While cryptocurrencies continue in their efforts to gain regulatory approval, enthusiasm for blockchain from big banks and financial institutions is gaining momentum.
The recent news that JPMorgan has created the JPM Coin, a digital token using blockchain technology enabling instantaneous transfer of payments between institutional accounts, is just one of many examples that show the potential of blockchain as an evolutionary technology in the financial-services sector.
According to International Data Corporation (IDC), worldwide investment in blockchain solutions is forecast to reach $11.7 billion in 2022. Meanwhile in a recent Deloitte survey of over 1,000 senior executives, almost half of respondents said they expect their organizations to bring blockchain into production within the next year, while over 30% stated that they are already operating on blockchain.
In the IDC report, it is notable that it is the financial services sector which leads the way with $552 million set to be invested in blockchain projects during 2018. By comparison, the distribution and services sector was forecasted to spend $379 million on blockchain in 2018. While there is no denying the numbers are low, they represent that far from being slow to adopt, senior executives in financial services are taking blockchain seriously.
Blockchain, the basics
Blockchain is a distributed, shared database that holds records of transactions. It provides users with full transparency because the data and any changes to the data are visible by all parties that are allowed access. The blocks of data are verified by members of the network, and the links between blocks and their content are protected by cryptography. Previous transactions cannot be destroyed or forged which means that the ledger and the transaction network can be trusted more than centralized databases.
The technology has been in existence for around a decade, but it is only in the last couple of years that it has become less associated with its crypto cousins. It is still fundamental to cryptocurrency systems; it is the technology that underpins all crypto activity. But the creation in 2017 of new blockchain platforms such as Ethereum, Stellar and Hyperledger, which allowed for “smart contracts” (software that mimics a business agreement), meant that the technology could have many more uses.
Varied use cases: payments systems to clearing
These technological developments have had a radical impact on how we can use blockchain. In fact, the technology lends itself to just about every function in the finance sector. It underpins cross-border payments and processing, P2P payments, micropayments and currency exchange. For example, Santander has launched an app called One Pay FX that uses distributed ledger technology to allow customers to send international money transfers in near real time.
In clearing and settlement, blockchain can benefit investors, day traders and market makers by establishing fast, low cost counterparty clearing systems. Instead of T+1 or T+2, it will soon be possible to make trading fully automotive with virtually instantaneous settlement.
There are potentially unlimited use cases for blockchain. The distributed ledger technology (DLT) format creates trust between parties, increases transparency, speeds up transaction times and reduces costs. It enhances the security of products and the systems on which they operate and increases customer loyalty.
Creating liquidity out of complex assets
It is in the realm of more complex assets such as real estate that I believe that blockchain could make the most important changes.
Certainly, it will enhance the maintenance of land registry records; the transparency of ownership and title transfers mean that there can be no false ownership claims.
But blockchain has the potential to create a globally liquid secondary market for real estate. Properties could become tradeable investments freeing up much needed capital in an otherwise illiquid market.
Real-estate tokens registered on the blockchain could be traded in the same way as shares, with greater trading velocity, lower lock-up periods and greater control for investors. By using blockchain technology, it is possible to register fractional ownership in a transparent, trustworthy and auditable way.
Where to next?
There is no way of knowing where blockchain will lead us. But what we do know is that adoption of this nascent technology is gathering momentum. Trustworthy, transparent and immutable, blockchain is here to stay and I am sure that it will redefine many aspects of our financial lives.
