Blockchain: a game of winners and losers

Distributed ledger technology is being heralded across the financial services industry, but while there will be an array of winners from the technology, others will lose out, writes Hayley McDowell.

By Hayley McDowell

 Global Custodian and The TRADE are producing a FinTech supplement available with the next issues of both magazines. The full version of Blockchain: a game of winners and losers will be featured in the supplement. 

The hype around blockchain has been focused on its potential to revolutionise the financial services industry. The disruptive technology is set to lower costs, improve transparency and reduce the overall complexity of financial transactions.

In some cases, blockchain could possibly replace current centralised business models in the financial sector, as distributed ledger technology (DLT) works its way through disrupting the industry one section at a time.

For all its greatness and potential though, mixed within all the winners from its emergence will be the losers of distributed ledger technology.

For those companies winning through cutting costs, job loses will be the negative effect for thousands.

Let’s take reconciliation for example. During Sibos this year David Williams, partner, banking and capital markets advisory at EY said that some investment banks have 3,000 people doing reconciliation, before saying there was “no reason that can’t be replaced with automated processes”.

Custodian banks have taken a keen interest in blockchain, some experimenting and even implementing the technology into existing systems. Northern Trust, BNY Mellon and State Street – just to name a few – have all been very proactive in the blockchain space.

Job cuts

The consequences of distributed ledger technology on post-trade and custody have the potential to be quite severe.

A report authored by Citigroup explained that custody banks “benefit from a history of reliability when it comes to handling and safekeeping assets, as well as providing a certain degree of comfort to regulators”.

“However, in the much longer term, custody banks could see a reduced role as custody and back-office services are rendered obsolete by the technology,” it said.

Citi explained investment banks will likely become the beneficiaries of cost reductions seen by blockchain, which come from removing intermediaries in the trading process.

The conversations about disintermediation will likely rumble on for years to come as blockchain continues to grasp the financial sector.

“The potential of blockchain could be significant and there is a strong possibility it may disintermediate large components of the post-trade space and bring numerous advantages to these antiquated processes,” said John O’Hara, CEO of technology firm Taskize.

“However, this success will only happen if firms work together towards standardising the current post-trade environment and improving existing technology.”

Post-trade providers have been some of the early advocates of the technology, showing just what kind of affect it can have on that segment of the market. While their procedures could be streamlined, many have suggested that it could displace them in the post-trade chain.

Clearing, settlement and reconciliation looked primed for a fresh look in the coming years, meaning the buy-side will benefit from lower transaction costs and quicker processes, but providers may be disintermediated. 

Removing intermediaries

The distributed ledger technology could revamp regulatory reporting and even remove the necessity to use clearing houses for OTC derivative clearing. This is not before it has disintermediated a host of middle and back office roles across financial institutions.

Utilising Blockchain could render exchange traded derivative (ETD) and OTC derivative reporting to trade repositories or US swap data repositories obsolete if the information were shared via blockchain.

If clearing and trade reporting were to utilise blockchain you could also put regulators in the win column. Blockchain – if proper standards are introduced and it is regulated – could have contribute to increase transparency and a reduction of risk in the market.

Speaking at an event earlier in 2016, Philippe Denis, chief digital officer at BNP Paribas, spoke of how implementing technology will enhance existing systems rather than act as a replacement – perhaps unsurprisingly.

“People are going to use blockchain not to disintermediate or to disrupt the market but more to use new distributed ledger technologies to help the market be more fluent and more efficient,” he said.

“In the coming years, we will see this type of blockchain activity to work out where we position in the market, where we look at it and where we can apply it as a solution.”

Jason Nabi, head of EMEA for blockchain company Paxos, highlighted how the post-trade sector is behind the curve when it comes to automation and technology advances, at a recent Euroclear event.

“Post-trade is manual and expensive. The last thing you want to do is reinvest because it works,” he explained.

“This isn’t about costs it is about delivering capital efficiencies. We are going to have a three-year cycle where we will see real world examples.”

It is thought that blockchain partnered with robo-advice technology could also see the demise of traditional asset management.

The benefits of traditional asset management trading, managing and overseeing funds on behalf of investors could possibly disappear amid blockchain technology.

In the future, asset managers could use robo-advice platforms in the blockchain to manage bigger portfolios of securities. Asset managers who do not adapt to the almost certain technological advances of the industry, could be left behind.

Weighing up the winners and losers of blockchain technology, you would be forgiven for thinking the financial services industry is about to undergo a mass clear out. 


For more information on the FinTech supplement, please contact:
Sadie Jones
+44 (0)20 7397 3841