Chris Skinner built a successful career around work with technology companies that serve the financial services community. Fourteen years ago, he went rogue and began to write about the industry in a daily blog – The Finanser – and about its future in books – 14 in fact, over the past decade. Described by a MoneySummit reviewer as “a how-to guide for the age of digital banking,” his recent study, Digital Bank, analyses tech innovation and competitive strategy that can help institutions leverage the tremendous change the traditional financial world faces as banks meet the Internet.
Skinner is also founder, in 2004, of the Financial Services Club, a network of 3,500 financial professionals who meet in eight European countries to consider research, analysis, commentary and debate on the future of financial services. He serves as CE of research company Balatro Ltd, and is co-founder of Shaping Tomorrow, a website promoting services designed to help clients future proof their organizations with the help of AI. Skinner has been named by the WSJ as one of the top 40 global FinTech influencers, and a “FinTech Titan” by Next Bank.
In his most recent work, Skinner takes the digitization of banking operations one stage further to consider the intersection between the real time, physical world of the Internet of Things and technology that has emerged out of blockchain, the distributed database that was first introduced by Satoshi Nakamoto as Bitcoin in 2009. According to Skinner, “blockchain is now being used by new companies in the FinTech community as well as banks to generate a whole new Internet base of open source rather than using old clunking proprietary [systems] of the last century.” A practical reality today, Skinner argues that banks and startups are coming to view blockchain as the source of innovation in transactional processing. “On a global basis, most of the important banks are engaged and aware of innovation in startup companies, and incorporating new technologies, particularly shared ledgers, such as blockchains, into their operations to reinvent how they process work. And the ones that are actually not doing so well are the ones that have no one leading this change. That’s physically within mid-sized community and regional banks.” A next step is to extend the efficiency and real time capabilities of shared ledger technologies to transactional processing in IoT.
Chris Skinner’s new book, ValueWeb: How FinTech Firms are using mobile and blockchain technologies to create the Internet of Value, which explores this connection, is scheduled for review on InsightaaS. As preview to his thoughts on the ‘Internet of Value’, InsightaaS presents an edited version of Skinner’s discussion with Mary Allen on blockchain currency today and the next wave of banking revolution.
Mary Allen: I’d like to start by asking why blockchain is so tamper proof. The security proposition is, I think, the essence of why the technology is expected to revolutionize industries like banking. But why is blockchain viewed as a system that can’t be cracked when pretty much every other one is vulnerable to attack?
Chris Skinner: It’s a complicated subject that I’ll try to simplify. Initially, we had the Satoshi Nakamoto bitcoin paper in 2009, which was essentially an uncensored, open system for transactions. The reason that it’s tamper proof is that it’s got a system which verifies every transaction. That system is the peer-to-peer network of all the PCs connected to the Internet, which verifies transactions using blocks – the result is a chain of blocks that is known as the ‘blockchain’. What Satoshi Nakamoto actually proposed is a system that could verify transactions at a time and date on the Internet using a shared structure of a ledger. Out of that concept have emerged many different varieties and variations on the original idea. Some people are using open, uncensored networking to create shared databases.
The banks typically use closed, more controlled databases where you have to have permission to authorize transactions, and equally, the fundamental element, at least in the context I put it in, has been a shared database on the Internet, based on how much the constituency requirement is. And the core and the core importance is a shared database. It is shared by a group of players – let’s say all the banks of the world – and can therefore be trusted because it’s the banks of the world that control the shared database. This is not Bitcoin, because Bitcoin has no control and no management apart from servers on the Internet, so it’s very different. The reason why I point to that difference is because a lot of people say you can’t use blockchain for financial transactions – either because it is Bitcoin related or because it is expensive or because it is slow. The Bitcoin blockchain is actually expensive and slow. But the ones that the banks are creating are actually cheap and fast.
Allen: I’m glad you brought up that distinction because my second question has to do with distributed databases and the many individuals who are confirming transactions in crypto currency systems on the Internet. This highly dispersed system appears to be the antithesis of the way banks have been operating up until now with rigid control and managed transactional databases. What companies are involved in bringing those two worlds together, and how does the original blockchain technology have to transform in order to work in a banking environment?
