By Susan Dargan
Many years from now, when people look back at the first two decades of the 21st century, the stories they will tell won’t be about the Global Financial Crisis (GFC) or its aftermath. Instead, this period will likely be remembered for the role technology-driven innovation played in transforming and disrupting the way we live, work and interact.
Companies that fail to move quickly and decisively to explore and adopt these new technologies risk being rendered obsolete by those who do. As emerging technologies and breakthroughs in digitisation begin to spur re-assessments of business models, the value chain for financial services is ripe for disruption.Blockchain is one of the more potent vehicles for disruption, and its appeal is obvious. It allows for the near instantaneous and decentralised distribution, verification and record-keeping of transaction information, potentially far more effectively and efficiently than current methods allow. In a nutshell: it could create a single source of truth for transactions –with far-reaching consequences.But why has blockchain become the buzzword of 2016?Trust. Much trust was lost in the aftermath of the GFC. Blockchain has the power to automate the trust process. It could record every transaction ever processed through the network exchange, potentially creating an entirely different value chain and cost structure.Without going into too much jargon – traditionally, a trade comes first, followed by post-trade processes that include matching, reconciliation, settlement, clearing and reporting. In a world of blockchain, the fact a trade has been made means these other steps have already been completed – having become part of an automated system.Another potential benefit is protecting against money laundering; it allows you to track how money is flowing, exactly as it happens, meaning it would become incredibly easy to detect whether or not money is being moved legitimately.Risk. Blockchain could reduce systemic risk. When central parties or counterparties in a network are removed, the central points of risk or failure are also removed or greatly reduced. As opposed to having all messages or transactions sent to the single central point for validation or matching, a distributed system could greatly reduce systemic risk and, therefore, increase the resilience of the financial system.Simplification. Blockchain has the potential to notably simplify end-to-end trading workflows. This kind of technology is unlikely to replace high-frequency trading anytime soon, given the speed that already exists on exchanges. But it could greatly benefit the entire end-to-end trading process. In cases where speed of execution isn’t paramount, it’s the efficient workflow that could really add value. Many assets, particularly over the counter (OTC), are not trading in high frequency. In such scenarios, blockchain could be a great venue for bringing parties together. What’s next for blockchain in financial services? It’s important to recognise the blockchain is still highly experimental and in the nascent stages of development. Full-scale adoption, the true test of the blockchain, requires addressing a number of challenges, including significant areas such as trust, regulation and governance, people and technical scalability.For example, what will it take for institutions to adopt a dramatically different trust and security framework? How can the blockchain achieve the massive scale necessary to support institutional investment services? What will the regulatory and governance models of the future look like? And what will the implications be for the types of roles and skillsets the industry will require as advances in automation lead to a shift from repetitive tasks to higher-value activities?Disruptive technologies, though often hard to imagine, are the most far-reaching in their impact. While they may start off slowly in the form of experimental innovation, they could ultimately change an industry’s fundamental products and services through customization, collaboration, standardisation or the introduction of alternative applications. As a result, disruptive technologies – such as blockchain –tend to redraw an industry’s boundaries, enabling new business models and new players to emerge.Although we’re far from realising the full impact of the blockchain and other emerging technologies in financial services over the next few years, companies can’t count on business as usual.Susan Dargan is head of State Street Global Services Offshore“In a nutshell: [blockchain] could create a single source of truth for transactions –with far-reaching consequences.”
Susan Dargan
