Tech
How is blockchain changing financial services?
When Blythe Masters, a former JPMorgan Chase executive and one of Wall Street’s most prominent financiers, was named CEO of blockchain company Digital Asset Holdings in 2015, many saw it as a sign that the technology to build secure transaction networks , would disrupt financial services.
At the time, Masters told Bloomberg News, “You should take this technology as seriously as you should have taken the development of the Internet in the early 1990s.”
Eight years later, blockchain startups, like Digital Assets, have yet to make inroads into the world of finance beyond the realm of cryptocurrencies, which is where the technology began. Masters left Digital Assets three years after he joined. In May she returned to Wall Street as part of an ill-fated attempt to save Swiss bank Credit Suisse.
The collapse of cryptocurrencies scares the sector
After the spectacular explosion of cryptocurrencies last year, the question of how seriously the financial services industry should take blockchain seems even more up in the air than it was eight years ago. Late last year, in the wake of the collapse of cryptocurrency exchange FTX, several high-profile blockchain projects, including one from the Australian Stock Exchange, were suspended.
Advised
“A lot of the energy has been put into the cryptocurrency space,” says Robert Ruark, head of the U.S. fintech division at Big Four accounting firm KPMG. “When the crash happened, all those investments retreated.”
Financial experts, however, say the promise of blockchain technology and the potential to change Wall Street and beyond remains. One of the main reasons for this has to do with what a blockchain is.
Blockchains, often described as distributed ledgers, are essentially sophisticated but open spreadsheets. Imagine a Google Sheet where the editor gave access to anyone in the world. And there is no blockchain, but every digital asset, or currency, or token, has its own blockchain.
The only problem – and this is the innovation within blockchain technology and where the “cryptocurrency” in cryptocurrency comes from – is that the code that makes the spreadsheet work is encrypted. So while anyone can look at a blockchain spreadsheet, to edit it (typically to enter a transaction) you need to have the exact code (sometimes called a key) and enter a change that makes sense in the context of the rest of the spreadsheet.
You are seeing a snapshot of an interactive chart. This is most likely because you are offline or JavaScript is disabled in your browser.
So, even though anyone can view blockchains, they are nearly impossible to hack. Not that you haven’t heard of blockchain or crypto hacks – there are many. But most hacks involve accessing key codes, which are stored outside the blockchain.
The fact that blockchains make markets more transparent is a significant benefit for the technology, says David Treat, senior managing director at technology and capital markets consultancy Accenture. “Everyone gets the exact same information at the exact same time.” According to him, this corresponds to the direction in which financial markets are going, namely towards “greater access to information in a verifiable way”.
Why haven’t financial markets already migrated to a blockchain?
So, what stands in the way of moving to blockchain? A lot of it comes down to regulation, Treat says. Regulators must ensure that markets are fair, so they must approve changes. This slows down how quickly markets can migrate to new infrastructures, especially in the securities sector, such as bonds, commodities or stocks, where individual investors have already invested a large amount of money.
Another obstacle, industry specialists say, has to do with liquidity. Markets with the most activity tend to have the best prices and lowest transaction costs, even if the technology and market structure are better elsewhere. This may be why blockchains have taken off in cryptocurrency markets, which didn’t exist before the advent of the technology, but not, for example, in the bond market, where trillions of dollars are already traded through established networks.
Where was blockchain adopted?
Observers say the most immediate areas of growth in blockchain use are found in functions adjacent to trade and money markets, such as settlement and transaction processing. Linking transactions recorded on blockchain to those recorded off a blockchain has been the problem, here.
But several companies, the most important of which is Web3 Chainlink service platform, have developed software that connects blockchain with external data. Earlier this year, Swift, the global financial messaging platform jointly owned by the largest banks around the world, announced a partnership with Chainlink. In August, Swift and Chainlink successfully tested a system that can transfer value from one blockchain to another, allowing open, but isolated, networks to communicate with each other.
In another sign of how blockchain is increasingly adopted in traditional banking, both Citigroup and JPMorgan have announced blockchain projects in recent weeks.
Citi is testing a blockchain project that will allow its institutional and corporate clients to turn cash into digital tokens, making it easier to move money at times when traditional financial markets are closed. For now, though, Citi tokens can only be transferred internally, but the bank is working with regulators and other financial industry players to create an architecture that allows tokens to be moved between banks and other institutions.
In early October, JPMorgan said it would begin processing transactions between clients using a settlement network built with blockchain technology.
“When I look back and look at blockchain projects in traditional financial markets, I think the progress has been pretty good,” says Accenture’s Treat. “The vision for simplified blockchain-enabled networks exists – it just takes time.”