Blockchain – beyond cryptocurrencies
The early promise of blockchain is beginning to bear fruit as financial services firms invest in DLT projects to reduce risk and cost.
The growth in popularity of privately issued digital currencies, most of which are cryptocurrencies like Bitcoin and Ethereum, has taken the world by surprise and highlighted many other uses for the "blockchain" distributed ledger technology (DLT) that underpins them.
Blockchain is a decentralized external ledger that records and verifies digital currency transactions, using encryption to secure their validity. The Bank of England, Sweden's central bank and the Bank for International Settlements (BIS) have all published papers exploring the feasibility of central bank-issued digital currencies - government-backed "fiat" money that would compete with private cryptocurrencies.
Banks, asset managers, insurers, financial market infrastructures and venture capitalists are all investing heavily in blockchain projects that seek to provide new financial services as well as deliver old ones more efficiently.
Martin Arnold, Banking Editor of the Financial Times, says "blockchain is the hottest buzzword in the financial sector". "Financial institutions are setting up consortiums of like-minded companies and carrying out proofs-of-concept to test the potential of the new technology," he says.
"There's an awful lot of activity and excitement. Some of the areas of banking I have seen most progress in are clearing and settlement, payments, trade finance and syndicated loans."
Brad Levy, Global Head of Loans and CEO of MarkitSERV at IHS Markit, says "it feels like we are about three years in on a 12 to 15-year journey. It's early, but real". He points out that potential uses for blockchain are being examined in all industries, not just finance.
"There are cool things going on, like the World Wildlife Fund exploring DLT for tracking endangered species, and the former drummer of Guns N' Roses using it to collect music royalties. Its uses are being explored for shipping, supply chain management, food safety and identity management."
In finance, the greatest potential lies in areas "where data is more sensitive, where the management of assets and liabilities is not as automated as it could be, where speed is important, and where there is a multilateral workflow between companies," adds Mr Levy.
"The promise of blockchain is helping you move beyond your firewall, letting data flow in the ether, safely and securely. It is also where there is a heavy interaction with cash, in terms of reconciliation, in areas like loans, OTC derivatives, collateral management and repo."
IHS Markit is developing a blockchain-based system to handle payments in syndicated loan trading. Called Stax, it should reduce the complexity of cash transactions and reconciliation between parties in a syndicated loan.
Richard Crook, Head of Emerging Technology at RBS, says that a big advantage of DLT is that it is an open technology. "No single vendor has ended up owning it. That's a great thing," he says.
The fact that it can be complicated does not matter to users. "Most people don't know what TCP/IP internet protocols are but they use the internet. They might not know how GPS navigation works, but they use it," says Mr Crook.
Rhian Lewis, Co-Founder of CountMyCrypto and London Women in Bitcoin, agrees. "The point at which blockchain will become mainstream will be the point at which people don't know they are using it."
By Michael Imeson, Senior Content Editor at Financial Times Live, and Contributing Editor of The Banker. This article is based on a panel session at "The Data and Disruptive Technology Forum: Rethinking the Financial Services Ecosystem" organised by the Financial Times and IHS Markit in London in June 2018.
- Securities Finance 2018 Year in Review
- How banks can keep pace with XVA
- Using quotes to measure CRT MBS liquidity trends
- RiskTech100® 2019: Andrew Aziz discusses our recent FRTB award win
- Distressed Loan Settlement: A Time for Change
- Factor and style model performance: 2018 in review
- Investors Can Get Ahead of Cyber Risk – Here’s How
- IBORs, new benchmarks series - Focus on SOFR
Our private markets group will be exhibiting at next week's Asia Private Equity forum in Hong Kong. Click on the bu… https://t.co/ysrwN0GmuS