NOVEMBER 2018

CUT THROUGH
THE HYPE:
Assessing blockchain's potential
When Indiana Jones (“Indiana Jones and the Last
Crusade”, 1989) entered the grail chamber in search
of the Holy Grail, he found hundreds of cups in
different shapes and sizes. The custodian Knight
then reminded Indy that in order to claim the true
Grail, he must choose wisely.

Often when discussing the potential benefits of blockchain
technology, the story of Indiana Jones and his search for
the Holy Grail seems to be the most apt analogy: his search
can be likened to the pursuit of the best implementation of
blockchain technology. Since the potential powers of the
Grail depicted are so disruptive, the search is justified.
The same reasoning can be used in the search
for the right implementation of blockchain
technology. However, with such a wide variety of
industries and countless possible applications
to implement blockchain, the 'Holy Grail' of
applications, has yet to be discovered.
Hype versus reality

How do we Blockchain has the very real potential to change our world by disrupting fundamental central
authorities (for example, central banks), and it is supporting innovative solutions across
assess, then, a broad range of applications. However, it has, to date at least, fallen short of reaching its
where blockchain potential to disrupt entire industries.
technologies will
For example, blockchain’s first application was cryptocurrency, specifically Bitcoin. However,
have the most real cryptocurrencies have yet to displace any Fiat currency. So far, they have proven to be
and immediate neither the store of value nor the superior payment system that was heralded. Regulators
are increasingly focused on these assets as potential instruments of fraud or other misuse.
impact? In addition, the concentration of, or collusion amongst, miners could threaten the most
fundamental advantages of blockchain: immutability and un-hackability over time1.

F I G U R E 1: A S S E S S I N G B LO C KC H A I N ’S P OT E N T I A L

D o m ai n Ke y q u e s ti o n D i m e nsi o ns

Re g u l ati o n
Regulation

I N D U S TR Y W h at ’s t h e i n d u s tr y ‘re ad i n e s s’ Security
Security
MATU R ITY o n B l o c kc h ai n ad o pti o n?
C o o p e r ati o n
Cooperation

F i t for
Fit fo r business
b u si n e s s purpose
purpose

B U S I N E S S CA S E Wo u l d B l o c kc h ai n s o l ve fo r a S c al a b ili t y
Scalability
F U N DA M E N TA L S b asi c i n d u s tr y is su e?
F l ex i b ili t y
Flexibility

Ru n ni n g costs/OPEX
Running c o s ts /O P E X

CA S E F O R Wo u l d t h e t r a nsfo r m ati o n b e Te c h n o l o g y tr
Technology a nsfo r m ati o n
transformation
CHANGE a c tu all y c o nve ni e nt ?
Lo re m i psu m d o l o r si t a m e t ,
C o m p e ti ti ve value
Competitive val u e
c o ns e c te tu e r ad i p is c i n g e li te d

Source: AlixPartners

1. The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin - Ben Kaiser, Mireya Jurado, and Alex Ledger (2018)

Cut through the hype: assessing blockchain's potential 3

INDUSTRY MATURITY

Before any revolution, an industry is required to reach a One potential application of blockchain technology is the
certain level of maturity. The concept of Artificial Intelligence decentralization of authority, producing increased efficiency
(AI) gained initial public traction in the late 1970s, but AI has and quality of data communication. With this disruption,
only recently experienced major breakthroughs in industries industry regulations must be flexible enough to adjust and
such as healthcare, retail, and automotive manufacturing. We continue to guarantee that all transactions are unanimously
are finally beginning to see AI replace outdated technologies accepted and litigation-proof.
and improving daily life in a multitude of ways. The AI
The ability to guarantee security is another potential hurdle
revolution can be attributed to the amount of data available
for the widespread adoption of blockchain technology. Would
and the advancement of technologies which are able to
an entire industry adopt a new technology if the security
efficiently and effectively process massive quantities of
of its data, its clients’ sensitive information and ultimately
data, both of which took time and continuous innovation.
its profitability was put at risk? What degree of 'sharing'
Mature and innovative industries have been able to adapt AI
is acceptable in comparison to the risk that data is more
technologies and allow AI to disrupt for the better.
accessible than in a centrally managed repository?
In the first internet revolution, the anticipated disruption
There are several cases where the degree of cooperation
affecting the financial sector was thought to be the
between market players has positively or negatively influenced
disappearance of the physical presence of banks. Although
the industry’s adoption of a specific technology. The potential
the internet revolution did lead to the creation of online
implementation of a new technological platform results in
banking and some physical locations saw closures or
two trains of thought for existing players within an industry.
downsizings, physical points of sales are still a pillar of
One scenario could result in individual entities seeing the
financial institutions’ distribution channels. The notion that
adoption of the platform as a potential competitive advantage
the internet revolution would simply result in the complete
which therefore results in each entity developing a unique and
replacement of physical banks was unfounded. The financial
private solution to a shared problem. The second scenario
industry is simply not at a uniform level of maturity ready
would involve existing players realizing the mutual gains from
for major disruption by blockchain in the same way that
uniting and creating an open platform or a common standard
the online retail industry, for example, was ready for the
upon which each of them can develop their own offering. This
implementation of AI and machine learning to aid shoppers,
industry-wide adoption concern is a major hurdle facing the
as proven by companies like Amazon and Walmart.
speed of implementation for blockchain technologies.

