1) Build off a business case
Every consultancy and vendor now has a lab, a whitepaper, and a team of hundreds ready to build whatever DLT project you desire. Executives are rightfully suspicious of ‘solutions looking for a problem.’ Until someone presents a compelling business case, don’t progress. CIOs need to ask how a DLT initiative will drive value.
2) DLT can deliver real value
DLT by definition is most useful when you need to reconcile multiple sets of data across multiple organisations (or silos). Handily, this is a large part of banking operations. In addition, there is the potential to launch a wave of new products / services leveraging the unique power of smart contracts.
Example: Today trade finance is paper-based. The cost of postage alone to the industry is $40 billion per year and that’s before you consider all of the manual processing of that paper in banks and corporations. DLTs like WAVE can digitise this paper in a way that previous attempts had failed to. Trade finance has many governments, many laws, many ports, many banks. It has no logical point to centralise around. Fortunately, DLT lends itself to being a network without an obvious central point, making digitisation much more achievable and unlocking massive savings for industry.
3) Greenfield projects are easier
One of the most exciting things about any new technology is not replacing the old, but the new markets that get built and the new business models they support. Uber’s invisible payments. Netflix and Spotify’s subscription models. In finance, the same is now happening with DLT.
Example: Otonomos allows small businesses to register their company and shares (cap table) 100% digitally. These are then stored on a DLT (Ethereum in this case). At once, this reduces the cost and risks involved with paper. Paper can be lost, stolen and forged. The DLT record cannot be edited unless the owners themselves provide a secure digital signature. Banks could partner with services like this to offer new value to SMEs, and their capital markets could consider these private securities a new asset class.
It is relatively simple for financial institutions to partner with a small greenfield project in the short term and use those learnings to inform their own strategy.
4) Brownfield projects are hard but tangible
The existing market infrastructure (e.g. card schemes, standards bodies, exchanges and banks) has a degree of centralisation that historically helped to reduce cost and reconciliation. However, because that infrastructure is there and relied upon at scale by many parties, changing it will be hard. There are examples where that change makes real sense as part of an upgrade cycle.
Example: The DTCC announced its Trade Information Warehouse recently. This is an existing market utility that will require everyone who uses the information warehouse to upgrade; in time. They’re using DLT to provide greater transparency in trade information, but at the same time, must be mindful of the impacts any change will have on all their clients and the wider market.
Examples like this show serious changes are now happening at intermediary organisations in financial services. These changes will be slower than the greenfield ones but arguably more significant in the medium-term.
5) Start small
Don’t simply follow the same proof of concepts (PoCs) everyone else has done. CIOs should be testing and measuring a business case, capability, and client appetite. Aiming for 50 to 100 experiments with existing, highly-skilled engineers will yield at least one, and probably several, competitive advantages. The key with a proof of concept is in the learning.
6) Buddy up in Consortia
Nearly every financial services company in insurance or banking has one or more consortia memberships. In terms of pure information flow this makes perfect sense. However, you need to know quickly (if you don’t already) the areas where you can compete in blockchain / DLT.
Examples: R3, The Shensen Consortium, and B3i
Richard Brown explains the rationale behind R3 and the Consortia in an interview with 11:FS.
7) Focus and upskill
No one vendor or code base can solve all your problems. The key is to upskill internally around several areas that will deliver business value. Knowing the strengths and weakness of each vendor, and their individual “type” of DLT solution is essential. There are many choices, each with their own strengths and weaknesses.
- Ethereum – well supported public community, used widely in greenfield implementations, excellent for quick proof of concepts. Lacks some concepts key for commercial privacy (at this stage).
- Corda – well supported in financial services, built with the input of many key banks, likely widespread adoption. Is still early in development and has not been tested at scale.
- Hyperledger – actually three code bases. Hyperledger fabric has many organisations outside financial services contributing to it in open source and is widely known. Is still early in development and has not been tested at scale.
A number of projects are aiming to use these code bases in a live setting currently (e.g. CLS announcement to use Hyperledger). But CIOs need talent with the ability to understand the pros and cons here.
8) Exploit main areas
After initial PoCs, many in financial services are looking for new value creation opportunities and growth. Key areas to focus on:
- New asset classes (investment banking) e.g. Micro Bonds.
- Simplified contracts (investment banking, corporate, and retail e.g. 100% straight through processing of mortgages from signature to securitisation).
- Reconciliation and workflow management (investment banking, corporate, and retail e.g. 100% straight through processing of AML / Sanctions screening).
After appropriate testing, the CIO can talk to the board with confidence that DLT is ready for the big time.
9) Don’t get killed by committee
MIT experimentation is a concept gaining popularity, and uses data and rapid builds to drive decision making instead of processes and committees. Innovation can rarely survive a committee. If you click one link in this blog post, make sure it’s this one on MIT Experimentation.
The business needs to see the DLT experimentation processes and feel a real ownership in its success. Create the steps to go live, and ensure the talent is available internally to deliver. These steps will vary by organisation, but should look much more like an expansion from a series of experiments than a traditional waterfall development approach. Broadly the steps could include
- Early experiments – Is the idea feasible?
- Follow up experiments – How would you make it compliant? What’s the business case?
- Pilots – Do customers want this product? Do the economics make sense?
10) Partner with startups
There are many vendors and code bases, each with their own world view of what’s possible with DLT. While large vendors have amassed a strong skill set and make doing business easier and safer, CIOs risk missing the real innovations by not going a layer deeper an exposing themselves to the innovations coming from the world of startups. Programmes such as Techstars and Startupbootcamp, and resources like coindesk.com are full of interesting companies worth spending time to get to know.
11) We can help
There are lots of great resources you should consider, such as the memberships to consortia, working directly with startups, and getting close to the great work in the Hyperledger and Ethereum foundations.
11:FS helps small, digital teams go from experiment to pilot to live product. We’ve met with more than 300 vendors in the blockchain space, thoroughly evaluating available business cases, and have worked on both greenfield and brownfield projects.
Email 11:FS Blockchain Lead Simon Taylor to learn more: firstname.lastname@example.org.