Many early blockchain initiatives have only been implemented in testing environments, while their future commercial use remains uncertain. Nonetheless, an industry-wide conversation has emerged, as financial institutions explore blockchain’s theoretical appeal, its practical applications and standards have to be established to realize its potential.
Corporate Insight, a firm providing competitive intelligence, consulting and user experience research for financial service firms and educational institutions, recently released a 62-page report, “Blockchain Solutions and the Future of Finance.” The report is based on input from 14 companies active in deploying blockchain technology to financial services firms.
Blockchain technology offers a more efficient, cost-effective, and transparent future for financial services. The distributed structure of a blockchain gives each participant an identical copy of a shared ledger, ensuring the accuracy of information among network members.
The shared network simplifies the complex processes of various financial transactions by enabling direct connections between firms and market infrastructure organizations. This eliminates the need for multiple ledgers to be reconciled.
The direct connection also improves the speed at which currency and assets can be exchanged. In providing real-time gross settlement, digital assets can settle instantly, affecting net capital requirements and reducing exposure to settlement and credit risk.
Parallels are noted between the evolution of blockchain and the rise of the Internet.
The Internet, as a foundational technology, delivered an immense impact on the creation, storage and transfer of information. It took decades, however, to realize its potential.
Several executives interviewed noted that the Internet is to information what blockchain might be for value. The absence of universal standards, regulation and governance, combined with the technology’s nascence, suggest blockchain’s effect on financial services will most likely unfold in one to two decades.
While structural change in global finance could take decades to realize, this is not to say the technology won’t impact individual organizations in the near term. Nine out of 14 organizations’ representatives said they have solutions set to go into production in 2017 or 2018. The remainder are working to improve their products and are helping clients launch blockchain solutions.
While poised to address existing inefficiencies, some of the technology’s characteristics cannot help financial institutions in the short run. Immediate transaction settlement could make short selling – selling borrowed stock shares and buying them back for a profit when they fall in value – impossible.
Loaning a stock cannot exist with a blockchain, as it settles transactions in real time and creates an immutable record of who owns what. For an investor to sell a stock, they have to be recorded as its owner, despite never owning the stock to begin with.
Blockchain providers are creating solutions to address such concerns.
Accenture, for example, announced a prototype that allows for a central authority to edit stored information, contradicting the immutability principle.
In December 2016, Digital Asset Holdings unveiled an addition to its blockchain to address privacy concerns, referred to as fingerprints. The fingerprints allow recording of data on the blockchain, but are one-way cryptographic functions accessible exclusively to designated parties.
From now to 2020, Corporate Insight believes the most likely blockchain use cases will focus on specific process inefficiencies like requiring a person to reconcile trade data across multiple ledgers. Such applications will be limited in scope.
As solutions proliferate, a multi-chain environment consisting of many providers with chains in production could emerge. Providers believe a multi-chain environment would help scale the technology. But from a competitive viewpoint, organizations will have to compete to become the standard.
In addition, multiple chains will need to address interoperability, the ability of computer systems and software effectively exchanging information.
A unique outcome has been the collaboration the technology has encouraged across the industry.
Hyperledger is an example of an open-source consortium encouraging the collaborative development of blockchain technology. The organization has grown to include over 100 members since 2015.
Financial areas where blockchain technology is expected to have a useful impact include real estate transactions, commodities, cross-border payments, capital markets, loyalty rewards, know your customer requirements and identity management.
Half of the use cases outlined in the report address blockchain applications and solutions that focus on capital markets, payments and trading platforms. Such solutions are designed to allow firms to easily enter the blockchain space with strategies tailored to their specific needs.
Symbiont, for instance, provides a platform that focuses on private equities, syndicated loans and non-financial use cases.
The remaining half provide secondary components of the technology, such as web services, smart contracts and software development kits.
SmartContract offers “Smart Oracles” that connect smart contracts to external data and payment sources, in addition to internal legacy technology.
Monax Industries offers an open-source platform and smart contract-based software development kits that apply to several use cases, including asset origination, asset servicing and record management.
Hyperledger provides an open-source organization, where any party can use the open-source code to become a contributor to various projects.
Bloq, BlockCypher, Monax Industries and Loyyal sell their products through specific partners such as PwC and Deloitte. The partners act as distributors. When selling products through such an organization, blockchain providers have a limited relationship with the end users.
The partnerships emerging allow financial services firms to reduce the time, effort and cost to build a blockchain network from the ground up.
Firms like AlphaPoint, Chain, Paxos, SETL, SmartContract and Symbiont partner directly with customers. The process for such players varies based on the client’s product needs and blockchain knowledge.
Chain and Paxos indicated that it can take up to two years for partnerships to reach completion, or the time when the product goes to market.
Chain and Nasdaq in 2015 created the first record of private securities on a blockchain on a platform, Nasdaq Linq, that allowed private companies to trade shares pre-IPO. This reduced settlement time and eliminated paper stock certificates.
Overstock in December 2016 issued the first public stock offering on t0, an alternative trading platform. By partnering with Keystone Capital, a securities broker-dealer, the offering was open to retail investors who owned Overstock stock. The platform allows users to trade shares digitally, securely and immediately.
BlockCypher partnered with ShoCard, a blockchain startup creating digital identity solutions, and the Department of Homeland Security, to help solve identity management challenges and combat cybersecurity.
ConsenSys teamed with Microsoft and BlockStack to provide Ethereum based Blockchain-as-a-Service on Microsoft’s cloud computing platform Azure, Microsoft’s cloud computing platform, to provide a blockchain-based identity system.
ConsenSys teamed with Lo3 Energy, a technology consulting firm, to execute an energy transaction through its TransActive Grid platform.
Symbiont teamed with Credit Suisse, Ipreo and R3 to demonstrate how blockchain technology can be used in the syndicated loan market.
More blockchain solutions will come to market in 2017.
Digital Asset Holdings, SETL and Paxos have provided specifics about products they expect to launch this year.
Paxos will launch a blockchain-based gold settlement service, EuroClear Bankchain.
Digital Asset Holdings will launch a post-trade service to improve Australia’s cash equities market post-trade process. This solution will be deployed in partnership with the Australian Securities Exchange and could replace the existing settlement system.
SETL teamed with Cobalt, a distributed ledger provider focused on the FX market, to reduce post-trade risk and cost for participants trading foreign currencies. The solution is set to go live in Q3 2017.
The report goes into detail on all of these organizations, including their histories, partnerships and future outlooks. It acknowledges all of the individuals that provided insight from each organization.
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Last modified: October 5, 2020 5:06 PM