To assess an industry’s degree of

maturity for blockchain implementation,
three key areas must be analyzed:
REGULATION

SECURITY COOPERATION
BUSINESS CASE FUNDAMENTALS
To disrupt an industry, a new technology
must radically solve some basic and
fundamental challenges. It is not a simple
matter of being economically convenient;
disruption consists of drastic improvements
in both quality and efficiency.
For example, the adoption of blockchain may eventually
remove the need for central authorities in certain industries.
(For example, central bank monetary roles may be redundant
in a world where currencies are issued digitally.) But would
economic systems be more secure and safer or would the
overall cost of managing money be lower?
The idea of having multiple decentralized authorities
responsible for currency issuance has obvious benefits,
but the threat of cyberattacks must be addressed and
understood. (In a so-called '51% attack'2 someone controlling
a majority of network hash rate could revise transaction
history and prevent new transactions from confirming.) On a
business-as-usual basis, a blockchain solution is likely to be
an improvement over current technologies in many industries,
but would it still be valid in a 'Black Swan' event?
Efficiency may constitute another key issue: Bitcoin’s trust-
minimizing consensus has been enabled by its proof-of-work
algorithm, resulting in a massive use3 of energy due to the
number of miners competing to solve the algorithms that
would validate transactions into new blocks. So, the question
lingers: is the economic cost of digital currency issuance (and
its lifelong management) lower than that sustained by the
financial systems today?
Two different dimensions must therefore be assessed to
understand the real value coming from blockchain adoption.
FIT-FOR-BUSINESS PURPOSE
Blockchain-based platforms need to perform better than
existing platforms. In the specific case of a card payment at
a retail shop, a credit or debit card can be swiped and in a
very short time (usually under 1 to 2 seconds) a response is
generated. Would a blockchain platform be able to meet such
a short response time or would a blockchain platform offer
other benefits in comparison to existing retail transactions
such as security or fraud protection?
2. https://bitcoin.org/en/glossary/51-percent-attack
3. https://digiconomist.net/bitcoin-energy-consumption
4. https://www.swift.com/resource/gpi-real-time-nostro-proof-concept
Cut through the hype: assessing blockchain's potential
SCALABILITY
Financial services businesses see billions of transactions
happening every month and in very short time frames. For
instance, Visa handles around 150 million transactions per
day. Considering credit or debit cards, existing platforms
can easily handle three to four hundred transactions per
second. These 'traditional' IT platforms are designed to
ensure 24/7 service to meet these high-volume needs.
The underlying technology is several decades old, but a
cheaper or more efficient replacement has not surfaced
yet. Could a blockchain-based platform meet the stringent
requirements of such a 'mission-critical' platform? SWIFT,
the world’s leading provider of secure financial messaging
services, has been closely following distributed ledger
technology and while it recently confirmed that working
blockchain is among its strategic priorities4, they have
also acknowledged that there is still significant work
and investment required by all participants, as well as
scalability gaps that need to be addressed.
FLEXIBILITY
In a fast-changing context, the possibility to develop new
features or products easily and quickly is mandatory. Legacy
transaction platforms like those used for cross-border
payments mentioned in the examples above are very rigid and
tough to change. A replacement blockchain platform has the
potential to challenge existing financial systems and could
considerably improve the quality and efficiency, also through
the application of smart contracts.
Case for change
Lastly, widespread adoption of blockchain technology
will require a clear case for change that can be
measured by an undisputed economic advantage
over the full lifecycle of a product or service (lower
run cost, shorter development time, and servicing,
among other things); a convenient implementation
cost (acceptable payback period, manageable
implementation risks, and acceptable deployment
timing); and ultimately tangible end-user value
(enhanced customer experience or easier platform
configurability for company’s employees).
5
A practical application: issuance of
securities over the blockchain
Issuance of securities (including, but
not limited to, bonds) and their lifelong
HIGHLIGHTS:
servicing is today still largely paper-
based and involves a high number of
The issuance and trading of securities is a government-regulated process,
intermediaries that makes the process
and traditional issuance process is often subject to:
inefficient, risky, and ultimately
expensive, especially for smaller •• High number of intermediaries involved, thus increasing overall
companies. Blockchain with its smart costs charged to the Issuer, and often prevents SME to access this
contract management capabilities way of funding. According to our analysis based on a range of reports
could radically change the industry. (Bloomberg, Haas Institute), the ‘all in cost’ for the issuer (as a % of face
value) ranges from 0.83% (investment grade) to 2.58% (high yield bond),
In order to assess the likelihood of the sometimes exceeding 10% for issues below $10 million
adoption of a 'new' industry standard,
•• Long clearing and settlement cycle, eventually accompanied by
we must first evaluate the industry’s
counterparty risk
'readiness' for blockchain adoption.
In the case of securities issuance, •• Servicing subject to manual processes and reconciliations (multiple
that means looking at the policy versions of the truth, or poor quality of information)
framework, cybersecurity standards, •• Lack of transparency and limited audit trail (this might be particularly
and the degree of cooperation among relevant for securities traded on secondary markets)
the largest players.

