One of the biggest threats to the banking sector today is technology. Whether it is coming from large technology firms such as Google Inc. (GOOG), Apple Inc. (AAPL), eBay Inc. (EBAY) or Amazon.com Inc. (AMZN), or from new financial technology (FinTech) start-ups, traditional banks are beginning to taking notice. One potential disrupter for the financial industry today comes from applications involving blockchain technology — the tamper-proof system of distributed ledgers which underlie cryptocurrencies such as Bitcoin. Large financial institutions, from investment banks to stock exchanges to central banks, are all beginning to work on their own blockchain-based solutions in order to stay on top of this innovation.
Banks are Taking Notice
Before looking at just how blockchain technology can disrupt traditional banking, it is worth taking note of some the key institutions that have publicly announced interest in it (meanwhile, many other banks are doing so without informing the public).
French investment bank BNP Paribas has announced it will begin looking at how blockchain technology can be applied to its currency funds and for order processing.
Technology-focused stock exchange NASDAQ OMX Group Inc. (NDAQ) has said it is working with blockchains to “reduce the time, costs, and points of friction across the capital markets.”
Goldman Sachs Group Inc. (GS), while not overtly reporting that they are working on anything in house, caused some speculation after it participated in a $50 million investment round in funding Bitcoin wallet and payments company Circle, Inc.
Spain-based Banco Santander (SAN) is working internally to develop blockchain-based solutions that will reduce its costs by $20 billion a year by the end of the decade.
Barclays (BCS) is viewing blockchain technology as “transformative” and is experimenting with it both internally and via partnerships with start-ups to use it as it relates to financial services.
It has been revealed that Citigroup Inc. (C) has worked on at least three different blockchain-based undertakings including its own cryptocurrency known as CitiCoin.
Additionally, Société Generale, Standard Chartered, The Bank of England, Deutsche Bank, DBS Bank, BBVA (BBVA), LHV Bank, BNY Mellon (BK), CBW Bank, Westpac (WBK) and the Commonwealth Bank of Australia are all in the race to research and deploy this technology.
The simplest purchase of a company’s shares to a complex over-the-counter currency swap requires clearing and settlement of trades. Ownership of the asset or contract being traded must verifiably change hands and be recorded. Today, exchange fees and clearing fees are added to the cost of each trade and can become sizable over time and given large volumes of orders.
If the ownership of shares could exist on a blockchain and any change of ownership could be immediately validated and confirmed, it would greatly reduce transaction costs and clearing costs for all sorts of asset classes from stocks to bonds to derivatives to commodities to real estate. It is entirely possible that such storied institutions as the New York Stock Exchange or the Chicago Board of Trade may one day be replaced by a distributed ledger technology that is more secure, robust and less expensive to operate and transact on.
Overstock (OSTK) recently announced it was developing a blockchain-based asset exchange called T0 in order to directly issue some of its corporate bonds to investors. New York-based bitcoin exchange Coinsetter has announced that it will roll out a blockchain-based platform to clear over the counter transactions which can settling in T+10 minutes. To put that in to perspective, buying a share of stock on a U.S. exchange takes T+3 days to settle.
Primary Market Issuance and IPOs
If secondary market trading can occur on blockchains, can primary markets also exist? The answer is yes. Imagine you are a company seeking to raise capital via issuing new shares to public via an IPO. Today, this would be a very expensive undertaking requiring an investment bank (or a syndicate of such banks) to underwrite and sell your shares. This can cost as much as 9% or more of the capital being raised.
Now, imagine that you can issue shares of your company by yourself directly to the blockchain where you can then sell them in exchange for money. These virtual shares can then be exchanged on secondary markets that also exist via the blockchain. If this scenario becomes accepted by the public, it could be a huge disrupter to both asset exchanges as well as the investment banking industry.
The Bottom Line
Blockchain technology is being taken seriously by the financial sector as it may prove to be a great disrupter to the traditional banking industry. The tamper-proof, decentralized, immutable nature of the blockchain make it ideal for reducing costs and streamlining everything from payments, asset trading, securities issuance, retail banking, and clearing and settlements. It becomes obvious that blockchain technology is much more than Bitcoin or cryptocurrencies. While those implementations as payments and money systems are indeed disruptive, the greater disruption may come from alternative uses of this unique and powerful characteristics.
By ADAM HAYES
