Most people associate the Blockchain technology with Bitcoin. What they don’t know that it has already moved on to the next level of applications in Financial Services and it seems every day other subjects are added to the list of things the Blockchain might be used for. Let’s have a look at the different areas:
The obvious application of the Blockchain technology is the transition of the use of it in virtual or cryptocurrencies for the transferring of funds. Ripple, which is a payment network that can be used to transfer any currency and its own ripple digital currency, uses distributed ledger technology. It’s distributed financial technology allows for banks around the world to directly transact with each other without the need for a central counter party or correspondent. According to its website already 10 of the top 50 banks work with Ripple and after RBS last year the Royal Bank of Canada only recently revealed it, too, had started a trial working on a limited-production proof of concept.
PayPal, the online payments system, is working together with Bitcoin payment processors and is looking how to integrate the technology, for instance by the acquisition of Braintree (the mobile and web payments specialist that was bought by then PayPal’s former parent company Ebay and remained with PayPal after the split) or adding industry expertise like the addition to the board of Fintech entrepreneur Wences Casares in January.
However, since the Blockchain can technically be used for any form of value transaction, it isn’t surprising that the list of financial institutions researching and investing in the technology. Ledra Capital, a NY based VC firm, lists 14 areas in Financial Instruments, Records and Models alone in its own Mega-Master Blockchain List of applications based on the technology Blockchain. The list includes private and public equity, bonds, derivatives and any voting rights associated with these instruments as well as commodities, spending, trading and mortgage/loan records. The use of the technology is theoretically possible along the whole cycle from the creation of securities to maintenance of positions to asset servicing and trading to clearing and settlement. For example, the Depository Trust & Clearing Corporation (DTCC) together with a group of six banks and financial services providers a few weeks ago announced that it had successfully tested Blockchain technology and smart contracts to manage post-trade lifecycle events for credit default swaps (CDS) (for more information, see here).
IBM, the tech giant, is a member of Linux Foundation’s Hyperledger Project, which is an open source, collaborative effort to create a Blockchain for business. Hyperledger serves as the foundation code for the IBM Blockchain products, services, and solutions. As part of this project, IBM demonstrates on its website how to make a simple asset transaction with a Blockchain network and how a commercial paper trading network can be implemented using Blockchain (see link), which is quite useful for anyone interested in getting an idea of the process.
Edward Budd, Deutsche Bank’s Chief Digital Officer, has been striking a sceptic tone in recent interviews on Blockchain, stating that the technology in his opinion is not going to destroy the business model of banks, but admitted that it will fundamentally change it though.
No wonder the list of banks exploring the Blockchain technology published by LTP reads like a who is who of the financial industry.
The race is on!