In recent years, the financial services industry has been at the heart of investigation into the potential of distributed ledger technology (DLT), more commonly referred to as blockchain. This distinction is explored in the report. Yet a number of challenges must be overcome before established financial institutions and even FinTech start-ups can invest fully in this potentially revolutionary technology.
The global blockchain benchmarking study, a joint project by EY, the Cambridge Centre for Alternative Finance and Visa, is the first of its kind. It presents a comprehensive view of how the financial services industry, as well as the public and private sectors in general, are currently using DLT, how they envision using it in the future, and the challenges to mainstream adoption.
DLT has the potential to enable banks and other financial services firms to reduce costs, increase speed and efficiency, redefine business models, increase transparency and improve trust across transaction value chains. However, there is still work to be done to build confidence in areas such as legal and regulatory frameworks, industry standards, governance, security, and ultimately identification of the richest opportunities to deliver business value.
At the same time, there is a great deal of misunderstanding surrounding blockchain and DLT. More education is needed for firms throughout the financial services sector, as well as for their customers.
With data gathered from over 200 enterprise DLT start-ups, established corporations including banks and financial market infrastructure firms, and public sector institutions including central banks, the study confirms that banks are the largest users of DLT platforms and/or services, followed by FinTech firms, insurance companies, custodians and exchanges. Some 70 percent of study participants indicate that they believe DLT systems are suitable for tracking financial assets ranging from currencies, securities and derivatives to syndicated loans and loyalty points, among others.
It is not surprising that the financial services sector has been a leading developer of blockchain based solutions, since the first well-known applications of blockchain technology were focused on cryptocurrencies. However, cryptocurrencies have also been a source of a number of misperceptions surrounding the technology – misperceptions that this report clears up through in-depth analysis, as well as providing a view on the current state of digital currencies.
Central banks, the institutions that provide the infrastructure for their country’s financial services firms, are also engaged in research related into digital currencies; more than 80 percent of the 57 central banks studied say they are looking at the matter. But the system for this kind of cashless currency is still in its infancy.
Meanwhile, central banks also envision multiple uses for DLT that could be easier to implement. DLT has the potential to reduce transaction, settlement and reconciliation costs. Through DLT, banks might upgrade financial market infrastructure with collaborative, inter-operable systems and platforms. The global audit log provided by the use of a distributed ledger enables greater transparency and traceability, which a number of central banks stated could be helpful in assisting them with their supervisory roles. Several central banks also mentioned that DLT could bring improvements to current security models.
DLT platforms and systems have advanced in the last several years, and the number of enterprise DLT start-ups around the world has increased from approximately 37 companies in 2014 to at least 115 in 2017. There are still hundreds of small, fragmented networks that are being used mostly for testing purposes, but this study comes just when the world’s DLT networks are on the cusp of a new stage of growth. In the next few years we expect to see the emergence of large-scale networks, many of which will be industry-specific.
The global blockchain benchmarking study details the ways that the growth of such networks, combined with efforts now underway to enhance privacy and confidentiality, protect data, and set up standardized systems. This could open up new potential uses for blockchain in areas such as capital markets, payments, insurance, and trade finance.
By evaluating both the possibilities and the limitations of blockchain technology, the study will help financial services firms determine the potential the technology holds for their business to create new products and services for the 21st century.
Key highlights of the report
- Significant growth of the enterprise DLT ecosystem: at least 115 DLT start-ups employing more than 2,000 people are active in the ecosystem, in addition to large established corporations that increasingly set up entire business units and research labs exclusively dedicated to DLT
- The protocol layer is slowly maturing: several dozens of start-ups and established corporations building and improving the core infrastructure (protocol frameworks, core building blocks); but ‘immature technology’ still considered one of the key challenges to broader DLT adoption
- Only limited network and application deployment to date: the vast majority of users are experimenting with small-scale, isolated networks; live applications mostly built as ‘permissioned layers’ on public blockchains
- Majority of investigated use cases still related to financial services: majority of enterprise DLT companies are targeting financial and insurance-related use cases and actors, but increasing attention is given to non-monetary applications (identity, supply chain, intellectual property)
- Trend towards opening core infrastructure platforms: an increasing number of companies are open-sourcing their platforms, shifting monetisation of the platforms to higher stack levels (consulting, application development, support)
- Key challenges to broader DLT adoption remain: unclear regulatory environment and resulting legal risks are most often mentioned; study participants consider privacy and confidentiality to be more of an issue than scalability and performance concerns
- Interoperability still in its infancy: fragmented landscape of incompatible protocols; but increasing focus put on developing common standards via the joint development of enterprise DLT frameworks by a variety of consortia
- Significant public sector DLT activity observed: local, regional, national and multilateral institutions are all engaged in DLT-related activities; 77% of countries represented in the study have multiple institutions showing interest in DLT
- Public sector institutions are experimenting with a variety of DLT protocols: 63% of central banks and 69% of other public-sector institutions have already been involved in proof of concepts and/or running trials; and are generally further ahead than central banks
- Ethereum has been widely tested at central banks: 57% of central banks are experimenting with either the public Ethereum network or a permissioned version
- Existing DLT deployment plans: 15% of Office of Public Sector Information plan to deploy DLT-based applications this year, and another 23% plan to do so within the next two years; central banks are more conservative