F I G U R E 2: B O N D I S S UA N C E – S TA K E H O L D E RS A N D I N T E R M E D I A R I E S: S I M PL I F I E D OV E RV I E W

INTERMEDIARIES
Designing and compliance

Authorities and
r e g u l a to r s

Le gal and
B r o ke r s
financial advisors

Rating agency
Dealers

Primar y
I ssu er Underwriter i nve s to r s
Retail
i nve s to r s
C u s to d i a n

Other
Ser vicing

Registrar subscribers

P ay i n g a g e n t

Pre issuance P r i m a r y a n d s e c o n d a r y m a r ke t s

Key intermediary Other intermediary Main trading parties

Source: AlixPartners elaboration

Cut through the hype: assessing blockchain's potential 6

F I G U R E 3: B O N D I S S UA N C E – K E Y AS S E S S M E N T M E T R I C S D E F I N I T I O N

KEY METRICS DESCRIPTION

R eRegulation
gulation P o l i c y f r a m e wo r k Av a i l a b i l i t y of a c l e a r r e g u l a to r y f r a m e wo r k
MATU R ITY
I N D U S TR Y

S Security
ecurity C yberat tacks C a p a b i l i t y to r e s i s t to c y b e r a t t a c k s

S t a ke h o l d e r s D e g r e e of c o o p e r a t i o n of m a i n p l ay e r s a i m i n g a t c r e a t i n g a n
C oCooperation
operation
c o h e s i ve n e s s industr y standard

F i t fo r Settlement time T i m e to s e t t l e t r a n s a c t i o n s
Fit for business
business purpose
purpose
Audit trail C a p a b i l i t y to t r a c e e ve n t s a n d m a ke q u i c k a u d i t s p o s s i b l e
F U N DA M E N TA L S
BUSINESS CASE

S cScalability
alability P r o c e s s a u to m a t i o n D e g r e e of p r o c e s s d i g i t a l i z a t i o n a n d a u to m a t i o n

A d d n e w/m a i n t a i n F l e x i b i l i t y of t h e s o l u t i o n to a d d n e w f u n c t i o n a l i t i e s o r m o d i f y
F lFlexibility
exibility
functionalities existing ones

I s s u a n c e ( % of F.V.) C o s t of i s s u a n c e i n % of t h e F a i r Va l u e
Running costs/
Running
OP costs/OPEX
EX Fu l l a s s e t l i fe c y c l e C o s t a s s o c i a te d to t h e s e r v i c i n g of t h e b o n d a c r o s s
t h e l i fe c y c l e
CASE FOR

Te c h n o l o g y C o s t to a c c e s s / C o s t to a c c e s s a n d j o i n n e t wo r k s r e q u i r e d to e xe c u te t h e
CHANGE

Technology
t r a n s fotransformation
rmation j o i n n e t wo r k s i s s u a n c e a n d t h e s e r v i c i n g of t h e b o n d

Lorem ipsum dolor sit amet, # i n te r m e d i a r i e s N u m b e r of i n te r m e d i a r i e s i nvo l ve d i n i s s u i n g a n d s e r v i c i n g

Com Competitive
p e t i t i vevalue
value D e g r e e of m a n u a l N e e d of m a n u a l a c t i v i t i e s (e .g . r e c o n c i l i a t i o n t a s k s)
consectetuer adipiscing elited i n te r ve n t i o n

Next, we consider the key business case fundamentals, which include settlement time, management of the audit trail,
process automation, and the flexibility to add or change process functionalities.

Finally, we compare the economics of bond lifecycle management under the current system to that under blockchain.

