We’ve been attending several high-profile industry conferences recently and have noted some clear trends emerge, namely in the discussion around data, products and services. The Financial Services industry is looking at how it can harvest the value of all the data it holds and equally how new insights of these data, and the data itself can, or should be used to create the new products and services of the coming decade.
With data comes great responsibility and the need for trust.
New technologies often claim that their objectives are to reduce the need for trusted intermediators, arbitration costs, and fraud losses, as well as the reduction of malicious and accidental exceptions.
Not only do we believe that trust remains critical to ensure users’ funds and personal information are secure but equally that the technology proves that they can be trusted in replacing the intermediaries.
Here are three examples of where innovation meets trust;
Tokenisation
Tokenisation is a huge opportunity which relies on trust. It is important as an aid to the wider adoption of alternative assets by broadening the accessibility and appeal of alternative asset classes. This means they can be brought to a broader group of investors and even to the retail sector. What is currently holding it back from adoption is not so much the technology, but the regulation around investor suitability and ability to trade as well as liquidity requirements.
Alternative assets often have long term capital and investment horizons (>5 years) and therefore need an aligned commitment of the investors. Tokenisation can (partly) compensate for the capital commitment ie a £100 million building can be tokenised into smaller parts to invest in. Equally the tokens will be easier to trade if and only if regular valuation is trusted and reliable.
Smart contracts
A smart contract is, despite its name, not a legal agreement but instead a series of transactions which are automatically self-executed by a computer programme, according to the terms of a contract or an agreement.
The smart contract runs autonomously, requires no need for manipulation by humans, as is the case with paper contracts, and there are no intermediaries. According to this definition, trust is not a requirement because the blockchain automatically executes the contract once terms are met.
We beg to differ. It most certainly can be argued that if the smart contract does not deliver the expected outcome, the trust is quickly lost.
As comparison is often made between a smart contract and a vending machine in which you put a certain amount of money and choose a certain product with a push on a button. If the smart contract would not execute in line with the price indicated and choice of product, the vending machine (smart contract) would not be trusted.
Another example often used for comparison of a smart contract is that of currency exchange. High street banks were known for charging significant exchange fees and tried to compete with neo banks by incorporating these fees within the exchange rate offered. The “smart” contract was quickly seen for what it was and trust in the process was lost.
Blockchain, Distributed Ledger Technology (DLT)
Blockchain is another technology which is boosting the shift towards digitalisation in finance. Often associated with crypto currencies, the use goes well beyond that.
Blockchain is not a single-player game it is a team sport. Therefore, organisations that insist on forging ahead to create their own blockchain solutions are likely to be disappointed. There is little value to be had from a blockchain that only has one participant. The value of a blockchain lies in its participants and the extent to which they commit to the platform.
The original purpose of blockchain technology was to enable the transfer of value within trust-less networks, where the different parties did not have to trust each other to conduct transactions involving the exchange of value1.
However today, blockchain solutions require a network of parties to agree to use the network, agree on the underlying business processes that will govern the network, and then to integrate their systems with the network. Without trust between the parties, in the processes and governance of it the willingness to integrate the party’s system within the blockchain network are unlikely to happen. Equally, the processes need to be fit for blockchain purpose and need to fulfil the requirements of reliable, repeatable and at speed.
Innovation and trust as equal partners
In today’s world, the distribution chain consists still of processes that are paper based, convoluted and do not actively involve all parties. Innovation and digitalisation are more than often initiated from an efficiency point of view and less so from the perspective of effectiveness of the overall chain.
Although all of the above examples of innovative technologies may claim trust is not a requirement because the technology automatically executes the transaction once terms are met, it is clear trust in the technology itself is paramount.
Crypto currencies over the past decade have suffered significantly from the lack of trust in its technology or the companies executing it.
We therefore believe that innovation only thrives when it is coupled with a foundation of trust, ensuring the new ideas are accepted, adopted, and sustained over time.
