Case for blockchain in financial services dented by failures

A number of high-profile blockchain experiments in banking and finance have ended in failure this year, undermining the case for the technology’s future in financial services.

The biggest blunder came from the Australian Stock Exchange, which in November abandoned a plan announced seven years ago to upgrade clearing and settlement of shares to a blockchain-based platform. The exchange booked a A$250mn ($168mn) charge and apologised after admitting it needed to start the project again from scratch.

Other initiatives in insurance, banking and shipping have also collapsed, suggesting that shared digital ledgers may fall flat in the quest to reform cumbersome operations. Even proponents of the technology warn that adopters should be prepared for multiple failures.

“We are forever coming up with new ideas and killing them if they’re not appropriate,” said David Newns, head of Six Digital Exchange, which issued the first digital bond on a distributed ledger in November. “We’re in the invention space, so we have to think of new things with the expectation that a lot of those ideas will fail.”

In July B3i, a consortium of 15 insurance and reinsurance companies, ceased activities and filed for insolvency. The project had aimed to reduce inefficiency in premium and claims settlement, and place contracts on blockchains., another blockchain consortium of 12 banks focusing on trade finance also entered insolvency in June. The project had included Deutsche Bank, HSBC, Santander, Société Générale and UBS.

Most recently, Maersk and IBM announced in late November they were discontinuing TradeLens, a supply-chain blockchain solution for the shipping industry, saying it had not “reached the level of commercial viability necessary to continue work and meet the financial expectations”.

The failures have come alongside the crisis that has engulfed many of the crypto companies that tried to build their businesses trading and lending digital tokens such as bitcoin. That culminated in the collapse in November of FTX, the cryptocurrency exchange — a failure that has undermined the case for buying tokens in the hope of making a profit.

Still, some banks remain committed to blockchain technology. “There’s lots of negative sentiment about cryptocurrencies, most recently because of FTX,” said Mathew McDermott, head of global head of digital assets at Goldman Sachs’ global markets division. “That has nothing to do with the underlying technology.”

Goldman, rivals such as JPMorgan and other financial institutions are still open to blockchain technology, citing its potential for efficiency gains and cost savings. JPMorgan has promoted its Onyx digital asset platform, which links other banks and financial institutions such as Visa, and handles payments linked to about $1bn of assets a day in currencies and bonds.

But even some of those groups that have gone furthest with blockchain are cautious about its ultimate potential. In November, the European Investment Bank issued its second digital bond using the technology — a €100mn two-year deal arranged by Goldman Sachs, Santander and Société Générale.

Using the technology can potentially help streamline issues around documentation and payments but Xavier Leroy, senior funding officer at the EIB’s non-core currencies and special transactions division said the advantages were so far limited. “Given that we are in the initial stages, at the moment there aren’t many [benefits] — it’s mostly about potential for the future,” he said.

Some blockchain-related projects are also highly reliant on existing systems rather than replacing them, particularly so-called distributed ledgers that allow a select group of actors such as banks to share information on an immutable record.

This activity is related to blockchains and crypto assets but does not involve creating and verifying transactions in return for token rewards — a crucial difference from the blockchain on which bitcoin and other tokens are based.

HSBC, for instance, describes the FX Everywhere system that it uses to settle currency with Wells Fargo — which has handled more than $200bn of five currencies — as “blockchain-based”. Even so, its distributed ledger technology (DLT) relies on Traiana, a well-established market infrastructure, to act as the first step in the system.

“There is a definition element. Even though we say DLT, people hear blockchain, blockchain, blockchain,” said Mark Williamson, global head of FX partnerships and propositions at HSBC.

FX Everywhere uses consensus algorithms, cryptographic signing and other crypto-related processes. But it “doesn’t require a blockchain”, Williamson said. It also represents a tiny proportion of the overall business that HSBC and Wells Fargo handle in their currency trading operations.

A group of technology experts in June told US lawmakers that such “append-only” digital databases were not new. “They have been known and used since 1980 for rather limited functions,” they said.

Responsibilities to shareholders and regulation can also inhibit banks from using the types of blockchains that underpin tokens such as bitcoin.

These blockchains generally require maintenance by networks of computers that use vast amounts of power, in a controversial process called “proof of work”, but shareholders and regulators are pushing companies to invest in projects that are more environmentally friendly.

Banks are equally conscious they would have to navigate the different ways jurisdictions recognise tokenised investment products. In December, another Swiss stock exchange, BX Swiss, said it had completed a test trade of tokenised assets on a distributed public blockchain. However, it admitted it would require a separate market licence from the Swiss regulator to proceed.

“The challenge is when a set of institutions come together and individual shareholders need to be committed to the journey,” said Keith Bear, a fellow at the Cambridge Centre for Alternative Finance. “If priorities change and they don’t hit targets, projects fail.”

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