The Digital Future of Finance and Banking

Session Description:
How is the explosion in financial entrepreneurship and the development of new approaches to finance like Blockchain likely to change our financial institutions and ecosystems? As economic conditions evolve will tech push industry evolution even faster?
 
 
Glocer: I’m being joined now by two active participants and strategists in the blockchain world. First, I’ve got James Wallis, VP of global payments at IBM and of blockchain at IBM, and then William Mougayar, who is not only the author of this very fine book called “The Business of Blockchain” that I would recommend to you, but also a venture capitalist and an advisor to Ethereum, that many of you in this room know about. So please, join me.
In keeping with the rapid-fire motion of this conference, we have about 43 seconds together to explore blockchains, sidechains, cryptocurrency, cryptographic hashing and the Byzantine Generals problem and why the hell any of us should really care about that.
So I’m going to start with William, because when you write a book, you get first dibs. In the intro to your book, you say that, “If the blockchain has not yet shocked you, I guarantee it will shake you soon.” So why did you say that and why do you think it matters so much?
Mougayar: Well, first of all, let there be no doubt that the impact of the blockchain is going to be very similar to the impact of the Internet. And think about where we were 20, 22 years ago and how much has happened with the Internet and the Web. And the same thing is going to happen with the blockchain. We’re still in the very early days of seeing the impact of the blockchain, because it really hits at the trust factor. And blockchain is not just a technology. It is a disruptor for trust, and whoever has been providing the trust function, their role is going to be threatened, might disappear, will change, for sure. And I look at the blockchain as a great innovation enabler. So we’re still in the very early stages of understanding it, which is why I wrote the book and I wanted people to really, really understand it and I’ve tried to unpack the many elements of the block chain, because it is not just one thing. The most prevalent two properties that people know about when you think of the blockchain, you think about cryptocurrencies and you think about distributed ledgers. But these are only two out of ten other properties that the blockchain has and I think we need to have a much wider viewpoint in terms of what it can do.
Glocer: We’ll dig into that a bit further, and also I’m going to open it up for questions, because we have a little bit more time for this session. So start thinking about what you want to ask these two gentlemen. I’m going to stick with you just a bit more, William. Where do you think we’re going to see the effects first? Who are the canaries in the coal mine, the music industry, the newspapers of the first wave of Internet—who gets it first this time?
Mougayar: Okay. So there is a difference between how much activity there is and how much impact there will be. Right now, a lot of the activity is in financial services and if you ask anybody, it’s obvious there’s lots of activity. But, I will tell you for a fact that the financial services companies themselves are not going to disrupt themselves with the blockchain. They are willing to change themselves a little bit, but not to disrupt themselves. So all this flurry of activity that you see, while it looks like it’s going to impact banking, based on what I’m seeing, it’s going to impact banking marginally, but not in a very fundamental way.
Having said that, there will be other companies, in the same way that the wave of FinTech companies, like Betterment and others, have disrupted the banks, by just being from the outside coming into their turf. So there will be a number of blockchain companies that will disrupt the banks from the outside. So that’s the first industry. And then other industries—I’d like to see more in the government. Right now we’re not seeing enough work in government services that can be on the blockchain. Because the blockchain is about, for example, making sure that we know about ownership of a title specifically. That’s a big application that’s waiting to be developed. The blockchain can give us a chain, a chain of custody, so we can get the history of whoever owned a particular house since the beginning and that can replace whoever is doing title insurance, for example. But the area of opportunity there is not big cities—it’s going to be difficult for a big city to implement the blockchain. I think we’re going to see it first in small cities, small towns, counties, and the municipalities that are smaller, because it’s a lot easier to implement something for 5,000 people or 10,000 people, instead of 8 million people.
And then it goes down from there. Energy is one. Healthcare—the medical records area is just begging for blockchain applications. And there will be new models, there will be new companies. We still have not seen the Amazons and the eBays of the blockchain.
Glocer: Let’s hold that thought and come back to it. I’m going to turn to James now. William’s raised the issue of sort of disruptors versus incumbents. At least in financial services, where you and I spend a fair amount of time, traditionally—and I mean pre-crisis—banks were the arbiters of trust. They had the authority, they had the nice Doric columns on the old buildings, they had the old safe in the back. There’s a raging debate now in the blockchain world between, let’s call it permissioned ledgers that are permissioned by entities that say you can be part of the consensus organization and the great wide open original bitcoin blockchain, which is expressly non-permission. How do you see that debate playing out and talk to us a little bit about your work at IBM.
