Thursday, 14th December 2017
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John Smiles

Qualified Financial Advisor

Blockchain – What does it mean for financial services?

Blockchain or distributed ledger technology, is an idea that has found its time. It is now engaging the minds and budgets of almost all the most influential players in the financial sector.

Briefly, it is a decentralised network of databases that is updated by network members and uses cryptology to ensure the integrity of the ledger and authenticity of transactions. The technology was first developed for the digital currency, bitcoin, to record transactions. Since then, the financial sector has recognised the potential for a much broader application, from fund management companies, clearing houses and custodians to central banks.

The World Economic Forum (WEF) estimated last year that $1.4 billion had been invested in blockchain projects in more than 25 countries, generating more than 2,500 patents. The WEF concluded the technology will fundamentally alter the way financial institutions do business around the world, offering the potential to drive simplicity and efficiency. The expectation is it will become as normal a part of the financial services industry as mainframes, messaging and electronic trading are today.

Blockchain has already been used to buy and sell mutual funds under test conditions. Calastone, a technology company, replicated the equivalent of a full day’s trades involving 1,200 fund manager and fund distribution clients in 34 countries. The test proved that blockchain can be used to create a one-stop marketplace for trading and settling investment funds. This will benefit the fund industry because fund processing would be moved online, saving on staff, cutting costs and improving efficiency. The next step is to apply the technology to real live trading. If successful, this could transform the asset management industry because many firms still rely on manual entry systems, faxes and paper forms.

Data privacy is a major unresolved issue, because privacy concerns are not wholly compatible with blockchains unique transparency on transactions and such data may be market sensitive or be of interest to competitors.

Blockchain is still in its development phase and will be for another 5 or 10 years when the financial services industry will look very different.

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