Imagine a world without a smart phone? Has anyone under the age of 25 ever had the need for an A-Z, disposable camera or a pocket diary?
Apple introduced the iPhone back in 2007 and we haven’t looked back. It was around this time Bitcoin was born marking a global uptick in the development of Distributed Ledger Technology (DLT) but how far have we really advanced in the last 13 years?
The 2019 Gartner, Inc. Hype Cycle for Blockchain Business indicates the potential impact of blockchain will be transformational across most industries within 5 to 10 years. However, whilst DLT seems to be somewhat stuck in the ‘trough of disillusionment’ there is real feeling that within the next 2 years we will see significant strides made in terms of real roll out and adoption within financial services.
A distributed ledger is just a digital database that allows information to be shared, recorded and synchronised in multiple places at the same time. Transactions and immediate processing have the opportunity to create significant time and cost efficiencies that will revolutionise current practices in investment management and create an alternative infrastructure allowing for incumbents to come together to better manage data and process transactions. With talk of savings of between 25-45%, why is adoption and change so slow? When will the talk become a reality?
Is it down to a lack of use cases? Is the tech really solving an underlying problem? Is it regulation? Or is it, for those tech historians, the BetaMax v VHS conundrum, and how do you get everyone to back the same horse?
Most agree the theory is sound and the benefits many, with improved security due to an immutable record of transactions. DLT also has the potential to improve operational efficiency with increased speed reducing costs and enhancing risk mitigation, but the lack of market familiarity with the technology is a significant cause of the slow adoption, with concerns around the regulatory framework also affecting widespread adoption.
The fact distributed ledgers, by their very nature, have neither a specific location, nor a centralised source of administration, raises substantive hurdles when it comes to their governing jurisdictions and applicable law. With governments and investors increasingly focusing on environmental, social and governance considerations, it may also be hard to ignore the environmental impacts of the intense computational power needed to confirm transactions at scale. This is as well as the issues facing immutable ledgers from data input discrepancies.
So what does the future hold?
Emergent technology by its very nature creates unease but also significant opportunity. For the first time we are starting to see a real proactive stance by regulators such as the Financial Conduct Authority, who have quite rightly stated their intention not to regulate the technology itself, but rather the outcomes created. And use cases remain varied, with fund distribution and post-trade custody and settlement at the forefront, along with trading and client on-boarding.
DLT providers are indeed showcasing a world of possibility and disintermediation which is becoming more and more pressing as clients require greater efficiency, greater transparency and reduced costs. COVID-19 has, from a technology perspective, demonstrated the art of the possible when it comes to taking informed risks in order to adapt to the changing needs of business and consumers. DLT isn’t going away but how quickly it is embraced remains dependent on a collective desire for change.