Wallis: Well, it is a big debate, permission versus permission-less, and I think it will vary by industry. You know, I agree with William that a lot of the activity right now that we’re seeing is in financial services, a lot of it is hype and a lot of it is real actual work. There’s a whole range of activity going on. I think if we look back in a year or two, we’ll see other industries sort of catch up.
But if we focus on financial service, you know, rightly or wrongly, and probably rightly, it’s a very highly regulated industry. And the regulations seem to be getting more and more onerous as time goes on, right, as a result of 2008—you know, there’s more and more and more been coming along and we don’t really see any light at the end of the tunnel. That’s a huge expense for financial services firms. So the notion of the permissions blockchain network where the characteristics are that you know the entities that you’re dealing with and those entities have permission to see the relevant parts of the distributed ledger that’s part of that network is really critical in a regulated industry. You need to know who you’re dealing with. You need to know that the transactions are going to be validated. You need to have the ability to regulate and access the activity.
So the idea, at least in financial services, around a permission network is critical. We have a project that we’re working on with one of the banks in the Netherlands on a compliance ledger. So they’re replicating financial data onto an internal ledger initially that sends the—their internal auditors then get access to that. The next phase will be external auditors. So this idea that you can have this distributed database that’s trusted and immutable so once the record’s there, it’s permanent, once that’s in place and then you can allow different people to see it for different reasons. That’s why, certainly at IBM and with the banks we’re working with, we’re focusing very heavily on the permissions project.
Glocer: And do you think—sticking with you a moment, James, people seem to divide, again, between applications of blockchain to take out cost versus the somewhat hazier where we’ll be, the true innovation, the revenue-driving. So I know lots of banks that are just completely salivating over the prospect of eliminating their mid and back office in securities clearance and settlement, because in theory the promise of blockchain should be instant reconciliation as soon as a block is added to the chain, because everyone agrees that’s a valid transaction and no more failed trades, etcetera. But you’re actually in an organization that’s leading a lot of this work with Hyperledger. How’s it really working? Tell us a bit about sort of practically how’s it working and do you see more on the cost side or more on the revenue side?
Wallis: Okay. Yeah, good sort of four questions in one. I’ll try and slice it up.
Every CEO at every bank is interested in blockchain and I think if you asked them a year ago why, they were concerned about disintermediation, they were concerned about threats from startups. But as organizations have got more mature in their understanding, they’re now seeing that, really, in the short to medium term there are massive cost savings to be had. There are huge inefficiencies across multiple different use cases in financial services. So an example would be in trade finance, you know, where you have an importer, an exporter, shipping company, they each have their banks. There may be other intermediaries. It’s basically a several-hundred-year-old process and largely, you know, elements of it are largely manual still, paper-based, fax machines—you’ve heard of those, right? So what we’re seeing is those sort of processes where there’s inefficiency is where people are wanting to start, the banks. You know, we have lots of projects around the world, use cases like trade finance, post security settlement, compliance, they are all sort of bubbling to the top as the most popular ones.
To get on to the second part of the question around Hyperledger, so one of the things we did as a technology company about two years ago, when we started seeing the emergence and popularity around bitcoin is we started looking at the underlying technology, which is called blockchain. And we looked at the different examples of blockchain-related use cases in the market, so you know, Ripple, Ethereum, bitcoin, and so on. And we came to the conclusion that for a broad set of business applications in regulated industries, we thought that we needed more of a ground up approach to the technology. So we’ve developed something called open blockchain, which is an IBM development—
Glocer: Not an oxymoron? I don’t mean development, I mean open blockchain.
Wallis: Yeah, yeah.  But we came to the conclusion, and we’ve got a lot of experience in open source and open governance projects, that we thought we needed to have the community around industry jointly develop the base technology. You know, think of this as a technology that sits on top of the Internet that kind of sets out the standards and the rules for interoperability across different blockchains and sets out the characteristics of a basic blockchain technology. So the consensus rules, you know, the distributed ledger layout, and so forth. And we went and had a discussion with the Linux Foundation, because they have a very excellent track record of open source initiatives and, along with a number of banks and other technology firms, formed the Hyperledger project, which was pre-announced in December of last year and sort of formed earlier this year. And the goal is very simple. The goal is to get a set of standards and code, actual code that you can go run into the market as quickly as possible with as much consensus of industries thinking this is a set of standards that we can then use. And then I think people will start building on top of that. So people will offer other services on top, maybe KYC or, you know, sanctions or things like that, and then on top of that, you’ve got the individual use cases.
