Blockchain could cause industry rethink says study

Ledger technology could have a transformative effect on financial institutions.
By Paul Walsh
Financial services infrastructures built on distributed ledger technology (DLT) – such as blockchain – will have to redraw fundamental process according to a new study.

The latest research from the World Economic Forum suggests that fundamental areas of the financial industry would have to reconsider various processes as a result of DLT implementation.

The report specifically points at compliance, global payments and asset rehypothecation as areas that could be particularly affected by DLT implementation.

In areas of compliance, the report suggests that increased risks and costs associated with current systems make complying with regulatory demands difficult and, as complexities within the financial industry increase, it may lead to a compromise between cost and transparency.

The report also points to global payments systems being transformed by DLT with the potential of real-time point-to-point transfer of funds between financial institutions that could reduce currently existing friction between institutions, accelerate the speed of settlement and reduce operational costs.

Equally, asset rehypothecation is listed as a potential transformative value driver with the report suggesting that its current state can lead to ambiguities in ownership and assets composition due to a lack of transaction history.

Using DLT, the report suggests that market participants will have an improved line of sight into assets leading to improved risk evaluation and quality control.

DLT has been hailed by custodians as being the future of the industry with potential to streamline processes such as settlement, clearing and corporate actions.

It has since faced scrutiny with numerous industry commentators debating the technology’s potential.

Earlier this month, a A Celent and Misys whitepaper entitled ‘Beyond the Buzz’ concluded that DLT can soon be used in the post-trade processing of credit default swaps and in capital markets following a successful test involving Bank of America Merrill Lynch, Citi, Credit Suisse and JP Morgan.

A SWIFT paper published in April suggested that existing DLT’s cannot fulfil the requirements of the financial industry on the grounds that they are not “mature” enough to be fully implemented