Blockchain – a distributed ledger technology that provides a complete record for every digital transaction – began with the birth of bitcoin, the unregulated tech-based currency that appeared on the market in early 2009. While bitcoin is entirely uncontrolled, and therefore, an ideal breeding ground for illicit activity, blockchain was developed to underpin the online currency. It has since been hailed for its uses beyond trading uncontrolled online currency, and investment banks are rapidly jumping on board.
A cost saving solutionInnovations such as blockchain could offer investment banks a lifeline in a harsh financial climate, according to a new report from Accenture Consulting and McLagan,
Banking on blockchain: a value analysis for investment banks. The research finds that blockchain could save leading investment banks up to $12bn a year in back office costs.
“By replacing traditionally fragmented database systems, blockchain-based solutions can reduce or eliminate costs associated with replicating data and improve data quality,” says
Business Insider UK’s Oscar Williams-Grut.
Millions have been invested in the development and exploration of blockchain over the past couple of years, and projects are now beginning to come to light. “A consortium of seven banks, including Deutsche Bank, HSBC and Société Générale, announced a joint project to develop a blockchain-based international trade app last week,” says Williams-Grut. “Wall Street clearing house Depository Trust & Clearing Corporation has also begun working with firms to bring blockchain into the clearing process.” The trade app project, as reported previously by
Business Insider UK, will involve the commercialisation of a new product, Digital Trade Chain (DTC), which is designed to boost global trade among small and medium-sized businesses using blockchain.
Similarly, Deloitte made the headlines recently, announcing the opening of a new laboratory in Dublin that will develop pioneering blockchain projects for finance firms in Europe and the Middle East.
Business Insider UK article
Superior securityIn addition to improved data quality and the huge cost saving potential, blockchain has been branded as the next big thing in banking security. “Blockchain technology can promote security in a number of ways, such as enabling the capability to work with a transparent single source of truth,” Kim Sgarlata, a partner at Capco, tells
Raconteur’s Davey Winder. “The concept of decentralised decision-making also removes some challenges conventional systems currently endure, such as single points of failure and the operational risk posed by rogue system operators.”
$12bn
The amount that blockchain could save leading investment banks in back office costs per year
Stumbling blocks to the adoption of blockchain include negative association with bitcoin and its public network, as well as “regulatory obligations in terms of system robustness”, says Winder.
While blockchain can be used as a powerful tool to improve banking security, its effectiveness is, of course, case dependent. “When we discuss this with clients, we start by considering whether the problem posed could benefit from operational simplification, risk reduction, reduced fraud, improved efficiency and the reduction of capital lock-up,” says Sgarlata.
Raconteur article
A long way to goThe hype surrounding blockchain is immense, but is this level of excitement justified? “The finance world's attempt to build a white-collar version of blockchain has generated Silicon Valley quantities of buzz,” says
Bloomberg’s Lionel Laurent. “There hasn't been much genuine risk-taking, though, nor have we seen much of a result.”
The banking industry will face a much-needed “dose of reality” this year, according to Laurent, as laboratory projects are moved into “real world” scenarios. Banks are eagerly developing blockchain projects for all manner of trading operations, which have “traced an arc from fear to necessity: the fear of being usurped by tech-savvy upstarts or grassroots alternatives; the necessity of cranking up weak returns by taking a hatchet to clunky and costly back-office processes”.
Citing Bloomberg Intelligence data, Laurent notes that median return on equity (ROE) for major investment banks around the world is forecast to be approximately 7–8% over the next two years. This is a minor improvement on last year’s figures, but “lower than historic norms”.
However, it is important that the technology is not dismissed as pure hype. While risky – “it's not certain that industrial-scale finance blockchains will work as expected” – the potential is certainly there, especially in light of continuous technological improvements. Nevertheless, “if they want to keep the buzz going, blockchain's banking backers will have to prove they can offer even greater rewards, without having the spur for greater risk-taking that would have come from plunging market caps,” says Laurent.
The potential for blockchain is there, not only for financial institutions, but national banks and governments too – and this year is set to be an exciting one. A rise in real world applications, as well as new market entrants and increasingly sophisticated technology, will bring fresh ideas and innovation to light.
Bloomberg article
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