Blockchain is a sophisticated ledger system & a versatile technology that can record financial transactions, store records; be it medical or otherwise, act as a tracking system for logistics, information, and payments through a supply chain. In other words, it is a technology enabler that allows participants in a consortium of a network or networks to create a database of transactions shared by and available to all participants simultaneously. Thus, it is known to provide more security and, in some cases, anonymity. These features render the technology enabler as one of the most promising prospects in the field of investment, investment banking & trading.
According to a survey in the financial services sector and fintech by PWC, 77% of the players in the financial services industry plan on adopting blockchain by the end of 2020. In another survey conducted by Accenture & McLagan (2017), banks constituting 1/3rd of the sample size showed an interest in blockchain for their operations. The sample represented at least eight of the ten biggest global investment banks.
Blockchain In Investment & Investment Banking And Fintech – The Opportunity
A study by Accenture suggests that as it stands now, blockchain could help cut costs to the tune of increasing savings by 30%for investment banks. Some of the areas it helps in these matters include reducing reconciliation costs, making trade confirmation processes more efficient, increasing data quality, making complex regulatory reporting requirements seamless.
Decommissioning extensive processes & data infrastructure are crucial elements in any investment infrastructure- be it advisory or transactions. Experts believe that the technology is capable of more detailed impact analysis of businesses & capital markets than what existing infrastructures could achieve.
An analysis by Goldman Sachs in 2016 suggested that global cost savings concerning processes such as KYC (Know your customer) & AML (Anti Money Laundering) law compliances could help save up to $6 billion annually. This estimated figure doubled by the end of 2017.
Recent involvements of investment banks in the blockchain world:
- Swiss investment bank UBS has created its standalone blockchain lab to research for the company to use for transactions across its service domains.
- Goldman Sachs was involved in a $50 million round of funding Bitcoin.
- BNP Paribas, a French investment bank, has announced it will begin looking at how blockchain technology can be applied to its currency funds and for order processing.
As mentioned earlier, blockchain allows a decentralized network to share, transfer & record transactions, thereby curbing fraudulent activities such as data breach. Hence, it comes as no surprise that startups in the fintech industry have received increased funding. The PWC report mentioned above mentioned that this increase was at a rate of 41 percent CAGR and was over $40 billion between 2012 & 2016. Since the study, these figures have increased to the tune of $24 billion annually by 2019.
There is little doubt that deploying blockchain-enabled technologies reduces the time taken to run processes such as reporting and approval.
Role Of Blockchain In Trading & Clearing
Clearing & settlement of trades is essential for the most straightforward purchases of company shares in any listing. Ownership of assets and transfer of the same takes time to complete as verification is a time-consuming process. As mentioned earlier, blockchain as a technology enabler allows participants in a consortium of a network or involved in a transaction to be aware of the process simultaneously.
Blockchain has the potential to help fintech evolve into a space that promotes more convenient & ethical practices. The characteristics of the resultant technology/technologies that promote these include faster transactions, accessibility, lower transaction fees, security, overcoming regulatory obstacles such as secrecy laws & overall sinister industry resistance.
Ironically enough, it is regulatory obstacles that are proving to be the biggest preventer of blockchain’s widespread adaptation across industries.
Much like email, most online transactions are one way. There is no way to gain clearance until each party has reviewed it separately across different platforms in an integrated consortium. Blockchain allows direct integration to reduce the time taken to do the same.
Ripple, a blockchain-based venture-backed company, has been building a solution for banks to increase efficiency in the field of clearance and settlement. Although their primary objective is to impact transactions in retail banking, the resulting technology is said to impact overseas investment and B2B transactions also positively.
Unconventionally blockchain advocates predict that the successors of the likes of Facebook, Google, and Amazon will be built around decentralized protocols and are likely to be launched via an ICO (Initial Coin Offering). If such a disruption is to happen, it is expected to reduce investment banking margins, unless there is a mass adaptation trend in the industry.
Raising capital via an IPO is an expensive endeavor as investment banks are required to underwrite and sell shares. The cost of this arduous process could account for as much as 9% of the total capital being raised.
The basic framework of any blockchain-enabled system allows direct interaction with involved parties. This allows private and even personalized issuance of shares directly into the hands of the buy-side participants. These virtual shares can, in turn, be issued in secondary markets that can also exist on blockchain-based platforms.
The major problem here lies in acceptance by the general public. Once that is widely-achieved, blockchain can prove to be the biggest disruptor in the world of the new public investment domain.
Major financial institutions across the globe believe that blockchain is capable of bringing about a spin in new changes in the financial services industry. With the advent of the likes of Bitcoin, we have also seen evidence that there is a future for digital currencies. Research by KPMG suggests that there was a spike of $544m in the venture capital investment in blockchain companies in the year 2017.
Global banks in tech and investment-major economies such as Canada, Europe, and other countries such as HSBC, Deutsche Bank, and KBC have already started adopting blockchain to secure their customers’ identities as well as developing a blockchain system for trade finance. This is a clear indication of the current reliance on blockchain for databases and transactions. Its display of potential concerning driving businesses has already inspired a global transformation initiation in the financial services industry. As such, the global economy looks forward to a new space where transactions are more secure, less expensive, more seamless, and less exhaustive in terms of resources used.