“Possibly the biggest opportunity from
taking an open approach to innovation.”
This technology has the potential to
help minimize counterparty risk, reduce
settlement times, improve contractual term
performance and increase transparency
for regulatory reporting."
Blockchain is a disruptive technology platform that uses cryptography
and a distributed messaging protocol to create shared ledgers
among counterparties. Originally, blockchain technology was used by
cryptocurrencies whose popularity gave rise to the idea of blockchains
as a means of building consensus. Since then, banks have begun
exploring ways to apply blockchain technology to payments. In the
context of capital markets, blockchain-distributed ledgers enable
open-source, decentralized, replicated, shared and cryptographically
secure operations that are validated by mass collaboration and can
be applied to many financial instruments.
Unlike traditional ledgers in banks, which use central authorities to manage
transactions (see Figure 2), distributed ledgers built on blockchains validate
transactions through a protocol managed by the user community via a
consensus mechanism (see Figure 3). This decentralized approach changes
the power dynamic within the financial system, shifting power from
institutions to users.
Asset transfers can be facilitated without third-party intermediaries
through the use of “smart contracts”—programmed code that replicates
conventional commercial agreements by digitizing business transactions
between parties and validating them through a blockchain. Practically
speaking, this means blockchain-enabled networks have the potential
to increase trading efficiency, improve regulatory control and eliminate
unnecessary intermediaries.
In which situations does blockchain technology make sense?
Blockchains are most valuable when:
• They are used to keep track of complex things. For example,
a swap with multiple parties that has been sold and resold and
moved between custodians is often problematic in a traditional
back office, but a distributed ledger can accommodate various players.
A similar result can be achieved with a properly designed database,
but the ledger eliminates power struggles and ensures there is no
single point of failure.
• There is no well-established authority in place.
Examples include syndicated loans, fixed-income, currency
and commodity (FICC) derivatives, private equity, and bilateral
over-the-counter transactions.
• Transactions involve finite or countable resources. A blockchainenabled
distributed ledger makes it possible to track assets in ways
that are not possible with a traditional distributed database.
• A cryptographic audit trail is required. Examples include
financial accounting and regulatory reporting exercises
How can blockchains help investment banks?
Though still in the early stages, market players have begun exploring
how blockchains can help investment banks. Blockchains can be used to:
• Reduce total cost of ownership. Blockchain stacks offer a
robust and verifiable alternative to traditional proprietary stacks
at a fraction of the cost.
• Manage system-of-record sharing. Blockchain technology
makes it possible to give various parties (e.g., clients, custodians
and regulators) access to their own live copies of a shared
system of record.
• Clear and settle transactions faster. Blockchain technology
can facilitate the transition from overnight batch processing
to intra-day clearing and settlement.
• Create self-describing electronic transactions. Smart
contracts can use blockchain’s programming language to create
context-aware transactions for complex arbitration. For example,
a credit default swap could pay out automatically according
to pre-agreed logic that watches market data feeds.
