At the Distributed Ledger Technology (DLT) Conference in New York this past September, the IMN brought together some of the leading voices in the blockchain/distributed ledger space for an interesting discussion of blockchain’s potential impact on financial services. Through panels and interviews that blended the perspectives of large financial institutions, regulators and blockchain technology providers, DLT 2016 explored the biggest questions surrounding blockchain. Below, we explore several key themes that emerged from the conference. We’ve divided these themes into two categories: the benefits and the challenges associated with blockchain and financial services.
- Forced Cooperation Among Industry Players: Although opinions varied on what the future of blockchain will look like, participants agreed that a unique outcome of the technology is the cooperation it will force among financial services firms. Market participants have come to realize that the implementation and success of blockchain depends on a mutualistic approach. Whether the future state will be composed of a network effect for a few larger consortium chains, or a multitude of blockchains for specific use-cases, it was clear that participants believe the technology will have a significant impact on the structure – and even the culture – of global finance. The shift to an open and trusting culture will come about through the shared progress of a single goal – blockchain implementation – as well as the utilization of the technology itself, that provides transparency to very opaque industries.
- Increased Speed, Decreased Cost: A commonly cited benefit of blockchain is increased speed and decreased cost of existing financial operations. This concept was woven through almost every panel and networking discussion at DLT 2016, with use-cases given for payments, remittance, syndicated loans, mortgages, compliance, clearing and settlement, and post-trade reconciliation. Once implemented, blockchain technology can overhaul many of the costly manual processes that exist within financial services, freeing up much needed capital and improving efficiencies across the ecosystem.
- Greater Transparency & Security: By its very nature, blockchain is a distributed immutable database that provides a clear view into the history of every activity or transaction ascribed to its network. Several panels focused on the value provided by this transparency within the global economy, offering up examples for stock lending, auditing, and trade validity. Through blockchains’ sophisticated cryptography and distributed structure, financial firms can mitigate risk by cutting out the middle man in a transaction, and work together through a single source of truth – the blockchain.
Below we provide two examples in the retail bank and brokerage industries:
Mortgages: One example of how blockchain could create greater transparency and security is the mortgage origination process. The process for creating a new mortgage is time-consuming and onerous for all participants, taking weeks and involving several exchanges of value and third-party validation. At its core, it is a record keeping challenge where errors can be costly (see Bank of America’s $17 billion settlement with the DOJ). By utilizing blockchain to organize all documents associated with a mortgage—including customer tax forms, credit reports, appraisals, titles and deeds—a bank can instantly assess the suitability of the customer for a loan, as well as the nature of the mortgage. This cuts down on the cost and processing time associated with securing a mortgage, and provides the transparency needed to establish trust for all parties.
Securities Lending: In an entertaining keynote speech, the CEO of Overstock and T0 Patrick Byrne discussed how after the Wall Street Paper Crisis, the SEC created the Depository Trust & Clearing Corporation (DTCC) to act as the central counterparty clearing system. Last year, the DTCC processed $1.5qn in securities with a settlement time of 3 days – or T+3. With the introduction of blockchain, third-party validation and its related fees could be eliminated, and transactions could occur in near real time. Byrne explained the importance of this to retail investors: “When you trade with ETRADE or Ameritrade, what are you paying? $8.95 now? At a major broker you’d be paying $25 a trade if you’re a typical retail investor. That money is going to feed a lot of different mouths through the system. We think that 85% of that cost goes away in the blockchain. Eventually, competitive pressures should force that down. We think it’s quite possible to offer free trading to the retail customer.”
- Proving the business case: Blockchain can be a perplexing topic. It is a nascent technology that tends to require some technical understanding. Several panels focused on strategies that would help to advance internal participation beyond technologists. While IT may see the value in investing in blockchain, internal adoption across departments will require buy-in based on tangible proof of the value it can bring. Seth Phillips, the Lead Product Manager of Paxos, a FinTech company focused on building blockchain solutions for financial institutions, explained it perfectly by stating, “If I pull out my phone and I swipe for an Uber to come, I don’t care what technology they use that sits behind that experience. I just want my car to show up.” In order to gain internal traction, blockchain solutions that are piloted through startups or built internally must solve a real business problem, but must also be shared and easily perceived across the organization.
- Interoperability: Parallel to the discussion on the future state of blockchain runs the debate on which type of distributed ledger is “right” for the financial services industry. Similar to the early days of the internet, there are currently many players vying to become the standard. As the market unfolds, interoperability will be imperative. Multi-chain environments will require communication not only between other chains, but also with firms’ existing legacy systems. Interoperability will undoubtedly become a factor in forming future standards. As more business requirements and technical challenges arise, solutions that solve both the business need and achieve interoperability will secure their place in the competition. Financial firms should continue to dedicate resources to the development of blockchain solutions. Although there is always an associated risk of investing in the wrong solution, this process will help de facto standards emerge and establish measurable benchmarks for firms to adopt.
- Regulation: The DLT regulation panel highlighted several examples of the New York State Department of Financial Services, the Fed, SEC and CFTC monitoring blockchain development, while displaying how closely regulators have worked alongside firms and startups to avoid impeding innovation. The discussion balanced between the need to foster growth while evaluating how that growth fits into the existing regulatory landscape. While they played it close to the chest, many of the regulators referred to the benefits blockchain could provide around identity verification and auditing.
The hype surrounding blockchain is warranted given the potential the technology has to alter the structure of global finance, and ultimately the institutional and retail financial services customer experience. IMN’s Distributed Ledger Technology Conference shed much-needed light on a sometimes opaque topic, illuminating the tangible near- and long-term uses for distributed ledgers in financial services.