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Financial Services Firms Eye Blockchain For Industry Transformation

Published 2018/03/13, 11:40
Updated 2020/09/02, 08:05

Global financial services firms, like so many other industries right now, might just be on the cusp of massive disruption via blockchain and the digital currencies including Bitcoin, Ethereum and XRP that rely on that technology. Indeed, we're at a moment currently where it appears financial services firms have one of two immediate options: evolve or die.

Though the development and adoption of blockchain technology is still in the early stages of implementation within the financial services sector, that doesn't mean savvy companies aren't working on solutions for a successful evolution. Survival notwithstanding, the 'smart money' understands that this technology has the potential to revolutionize the sector.

Blockchain technology acts as a decentralized ledger, recording each piece of data simultaneously across all nodes on its network. Information cannot be erased, which means the blockchain will hold a record of every transaction ever made. Ratings agency Moody’s reports that blockchain will transform and disrupt myriad industries.

Undoubtedly, blockchain poses a potential long-term competitive threat to a variety of business sectors, but the focus of this post will remain squarely within the financial sector. So what exactly are major financial services companies doing to harness the power of blockchain?

Financial Clearing Houses and Blockchain

Clearing houses play an important role in the financial community, acting as intermediaries between buyers and sellers of financial instruments. They're responsible for settling and clearing trades and reporting trading data.

One of the most popular clearing houses as well as one of the largest global financial services corporations is New York City-based Depository Trust & Clearing Corporation (DTCC). In early January 2017 they announced a collaboration with IBM (NYSE:IBM), Axoni, a capital markets focused tech firm, and R3 a distributed database tech company, to "replatform DTCC's Trade Information Warehouse" by building a distributed ledger technology (DLT) framework to drive further improvements in derivatives post-trade lifecycle events. This is a positive move toward blockchain implementation.

The CEO of DTCC, Mike Bodson, recently said he believes "it's too early for technologies like DLT to be of much use.” In an interview with Trak.in he claimed that many of the Distributed Ledger Solution providers are, in fact, working alongside organizations like DTCC to manage these solutions. Other major corporations reportedly experimenting with DLT inlcude the financial sector's Citibank (NYSE:C), as well as companies such as Intel (NASDAQ:INTC).

Banks Adopting Blockchain

Blockchain continues to gain popularity with commercial banks and other institutions within the payments sector. UBS (NYSE:UBS), Deutsche Bank (NYSE:DB), Santander (NYSE:SAN), as well as BNY Mellon (NYSE:BK) have been working on a utility settlement coin (USC) with the aim of creating a digital currency for use in financial markets. The goal would be to smooth the way for inter-bank settlements and replace middle-men who operate between buyers and sellers. A number of global banks recently joined the initiative including Barclays (LON:BARC), HSBC Holdings (NYSE:HSBC), State Street (NYSE:STT) and Credit Suisse (NYSE:CS).

UBS has been leading this project since 2015. During September of that year they launched their first USC concept in collaboration with UK-based blockchain company Clearmatics.

R3, one of the companies working with clearing house DTCC, above, has also raised funds from financial sector heavyweights including Wells Fargo (NYSE:WFC), ING Group (NYSE:ING) and Bank of America (NYSE:BAC), as well as Intel, to develop their Corda Platform, another way to record and manage financial transactions between regulated institutions.

Private Equity Management Eyeing Blockchain Too

Multinational professional services firm Ernst & Young (EY), and one of the 'big four' accounting firms, has been considering the application of blockchain technology to wealth and asset management. Angus Champion de Crespigny, EY's Financial Services Blockchain Strategy leader, points out that over the past few of years, private equity management firms have been examining blockchain technology for ways in which it could help their clients:

“More recently however we have started to see greater interest in cryptocurrencies and cryptoassets and our clients seeking viewpoints on how they may change the PE landscape. While there has been interest, the PE sector has been approaching with caution and there has been less spend than we have seen in other areas of asset management.”

Still, though there appears to be a lot of blockchain-related activity within the financial sector, it's still early days. Blockstack co-founder Muneeb Ali stressed in a recent tweet that there's still lots to be done and plenty of opportunity for innovation:

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