Author and investor William Mougayar has published a set of predictions and meditations about how blockchains are affecting the banking industry. The insights are part of a comprehensive blockchain and bitcoin sector analysis.
Mougayar, who has written extensively on disruption since the early days of the internet, sees the big evolutionary picture. Technology constitutes eras: a course can be charted from self-publishing to ecommerce to peer-to-peer to blockchain today.
In this respect he makes the point that innovation must permeate faster than the internet did in 1995-2000. The current groundswell within fintech is addressing obvious asymmetries within financial services and their legacy systems.
Mougayar said: "When it comes to covering their risk, banks and credit card companies will give consumers instantaneous answers/settlements (like for purchase authorisations or withdrawing money from an account); but when it comes to our own transactions (e.g. depositing a check or transferring money), we typically have to wait days before receiving confirmations."
Sensing a real threat from emergent technologies, banks have become invested in startups, but this is a "strange relationship", which leaves banks as spectators in their own evolution, and degrees removed from actual innovation.
Banks should take note: retrofitting the blockchain will be challenging, and may not yield significant benefits, warned Mougayar. He pointed to a 18-24 month time frame for full implementation, adding that it's easier to start implementing blockchain solutions in new segments, without internal integrations.
He categorically stated: "Blockchain and old constructs, such as clearing houses and private exchange networks (SWIFT, CCP, FIX, DTCC) are like oil and water: they will not mix well because one is based on centrally trusted intermediaries, and the other is based on 'no' intermediaries and peer-to-peer trust."
Proof of concepts
Proof of concepts (POCs) are timid experiments that don't show commitments and don't always allow you to see the potential benefits, stated Mougayar. It's better to implement smaller projects end-to-end, where you can see results. POCs can be used to narrow down the portfolio of committed projects.
Mougayar, who is an Ethereum advisory board member, is an advocate of experimentation with smart contracts – something which enables enterprise users to learn the basics of blockchain capabilities. This crucial learning process should not be outsourced, he said.
Capital markets are the quadrillion dollar opportunity and many very clever people are now jostling for position within that busy space. In addition to many well-funded individual technology startups, consortiums like R3CEV and the open source Linux Foundation working group are focused on this area.
Mougayar's question for 2016 is: "Will the blockchain make a dent in capital markets, or will it experience organ transplant rejection?" He added: "The jury is still out on the longevity of special purpose blockchains. They might make sense as private blockchains (e.g. Ripple)."
Many commentators believe it's only a matter of time until the burden of compliance is dramatically diminished thanks to blockchains. This transparent, tamper-proof, immutable data system can save management a fortune in compliance costs. Mougayar predicted that hopefully in 2016 we will begin to see "compliance move to intelligence and regulation will show signs of re-invention".
A blockchain paradigm enables banks' AML/KYC systems and controls to go beyond intra-company transactional analysis, when they had to share information via analog or documentary methods. Blockchains have the capability to transcend industries and jurisdictional borders. There is now an opportunity to trade-off reduced KYC requirements (thus fomenting financial inclusion) for the increased behavioral transparency afforded by the blockchain.
Looking ahead Mougayar predicted that companies will use the blockchain just like having a website today. He said 2016 will see some $1.5bn of non-currency assets transacted on blockchains. And VC investments in blockchain related startups will exceed $2.5bn.
He also said some fintech companies will be challenged by blockchain contenders; some consortia will start delivering (but it's not a panacea for everything); some blockchain startups will start to fail (visibly); and bitcoin as a cryptocurrency will enter online banking.
Of course, banks could ignore the blockchain or be timid with it, and Mougayar thinks if they do, the field of "alternative financial services" will continue to widen, and the banks' market shares will continue to shrink.