Summer in the City and time to review what could, arguably, be the ‘next big thing’ for capital markets – blockchain technology. It is certainly on the agenda across the financial services sector, consortia have been set up to drive development, and the business case looks great, with blockchain offering the potential for more efficient, lower cost and less complex solutions for applications such as transaction processing, clearing, settlement and, perhaps, client onboarding and Know Your Customer (KYC). So far, so good.
We detailed the potential of blockchain earlier this year and talked about it quite a bit at our Data Management Summits in London and New York City, but while most participants in financial markets have dipped their toes in the water, which is going to take the plunge? And how can blockchain, or distributed ledger, technology best be developed and implemented in a highly regulated industry?
First of the starting block, pardon the pun, with a large scale implementation is the Australian Securities Exchange (ASX), which is considering replacing its clearing and settlement system with a blockchain solution. It is planning to make a decision on whether to do this next year. If it goes ahead and is successful, the ASX could be the champion others choose to follow.
On a smaller scale, DTCC is supporting post-trade events for credit default swaps with blockchain and is expected to up the ante with wider clearing and settlement systems. Similarly, Nasdaq has made a start with the completion of a proof of concept using its Linq blockchain platform and allowing an issuer to complete and record a private securities transaction.
Not surprisingly, consultancies are looking for a slice of the action. Accenture and Swift released a paper at the recent Swift Business Forum London that assesses the opportunities and challenges of blockchain within financial services. While Swift hasn’t yet implemented the technology, Fabian Vandenreydt, head of securities and the Swift Institute, says it is working with its community to identify areas where the technology can provide the greatest benefits.
Deloitte is also making ground with a number of projects looking not only at post-trade solutions, but also the possibility of using the trusted and secure identity element of blockchain for client onboarding and KYC processes. In the post trade space, the consultancy last week shared a proof of concept for regulatory transaction reporting and said it aims to develop a platform that will support all regulatory requirements for OTC transaction reporting.
While these types of projects demonstrate fragmented potential of blockchain, the technology will only support major change across financial services if standards are developed. The R3 consortium backed by over 46 banks is tasked with this and is developing a standards based architecture based on Ethereum blockchain technology.
Marc Alvarez, chief data officer at Mizuho Securities, a member of R3 and developer of a transaction based service built on blockchain and in production in Asia, says standards are crucial to the success of blockchain, along with commercial models and sound business cases. With standards in place, he suggests blockchain could reduce friction in investment banks and lead to big cost savings, allow banks to enter new markets quickly and efficiently, and support a vast increase in information sharing with permissioned counterparties. But he doesn’t expect any of this to happen soon, and cites Microsoft founder Bill Gates’ view that we always overestimate change that will occur in the next two years and underestimate change that will occur in the next 10 years.