Is Finance Ready for This?
U.S. Rep. David Schweikert (R.-Arizona) walked into congress in Washington last week and spoke about something almost no one on Capitol Hill was expecting: the effect the blockchain will have on the global financial industry.
In fact, most his constituents in Arizona could be forgiven for not quite following along. As we pointed out in our introductory article about the effect blockchain is going to have on the world and our subsequent article about blockchain and government, just understanding the basic tenets of blockchain is difficult enough. Throw a topic like finance into the mix, and you’re asking for trouble.
Luckily, finance seems to be an obvious fit for the benefits of blockchain. It probably has something to do with the fact that bitcoin, blockchain’s most famous product, dominates conversation due to its meteoric rise in value and the controversy surrounding Silk Road’s extensive use of the popular cryptocurrency. Because the blockchain is a ledger system that operates with numbers, and let’s face it: there’s a heck of a lot more reward in building financial products than altruist social experiment apps, startups and fortune 500 companies from around the world are feverishly working to revolutionize the finance space using distributed ledger technologies like blockchain.
We’re going to look at a select few interesting examples of how blockchain is changing the finance world; from banking in Africa to the New York Stock Exchange and dynamic fintech incubators. It’s an exciting free-for-all at the moment, and a new-look financial industry is quickly taking shape.
Underbanked Africa
If you bank in Africa, chances are you use SMS, the text-based mobile information system ubiquitous to pretty much every corner of the earth. Many Africans bank via SMS because there isn’t an established way to transfer money in an environment often plagued with crippling bureaucracy at best, and outright corruption at worst. It’s a not-so-quiet secret that many places in Africa are severely underbanked, and for this reason, there’s an immense amount of optimism in the potential for blockchain technology to turn things around there. Banking on a distributed ledger in many African nations would mean that there is less chance for corruption because everything is transparent on the blockchain. Each entry is hashed with a unique key and timestamp that records with certainly what and when something was entered on the ledger. If an entry is changed, a new hash and timestamp is created, keep the old one visible and easy to reference back to. That doesn’t mean that the information put on the blockchain is accurate, it just means that if both parties agree to the first entry, it’s very easy to ensure that any alterations are tracked and agreed upon.
Even if the traditional banking system in Africa was trustable, there’s still a question of fees. Fees are a nuisance to first-world citizens, but for many people in Africa, fees can decide whether or not people choose to bank in the first place. Banking using cryptocurrency like Bitcoin or using fiat currency on a distributed ledger, cuts out most middle men, drastically reducing the amount in fees tacked onto each transaction.
Lastly, if there’s one case to be made for using the blockchain in Africa, it’s using Bitcoin as a way to equalize citizen buying power in countries like Zimbabwe where the currency is severely inflated to the point where it has next to no value on a global scale. Countries in Africa might be able to leverage bitcoin to alleviate the pressure of having to use weakened currency, improving quality of life and leapfrogging into the forefront of tech innovation, all in one massive swoop.
NASDAQ’s Sprint
The NASDAQ has been proactive in promoting Blockchain as a trust solution for some of its subsidiaries. It announced its first blockchain-based stock trade in December and announced the launch of Linq shortly after. Linq is NASDAQ’s own distributed ledger experiment for corporate governance.
Linq is groundbreaking because it serves non-public corporations. The technology helps smaller corporations to verify equity and to record shareholder vote results. A Linq trial in Estonia proved that smaller companies no longer have to use archaic systems like spreadsheets to keep track of governance issues. The trial tested topics like shareholder voting, equity balances and new private share issuance. Linq’s intuitive UI and strong NASDAQ makes it an innovative product that could have a big effect on corporate governance.
The aforementioned stock transaction is an important milestone because it eliminates middle transactions. Exchanges like the NASDAQ may be able to process its transactions without the need for a clearing house. By processing on the blockchain, NASDAQ has to wait for however long it takes to complete a block: typically 10 minutes. No clearing house also means less fees and more investor control.
The Small Guys
Of course, with all new technology it’s the small companies that hold the initial advantage because many larger firms are too risk-adverse to go all-in on an untested technology. Blockchain is no different and a slew of really interesting startups are trying to carve spots for themselves in a space that many agree could change finance in the years ahead. One incubator is putting its chips in the blockchain-fintech basket and investing time and space in 5 early-stage startups. Plug and Play, a Silicon Valley-based accelerator uses the backing of major finance powerhouses like BNP Paribas, Capital One and Deloitte to offer a 12-week program that helps companies with deal reviews, investment strategies and mentorship.
One such company is BlockSeer, an insights and analytics firm that works with government agencies to track cryptocurrency behaviour. It depends on your viewpoint about the nature of cryptocurrency and its role in providing anonymity and privacy to its users, but companies like BlockSeer could provide a degree of legitimacy to the blockchain platform in the eyes of government organizations like the IRS, FBI and CIA; entities that, whether you like it or not, are going to have a say in the ultimate success of bitcoin and the blockchain.
On the bitcoin side of things, another startup Abra makes it absurdly simple to pay with bitcoin on a mobile device. Abra uses a secure hot wallet (account with active funds) to pay for things, or to take bitcoin and move it to any bank account. Their no-fee system makes it an attractive way to pay with bitcoin and manage funds in and out of digital currency and traditional currency accounts.
Big Bank, Big Bet
For all the flak they caught for looking like unwitting ‘rubes’ during the ’08 financial crisis (as shown in the 2015 film The Big Short), JP Morgan is surprisingly at the forefront of blockchain investment, promising a whopping $9-billion in blockchain and other innovative financial technologies in the coming years.
JP Morgan would first like to change the way they buy and sell loans. At the moment, buying and selling loans is a cumbersome process that involves a lot of gut-check choices and multiple levels of human approval. By putting this process on a trusted ledger like the blockchain, banks like JP Morgan could not only save themselves a huge amount of money, but they could change an entire practice. They’re betting on the latter by investing in Digital Asset, a company focused on changing how financial firms do business.
Another key investment for JP Morgan is the Open Ledger Project, a Linux-funded venture tasked with creating a set of industry standards for global banks to follow. It’s clear that even at the highest executive level, the company is serious about making a difference. Daniel Pinto, JP Morgan’s head of investment banking said recently: “Blockchain will be big in everything related to settlement, and not just loans. While it is still early days, the technology looks very good”, a statement that sounds like music to the ears of those who believe that blockchain technology could change the world.
