5 Predictions for Blockchain Technology in 2016

Introduction

As the fintech world counts down the few remaining days of 2015, the buzz around blockchain technology still seems to grow daily. With that in mind, here are my predictions for what 2016 has in store for blockchain:

Blockchain Predictions

Blockchain integration challenges will see increasing focus from startups, established technology companies, and banks

Blockchain would probably rank as the top fintech buzzword of 2015, and with good reason – there have been numerous announcements about the use of blockchain technology. That enthusiasm will set the stage for a new focus in 2016: how to integrate blockchain with other areas of the fintech ecosystem. While it’s true that blockchain technology solves significant challenges in banking, it doesn’t solve all of them. At the end of the day, any system of record used in financial services must integrate to a myriad of other systems: fraud, AML, KYC, customer systems of record, other account systems of record, data warehouses, servicing systems… the list goes on and on.

As users of blockchain technology move out of the lab and in to preparing for production launches, integration capabilities will be increasingly important. I believe solutions will come from multiple corners. Some blockchain technology companies will work to expose more capable interfaces to ease integration. Real-time feeds will be important, but much to the dismay of blockchain proponents, some of these interfaces will need to be batch oriented. Software solution providers in the financial services space may use this as an opportunity to sell additional products, particularly in the reporting and compliance space.

Ultimately, I think integration will be one of the most onerous obstacles to blockchain adoption in banks over the next 12-24 months. Virtually no bank on earth uses its own custom software platforms for all core systems, so systems will need to adapt to this new component in bank infrastructure. This is not an insurmountable obstacle and these problems will be overcome, but banks will need help in this space.

Some early efforts by banks to leverage blockchain will fail and call in to question the blockchain strategy

This is a virtual certainty with any new technology and blockchain is not immune. While any technology project can fail for a variety of reasons, early adopters are particularly vulnerable to faulty, premature products and applying the wrong technology to a particular problem. I suspect we will see failures of both types.

Blockchain is very promising but it is still nascent and commercial deployments will inevitably bring faulty implementations to the surface. Scalability limitations and poor system integration architecture are the most likely culprits for technical failures. It may be tempting to attribute such failures to problems with blockchain technology itself or bad project execution, but it’s important to recognize that new technology introduces new failure modes. Designing robust, resilient systems requires the experience of failures. Blockchain projects should include careful planning to limit and mitigate the risk of technical failures.

Applying blockchain technology to problems it is poorly suited to solve will also result in failures. Again, early adopters are at a higher risk to this error. Some forward-thinking institutions will avoid this mistake through methodical R&D and a cohesive “test & learn” strategy. Unfortunately, some institutions will proceed too far down the path of a blockchain solution before realizing it is not suited to the problem. While these errors are unlikely to be publicized, they may be costly.

In both cases, executive leadership may second-guess the suitability of blockchain in general. Re-evaluating blockchain strategy in the face of failures is natural and rational, but it will be important to recognize that the strategy needs to be adjusted rather than discarded.

There will be at least one significant acquisition of a blockchain startup

The specific details of such a deal are impossible to predict, but my bet is on a startup making an actual blockchain implementation (as opposed to blockchain supporting technology) being purchased by a large software or solution provider. More specifically, I see companies like Microsoft, IBM, Oracle, and FIS being likely to make acquisitions in this space. I believe that companies offering comprehensive blockchain solutions, particularly those that support permissioned ledgers and relaxed proof-of-work implementations, being the most attractive targets.

The goal of such an acquisition would likely be to accelerate an offering in the blockchain space. Because blockchain product companies are still fairly young and have limited production deployments, an acquisition may simply be an acquihire to seed talent in to the acquiring company’s existing team. It’s not out of the question that the acquired product could be useful though – we are already seeing Microsoft offer third-party blockchain products on the Azure platform.

Regulators will rule on narrow issues related to blockchain

As tempting as it may be for banks to accuse regulators of inaction, regulators are in a tough spot right now. The pace of innovation and change in the blockchain space is faster than any other technology advance in the history of banking. I believe regulators are genuinely trying to balance their desire to allow innovation to happen with their mandate to protect consumers and the soundness of the banking system. As a result, I believe regulators will be hesitant to issue new holistic guidance around blockchain but will work towards a much better understanding of how to effectively regulate it. Regulators will continue the trend of the SEC’s ruling on the Overstock.com share issuance by ruling on more narrow matters. This may be frustrating for banks looking to innovate, but it is the most pragmatic approach possible. Larger banks will likely be able to work with their regulators to refine their collective thinking and posture towards blockchain while smaller banks will be left waiting to see how the situation plays out.

Less buzz, more substance

It would be hard for the buzz around blockchain in 2016 to exceed 2015 levels. All of my predictions suggest that 2016 will include more substantative progress on blockchain solutions, and I think that’s something we can all agree is a good thing.