In the last year the prices of cryptocurrencies have increased dramatically – compared to this time last year, Bitcoin has increased by 3x, Ethereum by nearly 10x, and Dogecoin by 100x.
This was partly fuelled by the relative ease of trading through platforms like Coinbase, Revolut and Robinhood, partly through the time and ready cash that people have available because of the pandemic, and partly through criminals/evil geniuses like Elon Musk.
There also seems to be greater acceptance of the relevance of crypo currencies as a valid financial instrument by major organisations. Both JP Morgan and Goldman Sachs have announced or unveiled crypto offerings for clients, Coinbase – a major crypto exchange – is now a publicly listed company, and more companies are planning to accept crypto as payment for goods and services.
On top of this, NFTs (non-fungible tokens) – a unit of data on a blockchain that represents a unique digital asset – also came into the mainstream earlier in 2021.
Digital artist Beeple sold a piece for $69 million back in March, becoming one of the most valuable living artists. Enterprising individuals were turning all sorts of digital content into NFTs – the original “Charlie bit my finger” video was recently taken off Youtube after being purchased as an NFT for £500,000 (although you needn’t look far to actually find the video on the platform – which does make the very concept of owning digital art a real head scratcher).
But the furore of early 2021 seems to have tempered dramatically. Although crypto prices are still significantly higher than last year, they have fallen by almost (and in some cases more than) half in the last two months.
And this is a recurring theme. Every so often the hype around cryptocurrency builds, which turns our attention briefly to the broader applications of the underlying technology for FS, and the implications of the highly volatile asset class.
But, like many recurring themes, these are already tired topics.
There are a number of examples of successful blockchain use cases and pilots across the industry – and tonnes of content detailing where the technology could be applied to solve meaningful industry challenges.
What interests us, is how the technology shifts from being a niche talking point that crops up a couple of times a year, or the focus of some very specific, isolated pilots, towards being something that can be embraced broadly across the industry as part of an inflight digital transformation agenda.
This seems like a somewhat less explored topic. Much like with Open Banking and now Open Finance, the rhetoric tends to focus on the WHY – those shiny benefits that help us to justify the need for any new technology or concept – but leaves out the HOW, because that tends to be the hard bit.
And it is the example offered by Open Banking that we leaned towards when considering this point. Open Banking, and particularly the provision of data via standardised APIs, has largely been enabled by two things – regulation and commercial offerings. This too, could be the path towards the adoption of blockchain technology within FS.
Regulation
Through the CMA remedies in the UK, the concept of Open Banking was born, and the introduction of PSD2 formalised this across Europe, with technical standards mandating the use of standardised APIs and approaches towards authentication.
Although painful for a number of the largest financial institutions, this regulatory push and focus on a streamlined, standardised approach towards data access will likely prove beneficial for all market participants in the long term. By forcing a technical standard, banks needed to enhance their digital capability, which drives auxiliary benefits.
The same could be said of blockchain. There are a number of use cases that could feasibly be driven by regulation that ultimately mandates the use of blockchain to satisfy said regulatory requirements.
For example, Digital Identity is a hot topic in the industry. Given the way that a blockchain can act as an immutable record of information, it could be a ready candidate for an industry solution for Digital Identity. But regulation is possibly the only route to moving towards a solution that inherently needs a high level of coordination and adherence to technical standards.
Commercial Offerings
The introduction of Open Banking regulation prompted new business models for those that saw an opportunity to consume, enrich, and provision data to third parties that could create new solutions.
These data aggregators act as industry enablers and push financial institutions to align to industry standards. The threat of not doing so isn’t as slap on the wrist or (unlikely) fine from the regulator, it’s the loss of revenue through customer churn.
Once again, blockchain could be enabled in a similar way. Organisations like R3 have created platforms that will help the industry to use the technology, and ecosystems to bring the industry together.
Competition in this area, coupled with a regulatory drive to use a blockchain solution to solve a common industry problem could move blockchain away from being a bi-annual topic of conversation, towards being a fundamental pillar of an innovative, digitally enabled technology stack.
