A white paper published Monday by Toronto-based financial technology firm DH. Corp. spells out considerations for banks as they proceed with the adoption of blockchain technology — the transaction technology that underlies virtual currencies such as Bitcoin — in order for it to transform the way that transactions are executed and documented in the financial sector.

There is “growing confidence that blockchain technologies will transform how financial services — and particularly payments — are conducted and delivered”, the white paper notes. However, the industry faces several challenges in adopting this sort of technology, the paper stresses.

One of the central challenges, the paper argues, is “to pinpoint and build robust use cases and business cases for investment in blockchain capabilities”. The other major obstacle, it notes, is “creating, piloting and deploying workable, scalable solutions to deliver on the business case for decades to come.”

The paper suggests that the conditions for tackling these challenges are within banks. “Today’s major financial institutions include thousands of legal entities — and, from both a client and regulatory viewpoint, they have an absolute need for visibility and accessibility into transactions across and between those entities. This creates a strong case for banks to use blockchain for internal utilities — in turn enabling them to gain the experience and insight needed to roll out blockchain capabilities across the banking ecosystem,” the white paper says.

Specifically, banks need to focus on identifying the areas where the blockchain “is obviously a superior solution to the technologies that have preceded it,” the white paper says. It’s too early to deploy the technology throughout the financial system, the paper notes, so firms should focus on areas where it can truly create value.

“While this strategy won’t result in disruptive advances in the short term, it will grow the understanding, experience and hands-on usage of blockchain that will provide the basis for future disruption,” the paper says.

In addition, banks will have to find ways to deploy blockchain technology alongside their existing technology. “Over time, real-world experience of blockchain deployments and operations will help to overcome this hurdle. However, until the blockchain technology and ecosystem gain greater certainty and stability, banks will understandably remain wary of basing their mission-critical business activities on companies and technologies that are less than 10 years old and still evolving at pace,” the white paper says.

At the same time, the technology has to retain its disruptive potential, even as it accommodates various regulatory and industry demands, the paper suggests. “The essential promise of blockchain — completely open, almost free, trusted — is remarkably similar to the promise that banks saw in the internet in 1990s,” the paper says. However, the internet has only made “limited headway in regulated markets”, it notes. “Some of the same dynamics are already emerging in the blockchain space. For example, it’s widely agreed that permission-less blockchain — ‘anyone can join’ — will not work in a regulated industry,” the paper says

“In terms of regulation, with regulatory frameworks for blockchain still at an embryonic stage of development, the challenge for regulators and market participants is to work together proactively to define the best supervisory models and approaches,” the paper says. It notes that blockchain technology could provide some benefits for regulators, but it’s also important to “ensure the technology isn’t overly stifled by rules and regulations.”

Scaling the technology to handle the very high volumes in certain markets will also be a key issue, the paper says. It may already work for low-volume markets, such as syndicated bonds issuance, the paper notes, but to work in high-volume markets, such as interbank payments, its performance will have to improve. “In two to three years’ time, the likelihood is that banks will have proven blockchain implementations and deployments up and running, delivering levels of speed, scalability and resource efficiency comparable with legacy systems. That will represent an inflexion point opening the way for blockchain’s move into higher-volume financial services activities,” the white paper says.

The adoption of the blockchain has to be aligned with the fact that banking is a long-term industry, the white paper says. “To succeed in the banking space, the technology needs to offer a level of stability, governance and managed evolution that will allow the industry to make a multi-generational investment in building the next disruptive utility,” the paper says. “This means that the concepts of ‘failing fast’ and ‘pivoting’ that have sustained the momentum of blockchain’s development through its early years will need to evolve into a very different environment: one founded on reliability, resilience and stability, underpinned by a technology platform that can last for five or six decades and more,” the white paper adds.

“If the past year was an era of experimentation and innovation for banks with regard to blockchain, then the year ahead could be the time we see this technology emerge from banks’ back rooms to solve real business problems,” says Moti Porath, executive vice president, global pre-sales, at DH, in a statement. “However, the technology must get certain things right in order to deliver on its transformative promise.”