Blockchain has been dubbed as "the future of financial services". And it's becoming increasingly apparent that such an assessment is justified. Among its many benefits, the technology allows data, information and assets to be both stored and transferred between parties located anywhere in the world. What's more, the blockchain ledger can be anonymous; it is easily accessible, and is significantly more fraud-proof than current ledger systems - clearly desirable qualities for a financial system to possess. And the fact that blockchain operates without the need for a central clearing house also has massive implications for the functioning of global finance.
Indeed, it is the financial services industry which has led the way on research during this early exploratory phase of blockchain development. By last year, nearly every major financial institution was conducting formal exploration into the technology's potential applications for its business. Recently, it was announced that R3, the blockchain consortium of which many of the world's largest financial services firms are members, raised $107 million in financing. And according to a report released last September by IBM, a survey of 200 global banks found that 15% expect to be utilising the technology in 2017.
As a reminder, blockchain utilises a peer-to-peer network of computers around the world in order to validate transactions. So instead of placing our trust in central intermediaries such as banks and governments - as is presently the case - blockchain facilitates the movement and storage of financial assets (such as gold, cash, stocks and bonds) on a peer-to-peer basis, whereby trust is established through high-level cryptographic security, and administered by potentially thousands of computers worldwide.
Blockchain will arguably have the greatest single impact on the payments sector. The current global payments system is characterised as (i) slow - it usually takes several days to complete an international payment; (ii) costly - a recent study revealed that cross border transactions cost $1.6 trillion per year, and (iii) prone to significant error - research from Experian found that error rates from cross-border transactions could be as high as 12.7%. But with blockchain, two parties can conduct transactions directly, without the need to go through a centralised entity.
Santander UK became one of the world's first banks to utilise blockchain in its new payment app, which allows customers to make international payments 24 hours a day, and which clears by the next day. The app was developed in partnership with Ripple, the US blockchain company which focuses on the international payments sector, and which has the third biggest market capitalisation of all blockchain systems.
For banks themselves, the process of clearing and settlements can also be greatly improved. The prevailing world of paper-based trading currently has to typically endure a 3-day timeframe for clearing and settlement (known as T+3). On the blockchain, however, the complete trade lifecycle, which can include its execution, clearing and settlement, can occur at the trade level, reducing post-trade latency and counterparty risk. Santander estimates that the technology could save banks $20 billion a year by 2022, primarily from the elimination of central authorities and from by-passing slow, expensive payment networks.
One property of blockchain that is particularly sought after is that it creates immutable, tamper-resistant distributed records of ownership. This concept can also be applied to ownership of financial assets; indeed, gold provides just such an example. Royal Mint Gold®(RMG) the digital gold offering from The Royal Mint and CME Group, is being launched using blockchain technology. This will allow the ownership and transfer of gold assets (each RMG token represents 1g of pure, fine gold stored in The Royal Mint vault) to be securely verified. As such, the world of gold trading is set to gain a significant boost in security, speed, transparency and efficiency.
Stock markets are also undergoing immense transformation through the adoption of blockchain technology, with US benchmark exchange Nasdaq leading the way. In 2015, the US technology exchange unveiled Nasdaq Linq, which allows private companies to digitally represent their share ownership using blockchain. Partnering with Citigroup, Nasdaq has also recently announced the creation of a new integrated payment solution that facilitates straight through payment processing and automates reconciliation by using blockchain to record and transmit payment instructions.
Looking forward, exciting times seem to lie ahead for the finance industry with regards blockchain adoption. Transferring money and assets in different ways should create the possibility for new, creative financial products to emerge. Financial inclusion is also likely to be bolstered, as more of the world gains access to a new blockchain-based financial system. And new digital currencies will be accessible to those who may be excluded from the majority of financial services at present.
We are undoubtedly in the early stages of what blockchain can enable the global financial system to achieve; as such, there remains much too eagerly anticipate over the coming months and years.
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