The potential of blockchain as a future financial services infrastructure

02 March 2017 Consultancy.uk

The potential for blockchain technologies to create considerable disruption in the financial services industry has created considerable hype, as well as spurred considerable effort to explore the potential. A new report considers the current state of the market, key drivers and benefits as well as potential roadblocks to implementation.

The allure of Distributed Ledger Technology (DTL), often called blockchain, technology has been strong in recent years, creating a flurry of activity among incumbent players, FinTech startups and academia. The technology, which underpins digital currencies like bitcoin, offers a range of benefits, from lower costs to faster and more transparent operations.

In a new report from the World Economic Forum, supported by Deloitte Consulting among others, blockchain technologies are explored in relation to a wide number of potential use cases – from key benefits to potential bottle necks.

Global DLT efforts

Investment in blockchain technologies continues apace. As it stands, more than 24 countries have invested in DTL, while more than 90 corporates have joined blockchain consortia. Research has so far generated more than 2,500 patents over the past three years. Banks remain confident in the future of the technology, with 80% predicting to initiate a DLT project by 2017.

Venture capital too has come to the party, which has the potential to disrupt a trillion dollar market, investing more than $1.4 trillion over the past three years into propositions. Corporates too are keen to court possible FinTechs, with corporate venture capital hitting $2.9 billion, while FinTechs themselves continue to explore collaboration options with industry players.

Value drivers for DLT technology

The value of DLT to industry players is multifaceted. The top value driver noted by the report is operational simplification, whereby DLT reduces or eliminates manual efforts required to perform reconciliation and resolve disputes. The second key driver stems from improved regulatory efficiency, as DLT allows regulators real-time monitoring access to financial activity between regulatory entities across borders.

The technology also allows for counterparty risk reduction propositions, reduce the clearing and settlement time, reduce locked-in capital requirements and boost liquidity as well as minimise fraud, by creating a full transparent and a practically immutable transaction history.

Key benefits of technology for products and services

The transformation potential of the technology can be relatively extensive. The immutability of the technology can end the dependence on information silos that require detailed reconciliation activities as well as audit and arbitrage concerns resulting from a lack of a single version of truth across actors. DLT promises, through its inherent structure, to eliminate the need for reconciliation as well as create a historical single version of truth.

The technology is also touted to reduce the need for central authorities across market participants, while reducing regulatory load arising from lack of transparency. The technology is inherently transparent, eliminating the imbalance of information among market participant as well as increasing the ability for regulators and regulatory entities to cooperate.

The third key pillar of the core of the technology is autonomy, ending central authority oversight in contract execution burdens, brought on by a lack of trust between counterparties. The technology ensures that agreements are executed to agreed upon business outcomes, while also disintermediating support entities established to resolve disputes.

Key potential barriers to technology

While DLT propositions have promise, hurdles remain. Bitcoin itself requires considerable computing power, and time relative to other forms of transaction, to validate transactions across its external ledger, making scaling the technology to levels required for consumer adoption difficult.

The technology continues to be developed however, with various ways of avoiding the pitfalls while enjoying the sights, being developed. Aside from technical difficulties, however, the technology faces a host of interest, legal and practical difficulties for implementation. In the infrastructure domain, upgrading or installing new infrastructure that interfaces with wider systems remains a key, and potentially costly, hurdle. Further, the report notes that “aligning key stakeholders for collective action will require difficult balancing of interests in the face of diverging interests and zero-sum games.” Finally, considerable changes at the regulatory level, across global jurisdictions would be required to allow for integration of propositions between parties across the globe, while parties will need guidelines on standards of practice, and the creation of new legal and liability frameworks.

The authors note that if these goals are reached then, “Achieving all three key observations will delay large-scale, multi-party DLT implementations in highly regulated markets. However, if successful, these could enable scalable infrastructure fabrics, industry-wide solutions and standardised processes.”

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