Pages Menu

Blockchain: despite high interest in financial services, be ready for it to slide into the ‘trough of disillusionment’

Posted on Dec 13, 2016

It’s probably no surprise to learn that blockchain approached the “peak of inflated expectations” – or the top of Gartner’s famous “Hype Cycle for Emerging Technologies”* in 2016.  Interest in blockchain has been increasing rapidly. It was the most frequently searched term on gartner.com by financial services industry participants in the third quarter of this year. However, be ready for it to slide into the “trough of disillusionment”. Despite high interest, and rising numbers of proof of concept projects, pilots and partnerships amongst large financial services providers, few have made it to production.

This is not to say that there isn’t significant benefit to be gained from blockchain, in financial services and also in other industries. Many of the largest areas of benefit for blockchain technologies occur at the industry level rather than the company level. Blockchain has the potential to be a key factor in the shift from technical infrastructure to ecosystem-enabling platforms, core to the concept of true digital business. While industry consortia are forming, it is a monumental task to get companies to agree to implement new blockchain-based systems and replace current systems that are working, albeit less efficiently. As it matures, blockchain is expected to help enable digital business due to its ability to bring trust among unknown and untrusted entities, and the promise of immutability of transactions stored on the distributed ledger. Its singular promise is that of dramatically reducing the need for a central party to manage transactions while avoiding any tampering of the data, which should result in significant cost and time savings.

To date, the greatest interest has come from financial services providers. A recent poll by Gartner of a group of IT service providers showed that more than 70% of their blockchain initiatives were for financial services customers. In Gartner’s recent survey of CIOs, 12% of Australian CIO respondents identified blockchain as a technology likely to change their organisation within the next three years. Half of those respondents were from banking, a third were from the media industry and just shy of a fifth were from government. Any business areas that have high transaction values but great inefficiencies in the transaction life cycle are ripe for consideration; a prime example is repurchase agreements (“repos”) between firms.

At the global level, non-banks (for example, exchanges and utilities, such as the DTCC and Nasdaq) are also among the leaders in doing various trials and pilots. While they could be the consumers of blockchain technologies themselves, they have a key role in adoption of these technologies in the industry. Their central role among market participants in facilitating both the transactions and the technologies that support them will be needed to get agreement on standards and commitment to implement blockchain.

When approaching blockchain, some of the big issues that organisations need to be mindful of are:

  • Most platforms and providers are at very early stages of development – and ill-equipped to address enterprise-grade requirements for integration, analytics and performance at scale.
  • Approaches and platforms vary greatly – making it very difficult to compare and assess suitability of these platforms.
  • Blockchain technology solutions must achieve a level of maturity in areas such as scalability, speed, security and analytics support to be fully business-ready.
  • The legal standing of smart contracts (a digital representation and extension of the traditional notion of a contract, which uses technology to facilitate, verify or execute it) remains unclear. For example, there are no large regulations that have been rolled out specific to blockchain in financial services yet, but certainly, regulators are well aware of the evolution. Further clarity of their legal standing will be necessary to propel the use of smart contracts.

 Derry Finkeldey is a research director at Gartner.

(*For more on Gartner’s  2016 Hype Cycle for Emerging Technologies Identifies Three Key Trends That Organizations Must Track to Gain Competitive Advantage, go to http://www.gartner.com/newsroom/id/3412017.  For more information on blockchain go to https://www.gartner.com/doc/3518019?ref=shareSummary)