The World Economic Forum (WEF) recently published a report titled “the Future of Financial Services” that looks at how disruptive innovations are reshaping the structuring, provisioning, and consumption of financial services.
In the report. cryptocurrencies and blockchain technologies featured as innovations that will present challenges for financial services stakeholders.
It is thus not surprising that a number of luminaries from the blockchain tech sector were listed as “innovators and subject matter experts” who contributed their perspectives to the project’s research. They include Circle CEO – Jeremy Allaire, Coinbased Head of Risk – Olaf Carlson, Bitpay CEO – Stephen Pair, ANX CEO – Ken Lo, and Second Market Founder – Barry Silbert.
The WEF project team ultimately found that, rather than provide a store of value, the greatest potential for cryptocurrencies and blockchain technologies was to effect disintermediation and to radically streamline value transfer.
Specifically, the researchers determined that blockchain technologies could have the following implications for incumbent financial institutions.
- As more efficient alternative rails are adopted, the role of traditional intermediaries as a trusted party may diminish
- Financial institutions may face a new set of risks (e.g., reputation, security) and regulatory issues as they participate in new rails
- Applications of these technologies can expand beyond money transfer to modernize other financial infrastructures
The project team highlighted six important themes that cut across the research that they conducted.
The relevant themes that blockchain tech obviously will play a part in are streamlining infrastructure and reducing or eliminating intermediation.
At the conclusion of the research phase, the project’s steering committee gave the project team a mandate to investigate more into high-potential disruption areas. The steering group is made up of leaders from the biggest stakeholders of the global financial services industy, including CEO’s and other C-suite executives from UBS, HSBC, BMO, MasterCard, XL Group, Standard & Poor’s, Thomson Reuters, Barclays, Visa, Alix Partners, FIS, Markit Group, Aon, CLS Group, Allianz SE, NASDAQ and Deutsche Bank.
For the steering group, the project team identified three major challenge areas of financial services innovation that will require multi-stakeholder collaboration to be addressed effectively. They are launching a project stream for each of these areas with the goal of effecting real results.
It is evident that they see the blockchain tech as a serious potential disruptor for intermediaries in payment systems. With such key financial sector stakeholders in the WEF steering group, it will be intriguing to see the outcomes of the “Applications of Decentralized Systems” project.
The WEF project team plans to publish outcomes from the above projects in early 2016.
There is more analysis in the detailed section of the WEF financial systems report that may suggest the track they will take on the decentralized systems project. They attempt to analyze how decentralized or non-traditional payment schemes could change the role of traditional financial institutions.
For decentralized payment systems, the project team identified key characteristics, advantages, and shortcomings as follows:
- Value transfer is recorded in a distributed ledger
- Transactions are managed by a distributed network of processors
- Sender initiates the transfer
- Transfer history is transparent, traceable and practically unalterable
- Lower direct costs of transaction due to distribution across the network
- Lower exposure to conventional fraud
- Settlement is near real-time; no counterparty risk
- High volatility in the value of the native “currency”
- Regulatory scrutiny creates challenges to connecting with fiat currency ecosystems
- Anonymity of accounts / irreversibility of transfers creates security issues
- Higher exposure to unconventional fraud (e.g., large-scale hacking)
The project team compared decentralized systems to traditional systems and other non-traditional systems.
They conclude that emerging decentralized payment systems and other non-payment systems will create competitive pressure for all value transfer systems to become faster, cheaper and borderless.
The key characteristics of future payment systems will therefore include:
- Global – Geographical distance as a factor in transferring value will continue to narrow and even under-banked regions will be connected
- Fast – The time it takes to transfer value between two accounts will be significantly reduced
- Transparent – The flow of funds will become increasingly visible and traceable
- Secure – The opportunities for fraudulent activities will be largely reduced
- Reduced Costs – The cost to execute transfers will be minimised with the streamlined and automated rails
In achieving these future state characteristics, the project team opined how the evolution of decentralised or nontraditional payment schemes might change the role of the major financial institutions.
They suggest three scenarios how the incumbent financial players might react:
- Compete with an alternative network of financial providers
- Facilitate alternative payment schemes as complements
- Provide leaner, faster payment options within the existing network
For competitive alternative networks, the forum looked at bitcoin merchant processor Bitpay and bitcoin wallet provider Coinbase as case studies. The report used the partnership between online full service bank Fidor Bank and the Ripple protocol as an example of complementary use case.
It is noteworthy that the WEF team did not investigate how decentralized systems, blockchains, or distributed ledgers could impact the other areas investigated by the report beyond payment systems, namely insurance, deposit & lending, capital raising, investment management, and market provisioning.