Stellar Leaves The Biggest Blockchain Challenges To The Banks

There are a few schools of thought when it comes to the projected role and impact of blockchain technology on the global financial services space.

On one side, some believe blockchain will disrupt the traditional banking system to the point of fracture, enabling the movement of money without the involvement of a financial institution.

Others, meanwhile, believe the blockchain can help banks enter into a new era of financial services, and this school of thought has led to the creation of internal blockchain exploration programs within the banks themselves.

But there has also been a significant increase in collaborative relationships between FIs and blockchain startups, presumably as traditional financial services attempt to get a leg-up on any possible threat that this disruption could place on their market share.

Stellar Cofounder and CTO Jed McCaleb has been front and center in this whirlpool of anxiety, excitement and speculation over the future of blockchain and what that means for the future of banks. The Stellar payment network offers an open-source protocol for payments, providing a rail for other institutions to build their own solutions.

“Almost every bank on the planet now has their blockchain exploration division,” McCaleb recently told PYMNTS about the rise of banks’ partnerships with blockchain innovators like Stellar. “They definitely see the writing on the wall that the world is moving in this direction.”

But the roadmap for blockchain’s role within the financial institution is hardly clear.

In addition to considerations like future regulatory constrictions on the tool, banks, despite their efforts, are sometimes in the dark about how this whole blockchain thing will work.

Marketforce, Pegasystems and Cognizant recently released a report that found more than one-third of financial services companies have never even heard of blockchain. An additional 23 percent said they had heard of the term but were unsure of how it worked.

McCaleb explained that he, too, has seen the struggle among FIs to truly grasp the concept.

“I think what’s tough for them is figuring out which of these technologies is real and which works and is solid,” he said. “There are so many options out there; it’s hard to know and understand what they need and what actually works.”

While McCaleb said that this lack of understanding has been the “biggest hurdle” for this space, he also noted that it may be a problem for the banks themselves to work out.

“On their side, trying to understand this space, they’ve been struggling with that the most,” he said of FIs. “But I think all of them understand the power of these kinds of blockchain solutions.”

Compliance is another issue that may likely land on the laps of financial institutions when it comes to adopting blockchain-based solutions. While regulatory constraints on the space have yet to arise, if blockchain is to disrupt the banking sector as many think it will, financial institutions will carry the burden of maintaining compliance.

That’s already a struggle for banks today, research says.

The Financial Executives Research Foundation and Robert Half released a joint report last month that found the cost of compliance among financial services players is on the rise, and the majority of these firms expect those costs to rise towards the end of the decade.

Protecting the funds and the data behind transactions completed via distributed ledger technology will surely be front and center with regulators at some point. Earlier this year, the chair of the International Organization of Securities Commissions, Greg Medcraft, told reporters that authorities will be eyeing blockchain and its capabilities in fraud detection.

Compliance may be key for any bank, but Stellar‘s McCaleb said that he hasn’t seen much worry among FIs regarding the security of payments made via blockchain.

“Everyone has concerns about technology in general,” he noted. “They want to know how it works and be assured that it’s safe and secure.”

Like getting educated on the technology and maintaining regulatory compliance, however, McCaleb said it’s largely up to the banks to keep transactions secure.

“It’s up to them on how to handle that kind of stuff,” he explained of banks ensuring that payments are legitimate and secure before a transaction is carried out.

Clearly, there are a lot of factors that financial institutions need to keep track of when working with blockchain, whether it be through developing their own solutions and experiments internally or working with a blockchain partner. The burden may be high, but according to McCaleb, financial institutions may not be able to afford to ignore the integration of distributed ledger tech.

But the biggest threat to banks in this evolution isn’t blockchain, said McCaleb. It could be other banks.

“Banking in general is not going to go away; people still want to put their money somewhere that’s safe, people still need loans, banks still provide services — none of that is taken away by things like blockchain,” he stated. “I think one of the things that might change is there might be consolidation in the industry.”

“Banks that don’t adapt and modernize, maybe, will be left behind,” he continued. “They might be swallowed up by other banks.”