Blockchain Technology: Pushing the Envelope in FinTech
Blockchain is one of the most talked about technology innovations in finance today. Traditional financial institutions such as banks run on IT systems built decades ago and as a result are inefficient, opaque, and cumbersome. Blockchain can potentially overcome many of these legacy issues. Blockchain introduces an innovative business model for transferring financial assets that uses cryptographically secured networks instead of myriad third-party intermediaries.
The most significant benefit of blockchain is that it can eliminate inefficiencies in existing markets and drive faster, lower-cost, transactions that are more efficient and provide increased liquidity, transparency, and security. The blockchain offers trust for the user, eliminating the need for the intermediary and mitigating the risk of human error with complete automation.
Financial institutions including banks, clearing houses and exchanges have become excited at the prospect that blockchain might overhaul, if not fundamentally transform their business models. Currently most institutions and startups are focused on three inefficient markets that are deemed ripe for an overhaul: syndicated loans, interbank payments, and equity shares in private companies. Financial heavyweights and prominent bankers have lent their support to exploring this technology and publically highlighting its transformative potential to overhaul existing systems.
Blockchain’s adoption across capital markets and for a range of use cases is a matter of “when, not if.” Over the next 12 to 24 months, we will see early adoption grow. Blockchain solutions might be rolled out for syndicated loans as early as Q2 2016, some use cases such as derivatives may still take at least two to five years to materialize. However, the equity settlement adoption is still at least a decade away. We cannot ignore the hundreds of millions of dollars the banks would have to spend on integrating this new technology with existing systems and workflows.
Some within our industry look at blockchain as a disruptive technology that will replace all clearinghouses. Our analysis indicates that this is not necessarily true. Blockchain is not going to replace institutionalized clearinghouses like DTCC and LCH. In fact, the exact opposite may be true. Instead of replacing these institutions, blockchain may facilitate their growth (depending upon the markets they exist within and the limitations of their individual charters). As it evolves and matures, blockchain and/or distributed ledger technology will allow these institutions to improvise on existing systems and processes. Blockchain technology is mostly in its proof-of-concept phase, but it’s still in the experimental phase for some broader use cases. There is a lot of testing and proving that needs to be done before this technology becomes mainstream in the financial industry.
However, when talking about blockchain adoption within financial markets, there are several challenges that need to be addressed before we see this technology become mainstream. Blockchain requires further due diligence for defining industry standards with regards to settlement, counterparty and other transactional risks involved. The market needs regulations to maintaining a balance between security and future mass-market blockchain scalability.
This 23 Page TABB Group note – “Blockchain Technology: Pushing the envelope in FinTech” explores the future of blockchain technology in the financial markets and further discusses the inherent benefits of blockchain against the challenges the technology has yet to overcome and the use cases. This note also highlights the initiatives of a number of the startups in this space including Chain, Digital Asset Holding, Hedgy, Ripple, R3, and Symbiont.