Glocer: I’m going to go to questions right after this. I just wanted to ask William, is there going to be one blockchain? Are there going to be many blockchains? Will they interoperate? How do you think about that?
Mougayar: Well, I mean, I’m making a bold prediction that we’re going to have thousands, if not millions of blockchains going forward. And in the same way that we have millions of websites today, at some point in time, the blockchain becomes a functional element that will be as easy as opening a website. But today, we’re still in the days where, back in ’95, you had to code in HTML to publish a webpage, and then later Wordpress came along and Squarespace and so on, and now we don’t even think about doing these hard kind of ways of doing it. So until we get to much easier ways of implementing blockchains based on functionality and not based on some very difficult to use technology, then we have to wait until that happens.
Glocer: James, you wanted to jump in?
Wallis: Yeah, just to add to that, I think the technology will advance fairly rapidly. R3 recently ran a project called Genesis, where they had five different organizations develop a simple sort of use case, and setting up a basic blockchain network with a couple of nodes on it in the cloud, you know, it’s like a 10-minute exercise, and then building the application, at least the one that we did for that exercise was less than half a day. Now, there’s a big difference between doing something as a demo or a pilot versus getting into the real world. There’s a massive difference.
Mougayar: Yeah, I mean, I think the real test is when they are invisible, when you don’t know that there is a blockchain behind the scenes. And we’re starting to see some of that. There is a street in Brooklyn where the residents are trading excess energy between each other and it’s based on an Ethereum blockchain in the background. But they don’t have to know that there is a blockchain. They just worry about the application and it runs and they can trade, buy, and sell.
Audience 1: Having walked into bitcoin in Miami two years ago, having spent 20 years in trusted computing, my observation was that blockchain was a new capacity for the Internet, the capacity to store fact. But the other half, which is how do I know that the information that was sent to the blockchain?
So the question is the assurance and cybersecurity controls originally specified by New York State were interesting, and still an open conversation. The integration of this fantastic new registration authority, which is blockchain, and this last conversation we had, which is Internet of Things is a device identity architecture network—I would suggest that the merger of those two pieces together starts to completely change what you would understand as the network. What blockchain replaces is what we call networking today, which is based on things like active directory and usernames and passwords and all of that. And so IBM in this is really interesting, because you have been a purveyor of enormous human identity, but this is a shift now to identity that’s prescribed by devices. And so the quality and assurance and integrity of the transaction needs to become part of the script of blockchain, so that we have cybersecurity controls—because blockchain is no better than Swift.
Glocer: And is there a question lurking in there? [LAUGHTER]
Audience 1: Blockchain is no better than Swift. If I send a bad instruction to Swift, we get 100 million stolen. If I send a bad instruction to Hyperledger, I get whatever the transaction is the bad instruction gets. I’d love your comment on the cybersecurity controls, not just the trust.
Glocer: So this is a chance to bring back IBM token architecture.
Wallis: No, it’s a great question. I think security is probably the number one question in the minds of the technology folks and the banks, right? At the end of the day, for the technology to get widely adopted—and I totally agree with you that it’s a network discussion, it’s not an internal discussion. And I also agree with you, by the way, that the Internet of Things totally connects together. We have some work going on with that in the trade and logistics industry with Internet of Things tied to blockchain. But security is the top issue and, you know, at the end of the day, however strong the cryptography, however strong the security that you put onto the blockchain, there’s still going to be processes required to make sure what goes on is validated, right? And in some ways, the technology promises to be more secure than traditional technology, right? But that’s still, you know, frankly, to be proven. It’s theoretically true, right? But until we see wide scale adoption and people moving real money around with the level of confidence, and hopefully you don’t see a hack like recently on the Swift network, then I think it’s promising, right, but it’s not there yet.
Glocer: Let’s try and get a bunch of questions. We can come back to security. We have one right up front.
