I met recently with the chief operating officer at a major bank, who offered a lighthearted yet insightful observation on the buzz around blockchain: he said the hype around the technology is so intense that if you walk into any venture capital firm and can spell blockchain, it’s possible you’ll get startup funding.
Of course, just about any new technology rides a curve of hype, at least for a while. But dismissing the puffery, I still believe blockchain is the most radical, transformative paradigm shift in financial services we’ve seen in a long time.
The origin of trust
Why is it such a big deal in this era of Digital Disruption 2.0? Because it diffuses (or decentralizes) trust. Banks have long been at the heart of all things financial. They have been the custodian, the clearing house, and the trusted source for all financial transactions.
All of that changes when trust is found in the distributed ledger construct of a blockchain. Many banks are apprehensive and possibly not yet believers in the power of it. But in fact, if leveraged right, it can liberate banks. The distributed ledger can replace clunky processes. Reconciliations and errors can be reduced, and settlements can happen faster.
Use cases for blockchain
For example, think of syndicated loans. Such loans, typically done through negotiated contracts, can require considerable, time-consuming back and forth before settlement.
Now imagine that process with a blockchain smart contract. No gauntlet of middle-and back-office processes, no third-party intervention. Everything happens in close to real-time.
Blockchain is likely to alter smart bonds completely. UBS is experimenting with a self-paying instrument that doesn’t require any middle office or back office, any settlement, or any registry. Smart contracts and automated payments remove the costs associated with issuing these bonds.
Other companies are investigating its potential as well. Nasdaq has used it to transfer shares for the first time. Mizuho Bank has completed a blockchain test focused on cross-border securities settlement. And, the Australian Stock Exchange (ASX) and Digital Asset are teaming up to improve post-trade processing efficiency using it, with the aim of reducing costs, latency, errors, risk and capital requirements.
Blockchain continues to demand attention as these and other financial services initiatives unfold. Will it be the source of all future banking transactions?
As I’ll discuss in my next post, the technology has intriguing possibilities beyond what we generally consider to be the world of banking. Let’s Talk on the potentials of blockchain.