Banks up the ante on blockchain
Disruptive technology doesn’t come much bigger than blockchain - the record of asset ownership underpinning bitcoin - and banks are taking a strong interest in how it can be applied to financial markets.
Nearly two dozen of the world’s leading banks have formed a partnership to roll out the advanced shared ledger technologies to global financial markets.
Working with R3, banks plan to establish consistent standards and protocols for the use of blockchain technology across the financial industry.
What's the benefit? For starters, banks could save huge amounts in collateral and settlement costs, while collateral could be moved around a lot faster, enabling banks to comply with new rules on derivatives markets.
Santander InnoVentures reckon that blockchain technology could cut $15bn-$20bn a year from banks’ costs for cross-border payments, securities trading and regulatory compliance by 2022.
"It is only a matter of time before distributed ledgers become a trusted alternative for managing large volumes of transactions," Santander said in its report, The Fintech 2.0 Paper: rebooting financial services.
Banks are not the only people keen on how to utilise blockchain. Visa is looking at how it can enable remittances to replace the use of current payment ‘rails’. Meanwhile Nasdaq has just launched a blockchain-enabled platform for trading shares in private companies.
Central banks are also interested in the potential for blockchain and its distributed ledger. The Bank of England issued a report last year that examined how the technology could be utilised.
The Bank said it could be possible for “the existing infrastructure of the financial system to be gradually replaced by a variety of distributed systems”, creating what it loosely termed as an “internet of finance”.
It added: "This development could allow any type of financial asset, for example shares in a company, to be recorded on a distributed ledger. Distributed ledger technology could also be applied to physical assets where no centralized register exists, such as gold or silver."
There is potential here for blockchain to illuminate the murky world of dark pools and bring more transparency to OTC transactions.
BBVA said in a recent report that blockchain could be used in a multitude of scenarios by enabling ‘smart contracts’ for everything from loans to inheritance and escrow.
Regards capital markets and blockchain, BBVA had this to say: “Securities based on payments and rights that are executed according to predefined rules can be written as smart contracts. There are already experiments for the issuance of smart bonds and the management of private stock markets. Contracts that monitor the performance of digital or non- digital assets can also be used as futures, forwards, swaps and options.”
Of course there are challenges - blockchain wasn’t designed for all these use cases, but as a way of creating and distributing digital currency. Applying to multiple real-world scenarios could be harder than the rarified air of cryptocurrencies. That won’t stop the financial services industry from trying, though.