Blockchain: mass adoption ‘could pose threat to T2S’

Blockchain technology needs to overcome several major operational and regulatory challenges before it is widely used for day-to-day activities across the financial services industry, suggests Standard Chartered.

Coinciding with Microsoft’s announcement of ‘Project Bletchley’, its new blockchain initiative, the bank is publishing its report ‘Blockchain-the road to mass adoption’.

The report’s author, Margaret Harwood-Jones, head of investors and intermediaries transaction banking at Standard Chartered, notes that blockchain as “the underlying DNA of cryptocurrency Bitcoin” could transform the way financial services companies do business, but questions how close is it to being used day-to-day.

“When it comes to some aspects of the financial services industry, adoption is still a little way off,” the report notes. “There’s no doubt that blockchain’s real-time characteristic and ability to act as a public ledger of all transactions could revolutionise many parts of financial services, reducing risks and bringing cost savings among other benefits.”

According to an estimate by Santander estimates, using blockchain to streamline cross-border payments, securities trading and regulatory could generate cost savings of US$15bn to US$20bn by 2022. Yet to play a significant part in areas such as central counterparty party clearing, trade settlement, collateral management, regulatory reporting, and corporate actions, the technology must first overcome several operational and regulatory challenges.

The report focuses in particular on whether blockchain could disrupt the European Central Bank’s (ECB) Target2Securities (T2S) project, which aims to standardise European cross-border trade settlement by integrating securities and cash accounts onto a single IT platform. “Some people have suggested that blockchain could play a material role in T2S, or even replace it,” the report notes.

“Blockchain’s benefits, such as real-time settlement capability, reducing counterparty risk and enhanced automation, could certainly disrupt TS2. However, right now it’s unclear if the disruptive technology could cope with European markets’ high transaction volumes.

“The ECB estimates that daily T2S peak volumes will reach 4.7m transactions with a value of approximately €10-15 trillion. By contrast, daily transactional volumes in Bitcoin total around 250,000 with a value of just US$257m.”

The report also suggests that blockchain’s success also depend on a smooth integration with legacy technologies, with potentially high costs if this isn’t achieved. Additionally, an increasingly digital world makes it vital for blockchain to prove to the market that it is secure from cyber-attacks.

“Nobody can deny that blockchain has the potential to impact markets globally, including emerging economies which are in the early stages of developing their market infrastructures,” the report concludes.

“But distributed ledger technology – should it truly take off – is likely to take years to come into fruition, simply because it will require harmonised standards and regulation agreed by the industry securities services industry, regulators and governments. The scale of this challenge should not be underestimated.”


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