Newly-published research from the SWIFT Institute investigates the practical application of blockchain – or mutual distributed ledger – technologies in securities markets.
The paper, entitled ‘The Impact and Potential of Blockchain on the Securities Transaction Lifecycle’, is based on interviews and focus group meetings with individuals from 75 organisations working in technology and post-trade processing.
The paper, prepared by Alistair Milne, from Loughborough University’s School of Business and Economics, and Michael Mainelli from commercial think-tank Z/Yen Group, finds that while blockchain offers the potential to transform the industry, fully achieving these benefits will require board level buy-in to a substantial commitment of time and resource, and active regulatory support for reform of business processes, with relatively little short term payoff.
Mutual distributed ledgers allow the sharing of agreed and validated data with cryptographic control over access and updating rights, says SWIFT Institute. Their application could substantially reduce the US$40bn per year or more of costs in global post-trade processing of securities trades and achieve substantial reductions of costs and risk in other financial services activities.
However, there is a danger of building unrealistic expectations of the extent to which the technology on its own will address the underlying need for co-ordinated change of business processes both within and between firms. A main finding of the research is that full application of blockchain will require substantial re-engineering of business processes across multiple securities market firms.
“Strong claims are now being made in financial services and the media about the potential of mutual distributed ledgers to reduce costs and risks enormously, some suggesting that this technology will completely transform financial market operations,” said Mainelli.
“Deep understanding of the technology, however, lags well behind the hype amongst practitioners, policy makers and industry commentators alike. Blockchain technology seems to promise major benefits for the industry, but few can say exactly how or why.”
As part of the research, the academics investigated three hypotheses:
1. The appropriate access levels needed in a mutual distributed ledger used for global securities markets.
2. Whether change should be piecemeal or carried out at an industry level; and
3. Whether the benefits of this technology requires major changes to existing business processes.
In practice some benefits of mutual distributed ledgers can be achieved using relatively simpler approaches e.g. reducing the substantial costs of reconciliation between the two sides to a trade by recording data at the time of trade execution in a shared bilateral ledger. Other goals associated with blockchain – the contraction of the settlement cycle to near-real time or the employment of so called ‘smart contracts’ to remove manual processing – do not require mutual distributed ledger technology at all.
Milne adds: “The challenge of using mutual distributed ledgers in securities markets is not just in demonstrating technological feasibility, but in achieving the necessary industry coordination to reengineer business processes across securities firms.
Moving to a blockchain model provides an opportunity for the industry to harmonise business processes, and it may also address the much long-neglected inefficiencies in post-trade processing. However, to realise the full benefits of blockchain will require buy-in from the buy-side, sell-side and regulators.”
The SWIFT Institute was launched by SWIFT in April 2012 to develop independent research.
A survey conducted by Capital One suggests around five in six plan to implement new treasury management products and services in the coming year.
The European Central Bank will extend its quantitative easing programme for nine months beyond next March, but scale back the level of bond buying from €80bn to €60bn a month.
The agreement, after three years of debate, raise questions on future investment demand, but Fitch Ratings doesnʼt anticipate major market disruption.
The European Commission fined Credit Agricole, HSBC and JPMorgan Chase a total of €485m for manipulating the price of the financial benchmark.