The rapid innovation in financial technology ("FinTech") has been hailed as the wave of change that will alter the financial services industry. The most prominent FinTech development is the advent of distributed ledger technology ("DLT"), most notably the Bitcoin blockchain which was initially hailed as a potential 'disruptor' to the financial services industry as we know it. Initially led by developers outside of financial services, banks and other financial institutions have recently invested significant time and money in identifying how they can use blockchain technology to improve their business and develop trial applications.
On 16 June 2016 many financial businesses were interested to receive copies of the speech the Governor of the Bank of England ("BoE"), Mark Carney, had been due to deliver at the annual Mansion House dinner on "Enabling the FinTech transformation"; and on 21 June 2016 Mayer Brown's London office hosted a forum run by the BBA on "Utilising Blockchain in Banking".
What is blockchain?
A blockchain is a decentralised electronic ledger of transactions, recorded as blocks of data in a sequence (or "chain"), built up using mathematical algorithms. Each block of data records a set of separate transactions and the chain sets out the full transaction history back to the first ever transaction. Because the ledger is distributed amongst different processors or "nodes" and secured by strong cryptography, transactions cannot be reversed and the entries on the ledger are secure.
The first notable use of a blockchain, in 2009, was as the distributed ledger which recorded transactions in the decentralised digital currency Bitcoin. While the Bitcoin blockchain operates an open network, blockchain ledgers can be restricted to a private network of users (or "permissioned"). The blockchain as used in the Bitcoin blockchain was originally designed to be fully peer-to-peer: thus historically every participant in the network has access to and visibility of the whole of the ledger and can thus see all the transactions previously made using it. The permissioned blockchain ledgers now being created by banks and other market participants have similar features but the developers are able to limit the participants in the network to chosen counterparties (offering confidentiality as well as lighter processing requirements) and hence greater speed.
It was the fact that, for the blockchain, transactions are recorded in full on the ledger and the ledger is distributed rather than centralised which meant it was hailed as a potential disruptor technology: a blockchain offers a platform for users to transact directly rather than through a traditional clearing or settlement system, potentially reducing settlement time and clearing fees.
Intermediaries such as the Australian Securities Exchange and Euroclear have examined the technology to consider the impact it could have on their businesses. With permissioned blockchains, financial institutions have found a way to deploy the technology to suit the needs of different participants transacting in the insurance and banking sectors. While the Bitcoin blockchain was said to question the need for banks, it has been claimed that universal usage of blockchain technology (or a form of DLT) could even remove the need for a central bank.
... or evolution?
In his 16 June 2016 speech, Mark Carney announced five ways in which the BoE is "enabling the FinTech transformation." The full speech can be accessed via this link, but in summary those five ways are:
- Widening access to central bank money to non-bank payment service providers ("PSPs"), enabling them to compete on a level playing field with banks (though the PSPs must meet the BoE's standards for such access);
- Being open to providing access to central bank money for new forms of wholesale securities settlement, to try "to help simplify the settlement chain, reduce its costs and raise its speed while increasing resilience";
- Exploring the use of DLT in the BOE's own core activities, including the operation of its real-time gross settlement system which, intriguingly, Mr Carney recognised "could open the possibility of creating a central bank digital currency";
- Partnering with FinTech companies to harness FinTech solutions for central banking; and
- Identifying how best to regulate FinTech developments, as the BoE is conscious that FinTech will present different regulatory challenges.
The BoE is seeking to lead the global approach in embracing FinTech developments to try to encourage what Mr Carney described as "a more open, more transparent, and more democratic financial system."
Mayer Brown hosts BBA forum on Utilising Blockchain in Banking
The BBA and Mayer Brown, like the BoE, recognise that DLT and blockchain technology represent an important part of the future of the financial services industry. The BBA forum hosted at Mayer Brown's London office on 21 June 2016 brought together FinTech, banking and public sector representatives to discuss and explore the application of blockchain in financial services and the global approach to regulation.
The various discussions were introduced by Chris Skinner of the Financial Services Club, who drew an interesting comparison with disruptions taking place outside of financial services. This was followed by a lively panel discussion moderated by Financial Times journalist Izabella Kaminska which featured George Hallam, the Head of External Affairs at developer Ethereum as well as Brian Donegan of the Isle of Man Government and Rhomaios Ram of Deutsche Bank. The discussion explored a number of issues such as the role of and approach to regulation, the adoption of the technology by mainstream financial institutions and the development of autonomous "smart contract" systems using the Ethereum blockchain.
The issue of control frameworks and design was explored in a debate featuring researchers from University College London and the payment services provider Coinbase. A presentation was also given by Brian McNulty of the R3 consortium showcasing the range of projects on which they are working, including the "Corda Ledger" platform, which is the basis of a new derivatives trading platform which Barclays recently introduced.
Partners from Mayer Brown also convened a panel, chaired by partner Mark Prinsley, analysing regulatory approaches in the UK. This included partner Guy Wilkes discussing the Financial Conduct Authority's ("FCA") ongoing "Project Innovate" initiative to allow certain companies to trial new regulatory applications in a protected environment (called a "sandbox"). Mayer Brown partner Mark Compton considered the FCA's focus on regulation, which could be considered neutral to the new form of media where existing rules continued to apply.
Blockchain has moved from being a potential 'disruptor' technology to one actively embraced by the financial services industry, including the central bank. Work continues, but currently the impact of FinTech, including blockchain technology, on the financial services industry appears to be more evolution than revolution. However, as it is still early days developments could well result in that evolution gathering pace.