Most blockchain technologies are developed by foundations or consortia, the members of which are often representatives of the industry hoping to create and successfully deploy the technology. But a consortium in the financial services sector must address the key challenges associated with the governance of the consortium; the ownership, licensing and use of technology produced by it; and any associated anti-trust claims that may arise from that if it is to successfully launch and ensure the widespread adoption of blockchain technology within its industry.
In recent years, the increasing pace of new technologies and new market entrants combined with weakening profits, a more challenging trading environment and tougher regulatory requirements have put banks and other financial institutions around the world under increasing pressure to reduce the cost and increase the efficiency and effectiveness of operating their businesses. Whether it be in trade finance, trade reconciliations, settlements of payments or client onboarding, major banks spend hundreds of millions of dollars each year on internal recordkeeping and checking operations to support their businesses that may not provide them with any competitive advantage against other banks, increase the value of business in the eyes of clients or necessarily satisfy the demands of regulators to ensure consistent and correct approaches are taken.
At the forefront of the emerging technologies being proposed to address these challenges is blockchain. Rather than each bank keeping its own record of events about the transfer of ownership of assets, the performance of contracts and the identities of clients logged according to that bank's own policies, procedures and standards that it constantly cross-checks and confirms with counterparties, each bank could instead, using blockchain technology, hold a copy of a ledger that is used to record this information according to common standards, with every change in the information verified and recorded in each copy of the ledger held by the participants in the blockchain.
But before any bank can reap the benefits of using these types of technologies, it is critical for those in the financial services sector to collectively play an active part in the development of these blockchain solutions and ensure that common technologies are adopted across the industry. Most participants are trying to ensure this happens by coming together to develop blockchain technologies as part of a foundation or consortium, but there are a number of key challenges for any foundation or consortium planning on launching this technology to overcome.
Key Issues and Practical Considerations
Defining the objectives of the blockchain technology to be created by the consortium and the role that each member will have in its success can be difficult to establish, with each participant often having different and competing interests that will have to be carefully managed. Some financial institutions will try to influence the direction the consortium takes so that the eventual solution will be tailored to satisfy their particular standards and legal requirements, spending a lot of time and consideration over the design phase to achieve this outcome. Others may focus less attention on the exact form of the solution and more on the strength of their investment and control over the created technology, seeking to obtain a dominant position compared to other members regarding the management of the consortium and potential financial return that may be made from the successful exploitation of the technology. The remaining institutions may have joined to obtain a seat at the table, looking to hedge their bets on the success of the competing initiatives emerging in the industry, unwilling to make difficult decisions or make anything other than essential contributions to the decision making process and the financing of the initiative.
Meanwhile, service providers involved in developing the technology for the venture may be interested in creating, marketing and launching the new technology as quickly as possible in order to establish themselves as the pre-eminent players within the industry, to maximize the return on their investment and to provide themselves with a springboard to expand their businesses into other areas with or without the financial institution partners.
These differences can often create tension over the direction and operation of consortia between members, slowing progress and in some cases causing fragmentation within the industry, with financial institutions leaving to create rival consortia, pursing different solutions and standards. So it is very important for the goals of the initiative, the number of likely participants, levels of investment and the roles each member will be able to play in its governance to be made clear in a memorandum of understanding executed at the start of the initiative or individual project.
Agreeing who will own and who will be able to exploit the developed technology is critical to the success of any initiative. While blockchain technologies may be built on open source software by its creators as part of a foundation or consortium, which allows users to quickly and freely develop code based on it, provided they do so in accordance with the open source license requirements (which may require any code developed from it to also be made freely available), these consortia will frequently require their members to contribute their own software, materials and know-how to the project. As a result, complex and thorough negotiations between the participants have to take place to agree the basis under which each member can use each other's intellectual property and confidential information for the purposes of running the consortium and the technology projects as well as the terms under which any technology that is developed from it, or that of other members, will be owned and can be used by the participants. Otherwise, consortium members risk losing control over their intellectual property, with rivals potentially able to use it and free to develop, monopolize and exploit the technology created from it, to the detriment of the contributing participant and others in the industry, and the success of the initiative.
Furthermore, members of consortia need to address the risks associated with the failure of blockchain technology to work as intended or where the use of the technology results in a participant receiving an intellectual property infringement claim because the technology incorporates copied technology. Negotiations between members on these types of issues can significantly affect the successful adoption of the technology within the industry because where technology has been created by a foundation or a consortium, there are often very limited protections for users of the technology to rely on to seek redress from those parties that provided or developed copied or defective technology.
Banks and other financial institutions cannot outsource or ignore their regulatory responsibilities and must ensure that their participation in consortia with industry rivals to develop shared technological solutions that they will adopt across the industry do not raise any anti-trust concerns.
On the one hand, coming together with other participants within an industry to develop new technology to help reduce the cost and increase the efficiency and reliability of common processes undertaken by the group to comply with non-competitive compliance requirements within that market should be an effort that promotes innovation and should benefit customers in the form of lower costs, more efficient and safer transactions. But creating a forum at which representatives of different financial institutions can discuss and share information about their respective approaches to internal processes within their banks to develop blockchain technology increases the risk that commercially sensitive information could be shared between them in a manner that results in claims of anti-competitive practices being adopted.
This is particularly the case where it is possible that the blockchain technology developed as part of the initiative will become one of the dominant solutions adopted by the industry. Service providers previously involved in providing legacy solutions that have been replaced by the blockchain technology may claim that they were excluded from the group. Other industry players involved in promoting or adopting rival solutions displaced by the developed technology may complain that the members of the consortium have worked together to force the general adoption of the technology, set prices or to unfairly benefit financially from the successful uptake of the blockchain technology they have developed to the detriment of the rival solutions that have been squeezed out of the market.
To avoid information being shared that may give rise to these types of claims, it is critical to ensure that an anti-trust "rules of the road" document is prepared that explains the types of discussions and information that can and cannot be shared between representatives attending foundation or consortium meetings and that this document is provided and explained at regular intervals to each representative. In most cases, an anti-trust lawyer will also be engaged to attend key meetings between representatives to moderate their discussions and provide on-the-spot advice to ensure that anti-competitive discussions do not take place.
So, while there are many potential benefits of using blockchain technologies, there are also a number of key legal challenges that businesses developing and implementing them will need to overcome to successfully create them as part of a foundation or consortium and deploy them within an industry.