The Potential Impact of Blockchain on Financial Sector

One of the highly debated and most controversial topics out there right now, is blockchain. The world’s powerful and smart people are yet to reach a new consensus as to whether this revolutionizing technology is a good or a bad evaluation, however, most of them agree to the fact that it is indeed an evolution. In an effort to try and reap its potential disruptive power, hundreds of millions dollars are being invested into blockchain technology by businesses from all industries around the world. With this degree of hype and focus, I consider financial sector the most important entity to be affected by blockchain. This article, being the continuation of Blockchain Week on[1], focuses the impacts the blockchain technology can bring for the financial sector.

As far as the impacts are concerned, these are usually expressed in terms of security, real time, transparency, security, full life-cycle transaction history, cost efficiency and immutability. For now, a huge swathe of Blockchain start-ups are emphasizing on the development of the solutions for financial sector, in terms of [2]:

  • Providing customers an access to crypto-currencies and support crypto-currency-related financial services (Safello, BTCjam)
  • Tracking and Settling both mainstream and digital financial assets in a cryptographically secure atmosphere (Digital Asset Holdings)
  • Decreasing the complexity and number of intermediaries participating in existing transaction processes (Aver Informatics, Consensys)
  • Better managing digital risk, for example custodial risk, settlement risk, counterparty risk
  • Developing distributed ledger on the basis of options to conventional financial services infrastructure and processes
  • Improving the ability to verify the historical transactions

The distributed ledger brings numerous particular differentiators[3]:

  • Distributed
  • Near Real Time
  • Immutable
  • Digitized

These characteristics might give financial sector a number of potential advantages:
Reduced risk of inflation or collapse of currency as detached from country or institution
Increased speed of settlement of transaction as no need of transaction verification by central authority
Operational efficiency gains through pure digitalization of assets
Reduced duplications of transaction required
No deletion or reversibility of transactions
Improved auditability of transactions and effectiveness of monitoring

Santander[4] also announced that distributed ledger technology can decrease bank’s infrastructure costs attributable to cross-border payments, securities trading and the regulatory compliances by between $15- $20 billion annually by 2022. Surely, the technology can decrease fees for financial transactions, risks based on currency exchange, transaction settlement period, cut off times and payment fault, need for the documentation duplication; it can facilitate audit trials and probably much more.

As financial institutions amongst others try to know the new technology and its potential effects on them, they are investing into the blockchain technology in numerous ways[5]:

  • Setting an internal teams, for example, BNY Melon attempted to integrate Peer-to-Peer model in its client server system and launched its own BK Coins for the employees.
  • Investing in the startup businesses, for example, Goldman Sachs invested 50 million USD in Circle Inc and Visa, NASDAQ, Citi. Fiserv, Capital One and French telecom Orange also invested 30 million USD in
  • Launching the start-up innovation hubs and accelerators, for example, UBS Blockchain innovation Labs in Singapore, Zurich and London, Barclays Accelerator)
  • Developing common initiatives, for example, JP Morgan, Goldman Sachs, State Street, Credit Suisse, BBVAM, RBS, UBS and Commonwealth Bank of Australia are sharing the data and ideas and investing many million dollar in the R3 to find the common standard, and to understand the potential and search for the use-cases

Though we are not probably going to see the blockchain technology leading to a paradigm shift in near term, however, we are surely seeing the voracious interest in the technology underlying and its cross industry potential use cases. While the financial sector is starting to respond to the risks and opportunities brought about by Blockchain technology, other industries must also keep a close eye on the same.

[4] Santander report “The Fintech 2.0 Paper”, 2015