Is Wall Street Ready for Blockchain?

Is Wall Street Ready for Blockchain?

March 11th, 2019 - Financial, Global Connectivity

By Praveen Pondichery

Is Wall Street ready for blockchain? That’s the question haunting the financial industry after Reuters reported several major financial institutions shelved their blockchain projects while they figure out exactly what to do with the new technology. Whoever gets it right will reap significant rewards – but it’s not clear when that will be.

Here’s a refresher on what blockchain might be able to do for the industry:

The current financial system, based on trusted intermediaries, represents financial contracts (cash deposits, bonds, stocks, derivatives, etc.) as digital records in thousands of cascaded proprietary ledgers of individual banks, exchanges or securities depositories. As a result, every transaction goes through tedious procedures that create complexities and inefficiencies in managing the whole setup, leading to significant errors in the process.

Blockchain technology has powerful mechanisms to make a trading platform more efficient, with the potential to revolutionize bookkeeping and records of ownership. It may even boost the back end of the trading sectors, where hefty costs are involved in maintaining and validating the records of all transactions.

With blockchain technology, there will be no need to maintain the same records of brokers, dealers, intermediaries, and clearing and settlement houses. Additionally, there will be smoother, more transparent and more effective monitoring of regulations and auditing.

Some potential applications for trading firms include:

  • Clearing and settlements in stock markets
  • Cross-border payments in banking
  • Asset management
  • Fraud-free insurance claims management

While blockchain has been around for roughly a decade, confusion still surrounds it. One common misunderstanding that blockchain is bitcoin or some other type of cryptocurrency. Another misconception is that it is a new technology in the early stages of development, so having blockchain as part of an enterprise solution may not be a good idea.

While these ideas are not quite correct, it’s true that there are significant challenges to overcome before blockchain becomes a part of a trader’s life. