Deploying blockchain technology, also called Distributed Ledger Technology (DLT), to execute transactions in the financial industry may be an overhyped concept. Or is it? According to a Bain & Company Blog post, “Blockchain in Financial Markets: How to Gain an Edge,” 80% of financial executives surveyed by Bain & Company said that, “DLT will be transformative and will significantly impact markets.” An almost equal number of the survey respondents said they expect their institutions to start using the technology before 2020. In a recent presentation in New York City, the acclaimed British futurist Rohit Talwar mentioned that blockchain is entering the serious application phase and will soon combine with Artificial Intelligence (AI).
What is the Blockchain and how does it work?
The blockchain consists of blocks of digital data, which are uniquely coded and identified. These blocks of unique data are attached to each other forming an unchangeable chain that cannot be altered. Each transaction is based on a set of rules previously agreed to by the transacting parties. Each transaction is simultaneously verified and recorded on all infrastructure nodes. The process is fully automated, fast, transparent and devoid of human interaction.
The Use of Blockchain Technology in Financial Markets Today
Although there are large investments made into the technology by most big financial corporations, the adoption and the proliferation of actual use cases is evolutionary rather than revolutionary and disruptive. A good example of this type of deployment is Switzerland’s stock exchange, which is owned and managed by SIX. SIX announced in a media release on June 6, 2018 that, “It will be the first market infrastructure in the world to offer a fully integrated end to end trading, settlement and custody service for digital assets.” SIX CEO Jos Dijsselhof is quoted as saying that, “This is the beginning of a new era for capital markets infrastructures. For us, it is abundantly clear that much of what is going on in the digital space is here to stay and will define the future of our industry.” In other words, traditional securities will be tokenized and available to be traded on a fully-regulated platform, which will be supervised by Swiss regulators.
This type of new capital infrastructure based on blockchain technology’s network-based, decentralized business processes is fundamentally changing business models and starting to make many middlemen obsolete. Companies providing labor intensive services, and companies with lengthy processes are most likely to be disrupted first. A McKinseyWorking Paper on Corporate & Investment Banking, “Beyond the Hype: Blockchains in Capital Markets,” identified potential areas of disruption/improvement to current business models across financial markets:
- Clearing houses
- Clearing brokers
- Clearing brokers
- Prime brokers
- Executing brokers
- Market makers
- Investors and asset managers
- Capital markets/investment banking
- Corporate banks
- Transfer agents
- Messaging networks
- Remittance providers
The reduction of inefficiencies resulting from blockchain deployments and the elimination of intermediaries could result in large savings. In an article published in the Harvard business review, “How Blockchain is Changing Finance,” Alex and Don Tapscott demonstrate that the estimated savings for Santander bank alone could be $ 20 billion a year, while the consultancy Capgemini is estimating that consumers could save up to $16 billion in banking and insurance fees through Blockchain-based solutions.
What the Future Holds
The future of the financial industry will most likely continue to be shaped by the emergence of decentralized network structures based on blockchain technology. This, however, is not a process of mere automation and optimization. It marks the emergence of new business models where trust is generated digitally and the need for human intervention will be greatly reduced over time. In its most extreme form, these organizations will culminate in Decentralized Autonomous Organizations (DAO.) DAOs are run by rules coded in computer programs called smart contracts, which reside on the blockchain. These companies will use various technologies such as the blockchain and AI to grow and interact independently without any human employees.
The current trends suggests that AI is automating white-collar jobs in various industries, but not eliminating the human factor. People are still needed for critical thinking and intuitive decision making.
A recent NewYork Times article, “High-Skilled White-Collar Work? Machines Can Do That, Too,” included a prediction by Chida Khatua, the CEO of EquBot, a company which helped create an ETF that is managed by AI. Khatua predicted, “…the asset-management industry would hire more financial advisers even as investing became largely automated.” He went on to say, “If I’m the customer explaining what I want, humans need to be involved,” and “Sometimes I don’t know what I really want.”
On that note, helping clients devise a good strategy to grow and preserve their wealth is still best done by humans. Tech-savvy advisors, however, can now serve clients better in the rapidly changing financial services landscape. Or as this Chinese proverb conveys, “A wise man adapts himself to circumstances, as water shapes itself to the vessel that contains it.”