Blockchain will power world’s back office in 5-10 years

By Irene Tham, The Straits Times Tech Editor

DBS Bank CEO Piyush Gupta cuts through the crypto-blockchain mumbo jumbo, and explains why he bought Bitcoin, which could provide a store of value like gold.

Beneath the speculative froth that led to the crypto meltdown in recent months, the blockchain train underpinning cryptocurrencies is still chugging along. 

In a candid interview with The Straits Times, DBS Bank chief executive officer Piyush Gupta said the bank spends about $600 million a year – half of its total tech budget – on experimenting with new technologies, including blockchain and artificial intelligence, as it prepares for a disrupted future.

In this future within the bounds of regulation, which Mr Gupta described as “utopian”, banks may no longer issue loans as smart contracts (self-executing computer programs) would allow investors to connect directly with borrowers in what is known as decentralised finance, or DeFi.

But he believes that banks will find opportunities in providing trust and custody services to consumers and companies, including securing their digital assets and helping them navigate the alphabet soup of currencies and payments. Finding a footing will require placing bets on future technologies.

We are big believers in experimentation,” he said, noting that useful blockchain tools have already emerged over the past two years. He expects blockchain development to accelerate in three to five years, and the technology to run “the back office of the world” in five to 10 years.

By keeping a highly automated unalterable record of transactions visible, a blockchain has the potential to boost efficiency, provide instant settlement and counter fraud in trade finance, which is still largely manual today.

A blockchain could also put all kinds of central registries, such as those for land titles and intellectual property (IP), out of commission. “Could you change that paradigm so who owns the house in Singapore is now visible on a blockchain? A solution like that in the next three to five years is quite possible,” he said.

Speaking to ST in DBS’ Marina Bay Financial Centre office, Mr Gupta cut through the crypto-blockchain mumbo jumbo, and explained why he bought Bitcoin, which could provide a store of value like gold.

 What is the one thing that people often get wrong about blockchain, DeFi and cryptocurrencies

A It is to conflate all of them. Blockchain is really a new method to record who owns assets, who has made payments on assets, and get line-of-sight without a central authority keeping track. That technology is powerful. It can change the back office of the world. It can change the role of stock exchanges, registrar of IP. Any central record-keeping entity can be dismantled.

With DeFi, we deal with ourselves only on the basis of smart contracts. Yes, the technology is important, but this goes to the next level, saying you don’t need nations, you don’t need central banks, you don’t need banks. A cryptocurrency is a digital currency. By the way, 98 or 99 per cent of all money in the world is already digital. Nobody actually takes sacks of notes and coins anymore.

It’s all done either through plastic (credit or debit cards) or digital money transfer. So, the digital part is not that different. It’s just the nature of how the accounting and settlement is done. The question really is: Is it private or public currency? Most of the privately issued crypto coins – whether it’s Bitcoin or Ether – suffer from a lot of volatility in price.

That means you can’t use it as a unit of account easily because the value changes. Elon Musk said he would use Bitcoin. He changed his mind within a week because he didn’t know whether he was getting paid $30,000 or $60,000.

 So it looks like central bank involvement and regulation are necessary.

A This is my view. You could always create private money or Bitcoin as a store of value. Frankly, why does gold have value? It’s only because we all collectively believe that it is valuable. However, to use it as a medium of exchange needs regulation and the participation of central banks.

 Have you or DBS invested in cryptocurrencies?

A DBS has not. I’ll tell you an amusing story. When we were looking at launching our crypto exchange, we were getting somewhat delayed. I gave them a date to have the exchange up and running. I said I wanted to buy it. Well, they got the exchange ready. I bought five coins. I was lucky because the price went up and I sold half of my holdings.

 DBS operates the crypto exchange for institutional investors. How much have they lost?

A I haven’t checked the number but I think it’s not unreasonable to assume that since the market dropped 60 to 70 per cent, investors would have lost that much.

 Since the crash, what decisions have DBS reversed, and did you expect the crash to take place?

A So we know it’s a very volatile market, but I didn’t see the crash coming. But honestly, going back to the one decision that we had to reverse, nothing.

Some people buy cryptocurrencies for their children. Is this good investment advice?

A People also buy lottery tickets. So my general advice is if you have some money you’re willing to lose entirely, you want to take a small quantum and take a punt on the potential value of this thing, then be my guest. But if you’re wanting to plan for your kids and your risk tolerance is not high, then I would advise against it.

 Is China right in banning cryptocurrencies?

A You can use this technology for illicit traffic and money laundering. So guard rails are important. There are purity checks to make sure that the coins are not tainted by illicit use or sanction evasion.

Once you start putting in guard rails, it’s okay to run experiments. And the rules which the central banks and regulators have come up with around AML (anti-money laundering) and KYC (know your customer). How do you transfer those rules to crypto payments? The solutions are coming together. That’s why this is an age of experimentation.

 There are compatibility issues with different blockchains as well.

A It’ll take us a few years before we figure out what the right landing places are. As we run our business, we’re also quite mindful about not betting the farm on any one thing because it’s so nascent. So we have a few pokers in the fire. We put a small sum of money in to make sure that we stay in the game and learn what is going on without committing ourselves to something that might disappear a year from now.

 E-trading and electronic invoicing have been talked about for ages. What makes things different this time with blockchain?

You need to change the laws to accept a digital letter of credit and a digital bill of lading. So, too many hurdles. But we’ve reached a tipping point. The technology architecture has changed – to cloud and open source (computing).

Instead of building one big system (that is hard to modify to connect with other systems), you have multiple micro services connected easily to each other through APIs (application programming interfaces).

For Singapore, we’ve been signing bilateral digital trade agreements and setting up digital corridors. Today, I’m a lot more optimistic that over the next five to 10 years, we will digitise trade much better than we’ve been able to in the last 30 to 40 years.

 So how will blockchain change the future of banking?

A Most DeFi evangelists will tell you that intermediaries like banks put in friction. You can give the money to me and then I’ll give you interest and you make all the interest. The bank doesn’t keep a percentage. And they would argue that this works now in a DeFi world. Because the blockchain allows you to know me and smart contracts will force me to pay you.

So a dystopian future says you don’t need banks. The problem with a dystopian future is it’s not that easy to rely on an unknown algorithm to deal with everybody directly. China had like 4,000 P2P (peer-to-peer) companies shut down in the last few years as many of them were scamming.

They weren’t using this technology but they were essentially doing P2P business. It causes fundamental questions to be raised. Do you need nation states? Do you need governments? Do you need central banks? All of them are intermediaries.

I don’t think the world is ready for all citizens to operate with one another without governments, societies and nations. Most governments will therefore be very wary of getting to that. How does the government do monetary policy? How do you manage the economy? How do you control interest rates? However, the utopian future is within the bounds of regulations, countries and governments.

You start using the technology to make the improvements that are required in settlement, trade finance, mortgage and the back office. In that world, banks still have a role to play. They can orchestrate the customer journey. They can make sure you’re not just relying on a smart contract, but you have somebody who looks after your interest.

 So banks’ business models will have to change as well.

A The most profound change for banks happened 50 to 60 years ago when people figured: “Hey, I don’t need to borrow from the bank. I can just do a direct issuance into the public markets. So I can issue debt or I can issue equity and investors will invest directly.”

So the change is to move from being a commercial bank to being an investment bank, from being a balance sheet provider to being an intermediary between issuers (companies) and investors. Banks can continue to change the intermediation role.

One role which I think banks will have is what I call orchestration, because customers will find it hard to understand the hundreds of currencies and fintechs. There’s a big opportunity for trust and custody service.

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