The first Blockchain- the Bitcoin blockchain was originally invented to revolutionise the financial payments, enabling a peer-to-peer system that circumvents the traditional financial system. Therefore, blockchain technology is disrupting the financial industry from its nascence.
Albeit Bitcoin was aimed at creating an independently functioning system that does not need the existing financial institutions to make money transfers, the financial institutions themselves have found that features behind Bitcoin-the Distributed Ledger Technology (DLT)- potentially can be very useful for their banking and international financial businesses.
The disruption of the finance industry by the DLT technology and potential applications have being explored by international bodies such as the International Monetary Fund, Institute of International Finance, the World Bank, European Central bank, commercial banks and other players of the financial industry.
Earlier in 2019, the chief of the International Monetary Fund, Christine Lagarde, has said that the DLT technology has already affected and disrupted the financial services industry.
The Institute of International Finance (IIF) wrote already in 2015, that ‘the blockchain technology, once viewed as a profound threat to financial intermediaries, is now being embraced by traditional financial services firms as a way to reengineer financial industry to their advantage’
Already in 2016, the World Economic Forum has conducted a project, of which the members of working group included executives of MasterCard, Barclays, JP Morgan Chase, Julius Baer, SWIFT, Black Rock and other key financial actors in the industry.
The ladies and gentleman of the working group have concluded that DLT has great potential to drive efficiency through the establishment of new financial services infrastructure and processes. DLT, according to the World’s financiers, will redraw processes and call into question orthodoxies that are foundational to the business models of today.
Next, they said that DLT should be viewed as one of the technologies that will form the foundation of the next generation financial services infrastructure.
All Members of the working group agreed that in order for the DLT applications to be impactful, deep collaboration is required between innovators, industry incumbents and regulators.
Viewing blockchain, or distributed ledger technology- from a perspective of it being a digital register, that contains ownership records and enables peer-to-peer transmission of data within the ecosystem- opens up opportunities to see multiple financial applications.
Cross border payments and peer-to- peer transactions are the most widely cited use cases for blockchain/DLT in finance. Blockchain, or DLT, intrinsically enables peer- to- peer transactions and transmissions of data, which is what information about money transmission is.
In the banking industry bank finance, trade finance and syndicated lending are well suited for DLT applications and Smart Contracts accompanying them. DLT could transform the paper and manual process heavy industry that requires continuous flow of documentation, shared information and records of ownership.
Another compelling application of DLT in the financial sector is share trading. Imagine implementing transactions on a shared ledger that gives every party a say in the validation of the transaction. Imagine the time and accounting efficiencies when everything is digitally recorded in one ecosystem and can be viewed by al participants.
In the Asset Management, the features of DLT have a potential to completely transform the industry, positively affecting both operational, fund accounting side, to fund management and also potential to increase assets under management. Solid initiatives created by financial industry players, such as Funds DLT of Luxembourg are at the initial phases of testing and the future looks bright for the innovative leaders.
An important invention that the blockchain technology brings to the financial market today, a new term- is asset tokenisation. What is tokenised asset?
There is no ‘token’ per se, a token represents an ownership of whole or a fraction of an asset in a digital way. You can view it as a digital accounting system, where everyone has the same Google sheet document, while access to a cell, representing data ownership, is by public/ private key combination. Data can be anything- representation of a fund unit, of a real estate property, or a representation of a fiat currency- so-called stable coin.
Today, asset tokenisation is showing a potential to unlock liquidity for previously illiquid assets. If ownership of a real estate property can be divided into 1000 digital ownerships units- tokens, and the owners of those tokens could easily exchange them between each other in their ecosystem- that unlocks additional liquidity options for investors.
Overall, blockchain or DLT will not be the only technologies that will make the banking and financial system days of today look archaic. Great part to play in the transformation of the financial industry will have artificial intelligence, data collecting, data storing and processing establishments, and, of course, the regulators.
But for now- remember- early birds catches the best worms!
Thank you for reading,