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Is blockchain necessary?

By Mohan Krishnan for Finextra

There is no dearth of material to tell us what is blockchain, how it is going to transform our lives in the years to come, where it could be applied, etc and the list is endless. That it is the next big thing after all, since the invention of steam engine, the electricity and the internet itself! World Economic Forum predicts that by 2025, 10% of global GDP will be on blockchain technology.

We hear a lot about the benefits by adopting this new technology from almost every blog or article we read. While these are all fine and great, what is the need for this technology now? What are the problems we are trying to solve and how big are these problems really? Are we really ‘suffering’ from these problems?

There is a growing thought in the industry that blockchain is a solution for yet-to-find problems and hence may be even the reasons for the hesitancy to adopt. Industry reports indicate that institutions are at different stages of experimentation in distributed ledger technology (DLT). Most believe it could take 3-5 years to have a material impact. One half of all the sampled institutions are in ‘wait & see’ mode and by May 2016, 86% are of the opinion the impact expected to take more than 5 years or never!

Is blockchain necessary?

As world is becoming more and more digital, people to people connect and their transactions are no longer simple and one-off, but are getting more complex and ubiquitous. Banks are moving towards cutting edge technologies while being threatened by emergent new and existing Financial Technology companies. While all of this has empowered the end user, digital frauds have emerged, manifesting in the way of double spend & digital identity thefts on a grand scale. These take a toll on the tried & tested legacy business practices & the existing infrastructure like never before.

The transforming Banking and Finance Industry will soon be no longer familiar to most of us. Regulators are finding increasingly difficult to adapt the policies framework to the new ways businesses are emerging. All of this result in non-linear increase in costs – both operational, infrastructural and regulatory. At this pace of the digital adoption & transformation, doing more of what we do, simply does not work. There has to be a fundamental shift in the way we do business. We are at that inflection point.

Blockchains are emerging to take us through this shift. Besides providing the high security and immutability, blockchains can cut the costs associated with these benefits. The adoption of blockchains becomes necessary from this perspective.

As per recent McKinsey Reports, the uptake of distributed ledgers will remove $110 billion in costs for the global financial services industry over the next three years (by 2019) as the technology is applied to critical ‘pain points’ across certain legitimate use cases. In the financial industry alone, the technology is thought to have the potential to cut bank infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance to the tune of $15-20 Billion per annum by 2022.

These costs referred here are for carrying out certain functions at the desired destination points and at the desired authenticity, by trustworthy agents. Hence these boil down to mainly two – handling costs (by trustworthy middlemen) and authenticity costs (for genuineness verification). By definition blockchains are decentralized, agent-free and immutable.

However, we are yet to find a way to keep the operating costs low and get a quicker response for authentication in the blockchain world. Presently these are posing as major roadblocks to blockchain adoption. Overcoming these appear possible after we establish the blockchain network ecosystem – either permissioned or permission less – to get to the economies of scale. Collaboration, trust and heavy investment from the players are required, as well as a simple way for the regulators to monitor.

And all of this needs lots of experimentation, learning and time.

• Disclaimer: The views expressed in this post are those of the author and do not necessarily represent the views of, and should not be attributed to, his employer.

First appeared at Finextra

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