Skinner: What you actually have is quite a number of different structures. And one of the key points is that some of the developers are using open, Internet-based, Bitcoin related systems and some are not. Some are more controlled and structured. But the leading companies at the moment are doing the most interesting things. A company like Digital Asset Holdings, which is developing a system for the clearing of settlements, is run by Blythe Masters who is the former senior managing director at J.P. Morgan Chase responsible for credit depot swaps and knows her way around the markets. She’s a bit of a poster child in this area. As her CBDO, she has attracted the former of head of SWIFT Americas, Chris Church, who is also quite an important financial person. So that is one example.
Another example is a company in the UK called SETL.io, which claims to be able to process over a billion transactions a second. This hasn’t been proven yet, but the claim is a substantial one because right now, if you are using Bitcoin’s blockchain, it processes about seven transactions per second. So these guys have adapted blockchain to payments and are able to process a billion a second, which would be tremendous if it is true. It was created by Peter Randall, who is the former the leader of Chi-X, the high speed, automated batch trading system used by most traders in the USA, which processes about 20 percent of the active markets now. And Randall, who created that in Europe, is now developing the new SETL system and the chairman of the company is Sir David Walker, the former executive director of the Bank of England, and former chairman of Barclays Bank, Morgan Stanley International, and deputy chairman of Lloyds TSB. So in this organization, you have someone that’s got high levels of credibility and who understands the financial markets.
The only issue that arises here is that there are twelve of these companies which are now focused on the clearing settlements area, including Clearmatics and Overstock. There are so many organizations focusing here because of the obvious potential for savings: if we can reduce the speed of processing, this would allow us to save huge amounts of money, while reducing settlement risk in equal measure. Currently, settlements take three days, so there is a risk that they won’t be finalized for three days – reducing this would generate huge benefit.
Another important area for usage in banks is digital identity. One of the big problems for banks is knowing who their customers are, but this can be tracked using the capability of the blockchain technologies. One more area is trade finance, and supply chain in corporate finance, where companies like Wave and Trade Off are creating shared ledgers to track the movement of assets globally, using a shared ledger structure that’s cheap and fast and easy. And finally the other big area is in claims generally in playing between currencies. There is currently still quite a high cost, in terms of the FX fees involved. If we trade currencies using a shared ledge structure, costs will be reduced. So payments, trade finance, digital identity, and trading settlement are the four big financial areas where hundreds of companies are now emerging.
Allen: You have argued that while blockchain is going to revolutionize the banking industry, it will also destroy the small and regional players. But if the technology can improve speed, save cost, improve efficiencies and increase security, why would it not also benefit the small and the regional players?
Skinner: Ultimately the system is going to be used for almost everything. Dee Hock, the founder of Visa, is talking about blockchain not just as the future of money and finance but as the future of governance because it can be used for things like tax ledgers or passport issuance. It can be used for benefits distribution – there are a whole slew of things outside banking which people might use blockchain for.
It really comes down to the shared structure which is the critical piece, though you have to have players sharing the structure. The small players, which tend to be regional banks, will have a problem in that, unlike most other technologies, blockchain does two things. The first is the creation of new standards, which in turn demand that banks reconsider their core systems, including backend structures, with an eye to replacing the systems currently in use with a new one based on the Internet and blockchain technology. Now the big banks can probably afford that transition and change. For the small banks, though, it’s a big ask: not only do they have systems that are decades old, they are now being asked not only to change those systems but to change to a system that is pretty complicated right now. Many simply don’t have the staff or the talent or the investment capital or the leadership to do this. And what they end up doing – typically because they don’t understand the technology in the same way that the big banks do – is they allow the big banks to define the standards for the technology. They have no input and hence become irrelevant; without any influence on the leadership, they follow the example of the leaders as their only recourse. There are a couple of banks, like the CBW Bank, which is one of the US community banks, that I think is quite incredible. But CBW is not really a bank, it’s more a technology company. This is where we are seeing quite a lot of discussion emerge: the banks that are become leaders in this space are the ones that call themselves technology companies with a banking licence, rather than banks with a technology department.
Allen: I’m not sure how familiar you are with the Canadian banking system, but I would imagine that you are aware of agreements between banks to co-operate on the introduction of processes that make life easier for consumers in terms of system access. What impact do you see on systems like Interac? If one or two of the leaders in the Canadian banking community change their whole backend infrastructure and they change the software systems that they operate on, what will happen to that cooperation between banks that is absolutely critical as far as good service delivery is concerned?