Audience 2: So my question is this: Have you heard about this experiment that was done on, I believe it was last summer, on a Greek island?  And it was at the time when Greece—well, in dire circumstances, still in dire circumstances, but anyway, it was a lot of it in the press, a lot of noise. And they were trying to figure out some remedies for this situation and decided to isolate one particular Greek island and perform a blockchain experiment, so in other words, a real world test case with practical, you know, isolated in time, ideal test market, and with people, consumers who knew about it. So have you heard about this?
I think it was conducted for about two months. I was just wondering if perhaps you knew what the outcome was and, you know, what all of the issues were, because they tested everything from A to Z.
Wallis: No, I’m sorry that’s new information to me.
Glocer: Anyone in here know about this Greek island experiment on blockchain?
Mougayar: I will follow it. I mean, I will check into it.
Wallis: Was it around identity? Was it to do with people’s identities or—
Audience 2: That I don’t know, but people were taking money out of banks and buying things in supermarkets and so forth, and it was considered an ideal real world test case because of the isolation on the island. And for practical purposes, to help solve, you know, a pretty big—some pretty big problems over there.
Glocer: I did hear, you know, at the time when Greece was either thinking of withdrawing or was going to be kicked out of the Euro, there was talk about if they had to bring the drachma back, to introduce a bit drachma directly, rather than trying to go through the logistics of distributing the cash again. But luckily that didn’t come about.
Audience 3: My question is for William. You had mentioned the disruptors and I was wondering if you could comment on who you think the disruptors will be in the healthcare industry when we look at patient providers and the payers? You know, it seems like all them have to come together to really transition from the centralized billing systems or the centralized databases and, you know, who will be the disruptor in that market?
Mougayar: Yeah, without being specific, right now I’m not seeing a lot of startups in the healthcare sector that are doing blockchain. There are a handful, not a whole lot though. We’re still early. It may not be in the payment side, but more in the patient record and the medical record side and in the actual testing perhaps. There are proof of concepts, for example, to connect big machines to the blockchain to ensure that a particular procedure was performed, let’s say. Or that a maintenance was done on a CT scanner or an important machine that needs to have that done to it. But I think we can expect something interesting to happen in the medical records area and in sharing data, for example. I’d like to see more applications where we can share data about ourselves without fearing that there is a risk of security or privacy there. Because when we aggregate data, then maybe we can find solutions to a lot of the diseases and the issues that we have. And we haven’t done a very good job globally, and even in the US or anywhere in the world, at pooling data and aggregating data so that we can find solutions. And maybe the blockchain, somebody will come up with a solution where the blockchain will give that assurance or that factor of knowing that, yeah, my data is being used in a way that is anonymous, but is useful at the same time.
Glocer: David, do you have a question?
Kirkpatrick: I do.
Glocer: Good, I could tell.
Kirkpatrick: I wanted to tie us back to the IOT theme from before. Given that IOT has this capability, potentially, of having this almost unlimited number of nodes and things to organize and systems to facilitate and coordinate, how big of a role could the blockchain end up playing in allowing that transition to happen more seamlessly?
Mougayar: A big role, but we’re still very early and I’ll answer that—actually, if you think about the origin of the smart contracts concept, which is logic that is tied into some rules—and Nick Szabo was the one that came up with that in 1994. And the idea, he did that, the example he gave was a vending machine. So he was tying in some logic to a vending machine. And the idea is that if the machine, if the human does something, then the machine will either dispense the product if the money has been provided or not. But the point is there will be a lot of applications in the Internet of Things. We’re seeing one where you can put in a device in an electric car and when the car is stopped at a red light, it can be charging itself and just paying with micro transactions on the blockchain, because of the currency at the micro levels. I think it’s an area that’s going to explode. We’re just at the early stages of it.
Glocer: James, last word?
Wallis: Yeah. No, I think the provenance aspect of the distributed ledger is going to really play a big part in Internet of Things. So an example that we’ve been looking is,  you know, manufacturing machines have telemetry now and there’s data on, you know, the settings and the tolerances and so forth. Imagine you had, unfortunately, a fatal car crash and then they determined a particular part was at fault. Today when the manufacturers do a recall, they do it like a mass recall, hundreds of thousands of cars, sometimes. But what if you could trace back the provenance of that part in that car to a particular machine on a particular day and the tolerance level was out a fraction on that day? You could identify then that maybe there was 200 other parts built during that failure and then recall 200 cars rather than 200,000. So this idea of traceability, the provenance of the—
Glocer: That is interesting.
Wallis: That’s a pretty cool use case, I think.