Your correspondent recently attended ISLEXPO, an event focused on innovation and business growth hosted on the Isle of Man.

As blockchain matures, large financial institutions will develop networks that use the technology to securely store and share clients' data with one another, a senior figure from the fintech space has predicted. 

Although blockchain technology is still in its infancy, there are components of it that are “excellent” and present many opportunities for financial services firms, according to Brian Donegan, head of fintech and digital development at the Isle of Man government. 

One opportunity in particular, he said, is blockchain's potential to create “notarised identities”. 

He described a notarised identity as a digital passport that holds a client's data, which could be interpreted by all institutions as a “single source of truth” to comply with anti-money laundering and know-your-customer regulations. This would ease the administrative burden currently placed on clients by eliminating duplicative onboarding processes, Donegan said. 

“We have to accept that blockchain cannot be uninvented – it's here to stay and it is being refined quickly,” said Donegan on the sidelines of ISLEXPO. “We're seeing clarification in the marketplace, particularly from larger financial institutions, which are saying that they like the idea of private permission blockchains [that cannot be publicly accessed].”

Fintechs, banks and regulators from across the world are forming consortiums and working groups, such as R3 and the Enterprise Ethereum Alliance, as they push to create proof-of-concepts using the nascent technology.

“Our vision for the future is that if we see financial institutions adopting this collaborative approach, then growth [of blockchain use] will be exponential and the major players will develop their own private blockchains and then connect them,” Donegan said. “What we will have is a network of private permission blockchains that will look like a 21st century-version of the [data systems] that are in place today.”

A blockchain is a virtual distributed ledger of transactions shared peer-to-peer that can record ownership across a public network of computers rendered tamper-proof by advanced cryptography. 

The technology is causing a stir within the financial services sector as its supporters believe it could reduce hidden expenses in the financial system by ousting inefficiencies across areas such as payments, syndicated loans and equity clearing.

Although blockchain rose to fame as the platform underpinning the controversial digital currency bitcoin, its uses are incredibly wide-reaching, and financial services firms realise this, Donegan said.

“In 2009 [when bitcoin was created], it really launched the first iteration of blockchain technology which happened to underpin a digital currency, but it could have been anything,” said Donegan. “People were blind-sighted by bitcoin and didn't see the true value of the underlying technology, but I think that is starting to change.”

Changing use
Even now, there are numerous organisations using blockchain technology to innovate the ways in which certain traditional asset classes are held.

For example, the UK's Royal Mint has announced it will launch a new online gold trading platform that uses blockchain to record ownership of the precious metal stored at its on-site bullion vault.

Additionally, Dutch lender ABN AMRO collaborated with technology behemoth IBM on a project exploring how blockchain could help streamline real estate transactions. IBM also helped develop a blockchain-based solution that facilitates the administration of a private equity fund managed by Unigestion.

Donegan explained that over the past two years, the Isle of Man has seen “a lot of the hype around bitcoin die down”, as firms increasingly shift their interests towards blockchain. 

By the end of this year, financial institutions will have spent more than $1 billion on blockchain-related projects, according to boutique investment bank Magister Advisors, and more than three-quarters of financial institutions plan to implement blockchain-based solutions by 2020, a recent report from PricewaterhouseCoopers shows.

Because of blockchain's ability to indelibly store and transfer data, Donegan suggested that the technology could help firms comply with the raft of new regulations, such as GDPR and MiFID II, looming on the horizon. (To see a related item on potential tensions between these two regulatory processes, see here.)

How this will work in practice, however, is unknown at this point, Donegan admitted. 

“There is definitely a role for blockchain to play in the GDPR story, we just aren't sure how this is going to look yet,” he said. 

And the road to business as usual for blockchain remains in flux as industry participants grapple with regulatory and technological challenges, Donegan added. 

“If you compare blockchain now to the internet in the mid 1990s, the simple reality is we are no where near at the level of languages and HTML that existed for the internet at that time,” Donegan said. “With blockchain, we don't have the underlying code that we had for the internet back then – but it will come. The next two to five years is going to be crucial for how this will all be defined.”