The Switzerland of Two Technologies - Between the Blockchain and the Cloud
The tale of two technologies - and the $64 billion industry caught in between - begins with a simple observation: things in Switzerland move slowly.
Most of the time this is viewed as an advantage. In fact, the Swiss tendency for evolution rather than revolution is surely one fundamental reason that over $3 trillion worth of wealth is managed by Swiss banks and financial institutions (over 60% from abroad). To them, slow Switzerland is synonymous with stability.
When it comes to adoption of new technology, being the slow and steady turtle may or may not be an advantage.
Over the last several years, two great technologies - cloud computing and the blockchain - have arisen. By virtue of Switzerland's languid pace of digitalization, these two tech trends now find themselves at odds in the minds (if not hearts) of the decision-makers in boardrooms from Geneva to St Gallen.
On the one hand, a technology that promises greater efficiency and cost-cutting, as well as more agility - the cloud. On the other, a singular and much-hyped advancement that purports to be able to, in some ways, replace banks, but also help save them (depending on who you ask).
In a nutshell, it is centralization (with its advantages) versus decentralization (with its advantages and potential disruption.)
The question is: can the two co-exist?
Guidance on cloud providers from the Swiss Bankers Association
Cloud questions
The case for the cloud has been a long time coming for Swiss banks (and banks in general). But with gentle prodding and encouragement, adoption has finally started to blossom.
The Swiss Bankers Association has been instrumental in the process with much hand-holding and guidance along the way. With FINMA's new and updated circulars regarding outsourcing published in late 2018, Swiss banks large and small finally received some legal footing on which to treat cloud service providers.
Of course, the choices are many and the options not without risks. A perfect excuse (or justification) for more delay.
And yet, things move forward with all the big names in cloud computing circling around with their various offerings - Oracle, IBM, Microsoft, Swisscom and Amazon Web Services. Even SIX, the Swiss stock exchange infrastructure provider, has gotten into the game.
With this step, most of the major (and even minor) Swiss banks are taking a huge step forward towards digitalization and efficient, 21st-century style online services - the sort of thing that a vast majority of customers expect.
Blowing away the blockchain?
Where does this leave blockchain?
Exactly - where does this leave the technology behind Bitcoin? If the cloud was great and finally safe enough to invest in, surely a dash of blockchain thrown in can't hurt, right?
It's not quite so simple as that.
Having just managed to summon up the courage to accept a technology that they can't really touch or feel, it is understandably difficult for banking executives to immediately make another leap forward and add blockchain on top. Even more so, because the main value propositions of the two technologies lie miles apart.
Security is (and always will be) the single biggest concern of any bank or financial institution. That is precisely why it took Swiss banks so long to make a "til-death-do-us-part" committment to cloud computing - even if managing 27% of the world’s cross-border assets makes the Swiss finance industry a good place for the cloud to flourish.
If clouds presented a host of questions-marks about their safety, it isn't hard to imagine what kind of fear there may be over blockchain as a base-layer technology. As CEOs and CIOs understand it, data is fully transparent, immutably stored and verified and traceable by anyone with minimal technical skill.
The reality is that this oversimplification of blockchain ignores the fact that varieties and flavors of blockchains may exist. Just like cloud technologies can be public, private, hybrid or even community, so blockchains have their variations, between public (Bitcoin, Ethereum, Tezos, among the most popular) and private or semi-private (Corda, Quorum, Hyperledger and others). Banks so far have generally explored the latter, since the very term "public" seems to be too scary to consider and it would appear to solve their personal data protection problems.
But then again, with the advent of zero-knowledge proofs and other privacy-preserving technology, that fear may eventually be a moot point.
EY in particular is working towards that end with its Nightfall implementation for Ethereum.
Dumb databases
Part of the conundrum for Swiss banks may stem from the fact that - stripped away from the incentive system that helps power it (i.e. the cryptocurrencies like Bitcoin and Ether which are native to their protocols) - a blockchain is (more or less) a database.
Some people like to point this out - both to show that blockchain isn't all about Silk Roads and terrorism and, on the flip side, to deride the technology as just another (slow) way of storing information.
So, naturally, when you line up a blockchain and a cloud storage solution and label them both to be apples - the cloud comes out looking much better. Of course, its centralized qualities also align much better with the business models of banks, built as they are to capture value through proprietary services - in other words, through centralization.
That means that blockchains and clouds are mutually exclusive, right? As long as they end up in the same apple basket - most probably, yes.
But as banks, both in Switzerland and beyond, have grown to understand, the cost of maintaining centralized systems - often barely digitized at all - can be enormous.
With two-thirds of Swiss banks posting a cost/income ratio of over 70%, things are not looking so good.
Is there room, then, to explore new business models that actually leverage the power of decentralization? Social media companies such as Facebook, platforms such as Uber and Airbnb have already demonstrated the power of network effects without embracing decentralization. It is wholly possible that financial services will see the benefit of modelling themselves more like platforms with a broad reach and less centralized cost burden and blockchain as the a trust layer connecting all participants.
The crux of the problem will be data storage and privacy. But this is where cloud technology may be able to jump into the equation. Contrary to the ill-informed oversimplifications often made, blockchains were never meant to be simple databases for massive dumps of personal data. Cloud technology was - at least as far as storage goes.
Combine the two and there are many possibilities to be explored. Some like IBM have already - trying to combine blockchain-as-a-service with a cloud setup. It would be a mistake, however, not to acknowledge the fact that - as IBM itself admits - “blockchian via the cloud” is best suited as a hook for other cloud services.
In the meantime, pushing blockchain by itself will be a hard sell with Swiss banks who have only just mustered up enough courage to start seriously building on the cloud.