Blockchain in Financial Services — Hype or Reality?
I recently attended the MarketTech conference in NYC, organized by the TABB Group. In the spirit of full disclosure, I was thinking blockchain is still in the science experiment phase, especially in an industry that’s so heavily regulated.
To my surprise, there are some really down-to-earth projects going on. For example, Credit Suisse is running a syndicated loan project meant to remove manual intervention from the process. Participants in the project include R3 consortium members BBVA, Danske Bank, Royal Bank of Scotland, Scotiabank, Société Générale, State Street, US Bank and Wells Fargo. Buy-side firms AllianceBernstein (AB), Eaton Vance Management, KKR and Oak Hill Advisors are also involved in the initiative.
“This project demonstrates the potential for blockchain technology to fundamentally reshape the syndicated loan market and the capital markets more broadly,” says Emmanuel Aidoo, head of the distributed ledger and blockchain effort at Credit Suisse. “This demonstration sets us on a path to increase efficiency and reduce costs, which will benefit banks and clients alike. By connecting a network of agent banks through blockchain, we can achieve faster and more certain settlements in the loan market.”
Why are Financial Services firms interested in Blockchain? First they see the potential for cost reduction in processes like trade settlement and reconciliation. 70% of the costs are due to the complexity of internal processes. Autonomous Research says blockchain could cut settlement costs by a third, or $16 billion a year, and cut capital requirements by $120 billion.
Second, they see revenue generation in the near future.
What are some of the challenges? Security, scalability and privacy. Most blockchains that banks are working on are private or pre-approved. Intel’s Distributed Ledger Technology group is working on improving security, scalability and privacy through the use of Intel hardware features such as Software Guard Extensions (SGX).
Just a quick search for news uncovered a host of projects announced in the last 3–4 months:
- Nasdaq partners with Chain to bring blockchain to private market
- Allianz bets on blockchain for catastrophe bond trading
- Firms led by JPMorgan test blockchain-powered equity swaps post-trade
R3 Consortium CEO David Rutter wrote in a recent post on TABBForum:
“By enabling the industry to move from duplicated and inconsistent isolated systems of record held at each firm and to cloud-based systems with shared data, business logic and processing, blockchain-inspired technology will facilitate mutualized and consistent middle- and back-office systems that assure that one firm’s view is identical to its counterparts’ view”.
Since I work for Cloudera, I’m trying to figure out how big data fits into the blockchain revolution, so I asked one of our experts to be a guest blogger.
Joao Salcedo has been supporting, designing and implementing big data solutions with Hadoop since 2010 and with Cloudera for the last 3 years as a Systems Engineer. Joao is an early adopter of blockchain technology using it with cryptocurrencies and developing applications on top of it.
Blockchain is a disrupting technology which allows to decentralize and distribute transactions on a public and encrypted ledger. Blockchain is essentially an organizational structure that allows transactions to be verified and recorded upon the agreement of all impacted parties. As big data allows the predictive modeling of more and more processes of reality, blockchain technology could help turn prediction into action. Blockchain technology could be joined with big data, layered onto the reactive-to-predictive transformation, which means analysis can help developers quantify the risks and benefits of modifications to the blockchain protocol, as well as monitor for troublesome behavior.
Financial institutions are willing to build their own private blockchains or are investigating the unspecified blockchain solutions: • Three large banks in the Netherlands — ABN Amro, ING and Rabobank — investigate the use of blockchain for payment systems. • Citigroup has built three private blockchains and an internal currency with a prime focus on payments and eliminating counter party risks when dealing with smaller local banks. Additionally, Citigroup has partnered with Safaricom, a mobile operator in Kenya, to enable transfer services to the unbanked. • Santander, one of the largest banks in the world, has identified 20 to 25 possible applications of blockchain technology in banking, including international remittance, syndicated lending and collateral management. • Similarly, Deutsche Bank has stated that distributed ledgers and particularly blockchains have possible applications in both fiat currency and securities management, creating transparency and facilitating Know Your Customer / Anti-Money Laundering surveillance. • Monetary Authority of Singapore (MAS) has named blockchains as one of the big trends in technologies affecting financial services, citing lower cost of operation, faster processing and failure resilience as their main benefits compared to the traditional approach.
Big data’s predictive analysis could dovetail perfectly with the automatic execution of smart contracts and analyze every transaction. We could accomplish this specifically by adding blockchain technology as the embedded economic payments layer and the tool for the administration of quanta, implemented through automated smart contracts, distributed applications (DAPPS), decentralized autonomous organizations (DAOs), and decentralized autonomous corporations (DACs).
The automated operation of huge classes of tasks could off-load humans because the tasks would instead be handled by a universal, decentralized, globally distributed computing system.
We thought big data was big, but the potential quantization, tracking and administration of all classes of activity and reality via blockchain technology at both lower and higher resolutions hints at the next orders-of-magnitude progression up from the current big-data era that is itself still developing.
A basic diagram of how big data can export blockchain data for further processing and analysis is following:
As you can see from Joao’s blog, big data and Hadoop specifically, act as a complementary processing and analysis engine to blockchain.
With this blog, I’m starting a series on blockchain, with a number of guest bloggers. Stay tuned and we look forward to your comments.