Myth vs. reality
Blockchain’s utility is proven. Its technical structures date from the early 1990s. Nevertheless, popularised with the publication in 2008 of a seminal paper dealing with ‘peer-to-peer’ (P2P) money clearing or ‘bitcoin’, DLT is frequently puzzled with its prominent application. The stock exchange prices quote for Bitcoin and other ‘cryptocurrencies’ is considered as a barometer of investor interest. This misperception in between blockchain and Bitcoin belies its disruptive potential.
To clarify the point, DLT is an advanced computer architecture built on a series of entries called ‘journals’ or ‘blocks’ including information and directions in a digital format. These blocks are linked in a ‘chain’ (thus a ‘blockchain’), offering a historical transaction log. These major characteristics identify DLT from the prevailing analogue and open access web on which organization now depends and in design discuss its broad-ranging impact. Initially, digitalisation and decentralised processing save expense and time, enable complicated computation, remove traditional central authorities such as banks, and provide transparency through P2P exchanges, as well as access to all historical records. Second, cryptographic procedures are trusted for every deal, guaranteeing the security and stability of databases and entries. Furthermore, the distributed database can be open up to the general public or regulated (permissioned) and provision made to update or amend entries.
Reflecting these benefits, DLT is expanding to eclipse such current applications as cash settlement, to consist of a range of more complex and higher worth deals. The ongoing decline in the cost of computing and data storage, coupled with technical advances, will accelerate this dynamic.
Very first wave
The first wave of applications in financing and banking is being driven by easily achievable gains in actively traded assets. These include greater security of information, ease of confirmation of clients required by Know Your Customer (KYC) and anti-money laundering (AML) regulations, increased processing speeds and assistance of recordkeeping. The common denominator of an existing, liquid market in the underlying monetary possession supports trading. Moved by expense savings attained by digitalisation and decentralised processing, the first wave of blockchain applications in FinTech have concentrated on transaction processing and settlement regimens.
These efforts are typically sponsored by industrial banks and consist of the cleaning and settlement of trades, such as credit default swaps, payment systems and digital currencies, as well as trade financing, including bills of lading and letters of credit, client verification and syndicated loan settlement. While the DLT systems and programmes to handle higher transaction volumes are shown, the pace of adoption depends upon the rate of change in business processes, regulatory compliance, in addition to establishing a level of collaboration to achieve an emergency of individuals, or a so called ‘community’.
There are numerous examples of these initial applications. MasterCard incorporated a blockchain payment system providing suppliers real time, lower cost settlements on cross-border transactions. Representing a consortium of more than 40 of the world’s largest banks, fintech firm R3 introduced a payment system built on DLT platform Corda, to expedite intra-bank transfers. Real-time cross-border payment blockchain network RippleNet is supported by a broad base of banks. Swift is another banking consortium formed to fix up international accounts, optimising system liquidity. And a JPMorgan network– the Interbank Info Network– is designed to accelerate compliance and put together data required to verify payment.
A more ambitious application of blockchain is as a source of start-up or initial equity capital. Referred to as initial coin offerings (ICOs) and imitated initial public offerings (IPOs), these fundraisings are being scrutinised by the Securities and Exchange Commission (SEC). As deals are restructured to comply with securities laws, the volume of such offerings– consequently described as security token offerings (STOs)– and the range of applications is increasing. While Wall Street’s brokerage community might be dismissive, the implications of these capital raising ventures is profound.
Recent examples of blockchain’s effect on financial markets work out beyond these initial applications or P2P financing or crowdfunding. The series of new, creative endeavours portend a brilliant future for blockchain. In contrast to the first wave, these emerging initiatives are designed to address less liquid properties and increasingly complex transactions. Resulting impacts will likely be more broadly disruptive and offer substantially greater returns.
By way of illustration, St. Regis Aspen, a Colorado resort, is a collaboration formed with a crowdfunding website, Indiegogo, that in lieu of a traditional IPO finished a private placement by means of DLT funding realty. This sale of ‘tokens’– fractional interests in the underlying home– raised $18m, certified with securities laws. Another innovative application, Ceres, is the digitalisation of oil and gas royalties and mineral reserves. This kind of personal placement is designed to bring together buyers and sellers to develop a market in complicated properties and capitalise on the growing interest in alternative financial investments protected by high yielding structured funding. The implications of these 2 efforts is substantial for incumbent markets in public and personal positionings as well as securitisations.
Capitalising on the previous designation by regulators of Bitcoin as a digital currency, a more disruptive application to worldwide banking is Libra, Facebook’s proposed digital currency. Connected to a basket of currencies of which the US dollar represents half, Libra is developed to be a tradeable currency, with an all set market based on the unmet requirements of a majority of the world’s population living in nations with restrictive exchange guideline. To the extent Facebook’s initiative succeeds, international monetary policy, currency markets and fiscal practice may essentially change. Moreover, the growing accessibility of digital currency represented by Libra will have a multiplier effect by assisting in financial investment in and increasing the liquidity of all digital properties.
What’s the takeaway?
Such game changing blockchain applications based upon tested innovation are considered extremely likely. However the timing of adopt
ion is by nature constantly speculative. Resistance to alter increases significantly with novelty. Blockchain technology’s broad ranging effects are, at the very least, novel. Progress, therefore, will be driven by and rewarded based on initiative. What is particular regarding DLT applications in business generally, and finance and banking in particular, is the vital worth of techniques anticipating coming changes and plans to capitalise on the opportunities represented.