Cut through the hype: assessing blockchain's potential 7

Assessment results of blockchain's
potential for securities issuance
On pure business fundamentals, blockchain promises
much by way of improvements over the existing system:
faster execution, higher reliability, and lower cost
along the whole lifecycle, enhanced flexibility to add
new functionalities or modify existing ones, increased
transparency of bondholders (which would be very
important, for example, in the event of bankruptcy).
In addition, the economics associated with a blockchain-
based system seem very attractive across most of the
metrics we analyzed. The bond lifecycle management
should be more cost efficient due to the reduction in
complexity (number of intermediaries involved), full process
digitalization (paperless), and avoidance of most common
reconciliation activities. Overall, the reduction of the number
of intermediaries ensures that less fees should be paid and
more effective exchange of information should take place
among stakeholders (for instance, but not limited to, the
execution of payments or change in ownership, also
through the application of smart contracts).
Cut through the hype: assessing blockchain's potential
However, based on our analysis, many hurdles
remain before blockchain can replace the
existing system. The industry does not appear
to be ready to adopt blockchain. Regulatory
frameworks are yet to be formalized in full and
only a few countries (for example, the UK) are
pioneering this technology supporting start-
up companies in the application of blockchain
along the whole lifecycle. Cybersecurity
standards are still unclear, and risks still need
to be fully analyzed. Ultimately, it is not clear
whether the industry will build a single standard
or, as it seems now, several independent
attempts will emerge, with no clear design on
the interoperability of the solutions.
8
In summary (fig. 4), although the new technology can ensure opportunities for cost optimization and servicing
efficiencies, the industry disruption is yet to come mostly due to (i) the lack of widely accepted common
standards, (ii) the limited track record around reliability of automation and application of smart contracts, and
(iii) the uncertainty around views of regulatory bodies over different countries.

F I G U R E 4: B O N D I S S UA N C E – OV E R A L L U S E CA S E A S S E S S M E N T

S e r v i c e d e sig n a n d a rc hi te c tu re
KEY METRICS CURRENT B L O C KC H A I N B A S E D

R eRegulation
gulation P o l i c y f r a m e wo r k Mature, in place Under review
MATU R ITY
I N D U S TR Y

S Security
ecurity C yberat tacks Mature S t i l l u n k n ow n

S t a ke h o l d e r s Fr a g m e n te d (e a r l y
C oCooperation
operation High
c o h e s i ve n e s s a d o p te r s , ‘ wa i t a n d s e e ’ )

F i t fo r Settlement time 3 to 10 d ay s C l o s e to r e a l t i m e
Fit for business
business purpose
purpose
Audit trail Requires reconciliations One shared ledger
F U N DA M E N TA L S
BUSINESS CASE

Scalability P r o c e s s a u to m a t i o n L ow A l l ows s m a r t c o n t r a c t s

A d d n e w/m a i n t a i n L i n ke d to H i g h (m o d u l a r, e .g .
F lFlexibility
exibility
functionalities l e g a c y s y s te m s API based)

I s s u a n c e ( % of F.V.) 1 to 2 . 3 % (m a x 10 %) S av i n g o p p o r t u n i t i e s
Running costs/
OPEX Recurring costs and U p to 4 0 % c o s t b a s e
Fu l l a s s e t l i fe c y c l e
high contingencies r e d u c t i o n (s e r v i c i n g)
CASE FOR

Te c h n o l o g y C o s t to a c c e s s /
CHANGE

Technology
t r a n s fotransformation
rmation j o i n n e t wo r k s
L ow o r n i l E x p e c te d l ow o r n i l

# i n te r m e d i a r i e s High P o i n t to p o i n t
Competitive
Com p e t i t i vevalue
value D e g r e e of m a n u a l
R e l a t i ve l y h i g h L ow
i n te r ve n t i o n

Cutting Using securities issuance as a test case, then, a model assessment framework
for the application of blockchain technology and its likelihood for adoption in the
near- to medium-term becomes clearer.
through While perhaps not the Holy Grail that has been promised, blockchain technology

the hype still has the potential to improve selected processes, and a rigorous and analytical
approach can help cut through the hype to identify these.

Cut through the hype: assessing blockchain's potential 9

CONTACT THE AUTHORS: FOR MORE INFORMATION CONTACT:

Marcello Bellitto Bernd Brunke

Director Managing Director
+39 02 360 12012 +49 89 20 30 40 98
mbellitto@alixpartners.com bbrunke@alixpartners.com

Steve Campbell Frank Burkitt

Senior Vice President Managing Director
+1 646 746 2451 +1 213 437 7172
scampbell@alixpartners.com fburkitt@alixpartners.com

Mark Doughty Claudio Scardovi

Senior Vice President Managing Director
+44 20 7332 5187 +39 02 360 12 091
mdoughty@alixpartners.com cscardovi@alixpartners.com

Maurizio Paolella
Senior Vice President
+44 20 7098 7582
mpaolella@alixpartners.com

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