology “will differ by use case, each leveraging the technology in different ways for a diverse range of benefits.” Goldman Sachs has already identified 5 potential real-world use cases for the technology.
‘Not a panacea’
While WEF is bullish on the potential of blockchain, the WEF report adds that blockchain is “not a panacea” and “should be viewed as one of many technologies that will form the foundation of next-generation financial services infrastructure.”
Bob Contri, Global Financial Services Industry leader at Deloitte Global, which worked on the report, says in an emailed statement:
“Before full adoption is possible, there are factors that need to be addressed, including an uncertain regulatory environment, lack of standardization efforts, and the need for a formal legal framework.”
Credit Suisse recently highlighted what it sees as 8 key challenges that blockchain must overcome before it can break into mainstream financial services.
The WEF report adds: “The most impactful DLT [distributed ledger technology] applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation.”
$1.4 billion in 3 years
Banks and financial institutions have been going crazy for blockchain technology over the last year and a half. Institutions are spending thousands on proof of concepts using the technology, issuing countless white papers, and joining industry-wide bodies to figure out how to use the protocol.
WEF says 80% of banks are predicted to start blockchain projects by 2017 and $1.4 billion has been invested into the technology over the past three years. 90 central banks are looking at the technology.
WEF identifies six “key value drivers”, which are basically reasons why everyone is going so gaga for it. They are (remember DLT is distributed ledger technology, just another way of talking about blockchain):
The report also sets out some examples of what these benefits might look like in practice for finance firms: