Blockchain technology has set the financial services world alight, with banks and other firms embracing the technology — even before they fully understand the exact role it will play.
Although banks have been skeptical of bitcoin — not least because of its shaky regulatory position — they have been quick to explore the blockchain technology that underlies the bitcoin network.
As early as January 2016, Charlotte-based Bank of America Corp.’s chief operations and technology officer, Catherine Bessant, said that it was “very important in the intellectual property world to reserve our spot even before we know what the commercial application might be.”
Two years later, a patent analysis by Ft. Lauderdale, Fla.-based intellectual property law firm IPVision showed that Bank of America led the field in blockchain-related patents, with 43 to its name.
In fact, the financial services sector, as a whole, figured heavily in patent filings, even outclassing traditional technology companies. Financial services firms owned 20% of all blockchain-related patents, according to the IPVision data.
So, why are financial services firms so interested in blockchain technology?
“They’re getting behind the technology in terms of how it will improve efficiencies and operations, and reduce costs,” says Kyle Kemper, executive director of the Blockchain Association of Canada. “It makes a lot of sense. If you look at Wall Street and the challenges it has had with settlements, blockchain could revolutionize settlements in that industry.”
Although trades happen at lightning speed, the backend payment and ownership settlements to complete trades can take far longer. Trades are processed using third-party services that can face bottlenecks as they struggle with high volumes.
“T+3” — meaning settlement three days after trading — was standard across the industry until this past autumn, when T+2 was adopted. As the volume of trades continues to grow, the banks settling those trades would sorely like to move to “T+0.”
Blockchain technology can solve that problem by enabling direct settlements between settlement banks and/or traders or brokers.
This is already happening. Depository Trust & Clearing Corp., a central securities depository in the U.S., is working with Digital Asset Holdings, a company formed by former J.P. Morgan Chase & Co. managing director Blythe Masters, to reinvent repurchase agreement settlements on a blockchain. Masters’ company also signed with the Australian Securities Exchange to clear equities transactions on a blockchain.
Nasdaq Inc. was also early to the blockchain-based settlements game with Linq, a blockchain-based system for documenting ownership of private securities. Nasdaq, encouraged by the project, now is expanding that initiative to another usage area: payments. In May 2017, Nasdaq partnered with Citigroup Inc. to create a straight-through processing payment system for institutional banking, facilitating payment for private securities via Linq.
In another more recent example, Toronto-based Canadian Securities Exchange announced plans in early February to launch a blockchain-powered platform to clear and settle securities trades.
Frictionless settlements are one example of how the industry is using blockchain technology to reduce risk, explains Doug Heintzman, practice leader for blockchain technology with the Burnie Group, a Toronto-based strategic consulting firm that advises companies on how blockchain can transform their business.
“Risk reduction is achieved through several mechanisms, including the improved [know-your-client] onboarding process and the reduced settlement time, resulting in increased liquidity and decreasing balance sheet risk,” he says. “Lastly, the ability to give regulators access to a complete and verified common ledger could not only simplify the auditing process, but also reduce the costs of the current anti-money laundering protocol.”
Perhaps the biggest endorsement of blockchain technology in the financial services sector — and an example of its distinction from bitcoin — comes from J.P. Morgan Chase. Although CEO Jamie Dimon has repeatedly expressed his disdain for the cryptocurrency, J.P. Morgan has created its own blockchain platform called Quorum, which was developed atop the Ethereum blockchain platform.
Quorum will support multiple finance-related use cases, including forming the backbone for a correspondent banking network launched by J.P. Morgan, Australia and New Zealand Banking Group and Toronto-based Royal Bank of Canada (RBC). The service, known as the Interbank Information Network (IIN), will use blockchain to process global payments. J.P. Morgan executives believe that the network will reduce payment times to hours from weeks and cut costs associated with resolving payment delays.
Participation in the IIN isn’t RBC’s only blockchain venture. The bank also has been experimenting with the technology to move payments between its U.S. and Canadian operations.
Other Canadian banks also are interested in the technology. In October 2017, Bank of Montreal joined the Batavia project, an initiative UBS Group AG and IBM Corp. launched to build a new global trade platform based on blockchain technology. In addition, Bank of Nova Scotia partnered with blockchain company AlphaPoint Corp. to produce a proof of concept distributed ledger platform for use across a range of applications.
Another area that financial services firms are hoping to improve with blockchain technology is syndicated loans. These multi-party arrangements often still are negotiated by fax. New York-based Synaps Loans LLC, a consortium of companies including major banks and fintech firms, is reinventing the process in blockchain form using smart contracts.
This is the second article in a three-part series on blockchain technology. Up next: What advisors and clients should know about investing in blockchain-based cryptocoins.