Predictions From a Blockchain Enthusiast; And Some From Mercator

by Tim Sloane 0

Initially this article in Banking Exchange appeared to hype blockchain, but it slowly dawned on me that no timeframes were provided and that the interview with William Mougayar declared many of my own concerns and gave no specific dates for when key solutions would succeed, so perhaps we are closer in our thinking that I originally thought. For example, regarding B2B transactions:

‘ “Business-to-business payments are full of inefficiencies,” points out Mougayar. He sees blockchain technology disrupting this sphere sooner than consumer payments. “Blockchain is a new set of rails,” he says. “And it is going to be a more efficient set of rails than the multitude of proprietary solutions and spaghetti kind of integrations that we have today. We now have a chance to rethink all of this.” ‘

B2B operations certainly need to become more efficient and I expect efficiencies will be driven by several technologies and that blockchain will find existing payment networks ready to compete. Visa Direct and MasterCard Send enable instantaneous account to account transfers today at competitive rates utilizing existing currencies. These and other existing solutions don’t require new regulations to succeed, which gives them some time to build a defensive position. It will be interesting to see who wins the race, new networks that need to bend existing laws and regulations or existing networks that adjust existing business models to better compete. It will be a great race that I would predict will take 3 to 5 years to finish the first lap of an eight lap race.

Mr. Mougayar and I also agre that the technology is immature, although I may feel it is more immature than he does:

“ . . . Now, I’m saying the blockchain is 90% business and 50% technology.

Yes, it doesn’t add up to 100%. If it did, it would end up being like any old IT project. You can think of improving current processes as many big companies do. But if you do that—not changing anything and just using blockchain to support existing processes—you are just using a fraction of its potential benefits. Blockchain can be used, like the web, to reengineer and rethink processes. That’s why I say it’s 90% business. You have to figure out what is going to change in your business. The blockchain is here to force us to rethink existing business models.

Blockchain technology is a little bit daunting today because it is still immature in some senses. We are still not too sure what’s going to scale and what’s not. We’re still in the early days of learning the limits of the technology.”

The problem from my perspective is that far too many believe the technology is a platform that will support multiple use cases. Ethereum expects to be a platform for multiple use cases that can operate on an international basis. The problem with this logic is that many countries have conflicting laws and regulations. The regulations regarding consumer data, for instance, varies significantly by country. The platform will need to be designed to meet those regulatory concerns or wait until the country adjusts those laws to address the blockchain opportunity. I argue that the former is a much faster path to success than is the latter. We are also aligned regarding blockchain startups:

“Start-ups will push the envelope, and some will not succeed. But that’s the nature of the field. Without ambitious start-ups, we’ll never know where the boundaries are.

At present, banks aren’t feeling any of the blockchain start-ups. But everything starts small, and before you know it, it gets huge. PayPal began very small and is now a multibillion-dollar company that has expanded into lending. Banks may end up becoming back shops, no longer the front ends.”

The majority of blockchain startups will fail to reach escape velocity. PayPal was founded in 1998 and it took 4 years to be valued at $61 million. It wasn’t until PayPal was taken private and applied to the eBay use case that the company grew rapidly to what it is today.
I argue that a consortium-like structure, focused on a specific business use case, is the fastest way to focus the blockchain technology, address regulatory hurdles, and manage the complexities of cross border transactions. Mr. Mougayar disagrees:

“. . . In a consortium, everyone is moving on the same level and in the same direction. No one is going to one up the other when they are all playing the same game. Collaboration is a good way to test concepts. But you’re not going to get much competitive advantage out of collaboration. And banks do not like to share everything, so they will share the minimum.”

I doubt early participants in ClearXchange share the feeling that consortiums don’t deliver a competitive advantage, but it is fair to say that the competitors may not be other banks. ClearXchange and Zelle come to mind as a great example of a consortium effort to recover a position in the P2P market. But then the reality of institutional size came up. When asked if smaller banks should get involved in blockchain“They will have to wait a bit longer. They don’t have big budgets to invest. There is no payback yet. Big banks can afford to invest in blockchain, but smaller banks and credit unions need to utilize technology that is tried and true. We are not yet at the stage where they can buy an out-of-the-box blockchain solution for business-to-business payments, securities trading, or anything else they offer. But I think we will start to see those, perhaps, two years from now.

There’s an exception: an executive at a small bank who sees the blockchain as a really important technology. That executive will say, “I’m going to bet a small part of my company on that.” That bank will need to think and act like a start-up, get aggressive, and be willing to take risks. This takes unconventional thinking.”

This statement is spot on. While in theory a valuable solution could appear before the two year horizon mentioned here, that is a timeframe that squares perfectly with the evaluation Mercator performed for TMG and CO-OP.

And then there are smart contracts:

“I’m disappointed that we haven’t seen some very simple use cases around smart contracts that touch consumers. A lot of the work done has been a bit too ambitious—centered on solving big problems with big companies, with smart contracts that are very complicated and part of bigger applications.

I’d love to see someone launch a very simple smart contract. How about a wager application? If you and I want to bet on the World Series or tomorrow’s weather, we could bet via smart contract. The smart contract would check the scores or check the weather, and automatically pay you a Bitcoin or pay me one.

At the end of the day, smart contracts are just logic—business logic encoded in software—allowing money to be exchanged if certain conditions are met or not met.”

We can certainly agree on simple! Regardless what solution a smart contract is initially focused on, B2B or consumer oriented, both the platform and the U.S. regulatory structure is unprepared for complex contracts associated with settlement. Indeed the safest and probably easiest contract to deploy using smart contracts would the deployment and control of corporate intellectual property; perhaps music, video or software. The funding could be implemented using traditional payment mechanisms, but the distribution and content management could be done in the blockchain. Since the terms and conditions are set by the corporation, this would be least likely to run afoul of existing regulations.

This article is a good read and worth your time to review!

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group

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