To consider the impact and opportunity of Blockchain for the banking sector, we can first consider the general trend direction, which can be summarized as a move to an open ecosystem.
The central technology feature of Open Banking is the API, making previously closed off systems open to partner developers to build upon those systems with new innovations.
Innopay offer this detailed article about the role APIs will play in opening up the banking industry, providing this informative maturity model for banks to understand what level of maturity they are at with their current capabilities:
Blockchain Banking as a Platform
The implementation of an ecosystem approach is defined as a Platform Business Model aka a Digital Marketplace, where this interconnectivity enables dynamic new business models, such as Paypal partnering with Amex for peer to peer payments.
A number of key innovations will form the framework for such a marketplace. In 2016 TechCrunch wrote your wallet will become the next platform, a concept that will be accelerated through the advent of ‘Blockchain Operating Systems‘.
For example as Adrian Bridgwater writes on Forbes, Nynja combines Cloud-based processing with a mobile virtual Operating System that has a communications and secure payments layer, and a multi-currency wallet.
The super sweet spot is where all these trends converge. For example in 2016 Mastercard started building a set of blockchain APIs, and recently filed a patent for a system that would enable multi-currency blockchains.
As ever integration of technologies is what unlocks their network effect, so these key steps will mark major advances in the market capabilities, such as interoperability between Blockchains.
Another dimension is better process integration, especially when combined with innovations from the Digital Identity field. For example the OIX, an open standards body for Identity, explores this scenario through the role it can play in facilitating cross-border account opening, a scenario that HSBC and Barclays are testing.
Blockchain as a Service
As we start to define the specifics of Blockchain for banking innovations, first we can consider the market of general enterprise Blockchain adoption, such as the Enterprise Ethereum Alliance.
This highlights another dimension of how open source development is itself conducted as an open innovation ecosystem, with thousands of developers across the world extending the code base through voluntary contributions, such as Cello among others, a module that enables on demand ‘as a service’ deployments.
This underlying infrastructure of ‘BaaS’ – Blockchain as a Service is a market that the Bank of America forecasts will reach $7 billion. Ventures like Thought Machine are offering Vault OS to leveraging the blockchain to deliver an entire banking system via the Cloud, an ‘operating system for banks’. Bankex also provides a complete Banking as a Service platform.
Nagashwini Hebbar shares this short presentation that documents a concise summary including a maturity model:
Digital Banking innovations
The banking industry can leverage these capabilities to launch innovative new business models, disrupting operating models and key use cases like currencies.
Sierra Leone and the UN launched a Credit Bureau of the Future, and Goldman Sachs has launched Circle, a ‘stablecoin‘ – a cryptocurrency designed to minimize the price volatility by pegging it to a stable asset, such as gold or fiat currencies.
In the case of Circle this is the US Dollar, and what is especially noteworthy is their plans to harness the open source ecosystem effort: Circle will run on a network called CENTRE, an open sourced consortium, which means there is no single issuer.
“What makes us different is that it is launched on an open sourced framework, meaning other companies can issue it [assuming they are a member of the CENTRE consortium],” said Jeremy Allaire, founder and CEO of Circle.
“Because this is an open standard model there has been industry support out of the gates,” adding that more than 20 companies, including wallets, exchanges and software applications will announce or launch support for USDC.
Ripple is another powerful example of the potential to disrupt existing traditional banking markets. As Wikipedia defines Ripple is a real-time gross settlement system, currency exchange and remittance network.
In this Bloomberg interview CEO Brad Garlinghouse makes the very interesting comparison of Bitcoin to Napster, that they are the first disruptor who defines the genre but ultimately are replaced by the second generation that learns from their mistakes and fine tunes the model to find permanent success, like iTunes and Spotify.
He positions Ripple as such a second generation player, setting out to take on the SWIFT network., confident of the potential to do so by highlighting the still present weakness of the traditional banking system, that it takes days to settle international transfers, when they can do it in seconds.
XRP is the “the native currency of the Ripple network”, and in this interview at the TechCrunch Disrupt event, the panel discuss the role of XRP within the overall cryptocurrency industry.
The interviewer tees off the session by highlighting that XRP has been railed against by many in the industry due its centralized nature, seen as being against the core philosophy of the sector, to which Brad responds by again emphasizing the point of second generation innovations.
He articulates this evolution in terms of integrating with the traditional banking systems, and Michael Arrington also on the panel, confirms the real world value of this by describing how he uses it as an investor to more efficiently and quickly transfer money around the world to their deals.