Skinner: That’s a good question. At the moment, quite a lot of associations such as Visa, Mastercard, SWIFT and quite a lot of central bank system structures, such as the Federal Reserve and the Bank of England are looking at these technologies and at what they can do with them. Existing players like Interac are, I think, beginning to investigate and research blockchain technologies and operations to see what they can do. I believe that under all that in Canada they have been doing some active work as well. Another challenge is that there are quite a few startup companies who believe they can replace the likes of SWIFT, Visa or Mastercard. I don’t believe they can because there is too much infrastructure and too many transactions already on those networks to simply replace them. But it’s interesting that there has been this friction for five to ten years around emerging companies that want to replace the old infrastructures, and the old infrastructures are trying to upgrade to new systems.
Allen: We will have to see how that roles out. I see it as a source of tension. The other potential block on more broad distribution of the technology is regulation. Are the regulators able to keep up or will technology innovators have to wait until regulators have audit process/systems in place that allow them to operate?
Skinner: The regulators regulate what they can see and at the moment they can’t see what’s coming out of this technology. It’s going to be a case of the regulators eventually recognizing that there is a new technology, it works this way and these regulations go around the technology. This has to come after a lot of development of the technology itself; in many ways. the regulators will be in catch up mode, but then they are always in catch-up.
Allen: What about standards? You noted earlier that the leading banks are each developing their own standard, but it’s not just the banks. How many standards are we talking about in blockchain?
Skinner: There are two major consortiums that are developing standards. The main one is R3CEV, which has forty-two of the biggest banks behind it, and that domain development of operations is coming through. The other big one is Digital Asset Holdings run by Blythe Masters, which has thirteen companies, not just banks but also Accenture, IBM and others are involved in developing standards. The NASDAQ has taken a big lead in this space by creating their own private settlement system for the link exchange so that when you trade equities on NASDAQ it’s now settled within ten minutes using this technology. There are a few others, but those are probably the three leaders in standards today.
There’s also a firm called Clearmatics, which is backed by UBS, but the problem I have with that one is that if you have a standard that is only backed by one bank, it’s not a shared standard and the criticality of this technology is that it has to be a shared standard, it can’t just be used within one or two banks. Now if you have forty-two of the biggest banks sharing a standard, well that pretty much sets the standard because that’s enough critical mass to force it to market.
Allen: It’s always interesting to talk about the leading edge and to talk about what’s new, but there is an adoption curve that is often quite different from what the media and startups are talking about. You have described changes that would have to be made to banking – or other systems. Specifically, what kinds of changes would a large organization need to make to infrastructure to leverage blockchain, and what’s a realistic time frame for us to expect mass market adoption as opposed to the bleeding edge of innovation?
Skinner: Yes, it’s early days today. If you look at the areas where the shared ledgers database structures are going to have impact, nearly all of them are related to transforming the legal marketplace for shared database or digital systems. So this would include legal industry traffic, ranging from marriage contracts to house deeds contracts to corporate actions and contracts – essentially, to whatever’s going to be digitalized over the next decade. In terms of mass market adoption, we’re probably looking at ten years out because part of it requires all the legal and financial government structures to exactly identify the model of the standards that they want to work to and where they apply. Maybe longer. You have to have those agreements in place – and these are shared between the legal community, the financial community and government community – so that may take some time. Standards won’t get much market adoption, so it’s probably a decade before we see a peak in the mainstream market place. However, it’s an important area because during that decade so many agreements will be made about structures that if an organization is not in that space, it will miss a huge opportunity.
Allen: It sounds to me like implementation process for different organizations has much to do with understanding the technology and applying it to different business use cases – and is more about business process change than a transformation of the underlying, supporting, IT infrastructure. Is that the case?
Skinner: I think it’s both. The immanent agreement on a new business process that has to be implemented may involve replacing your main processing system. In that case, you’ve got a big business and big technology change, so it’s both.
Allen: Is there something about blockchain that is important to the discussion that we haven’t yet touched on?
Skinner: The core message that I’ve included in my new book is that everyone is really excited about the Internet of Things – so the idea that your car, your house, your handbag become smart – that we can have embedded chips and communication. That is all well and good, but if you have an Internet of Things that can’t transact immediately in real time for low cost then you won’t have IoT because the Internet of Things orders things on your behalf. That’s the fundamental piece that is missing today. And that is the bit that is being built based around these technologies that we have just discussed. If you are going to have an Internet of Things, you’ve got to have an Internet of Value, which supports it with processing that is real-time and low cost.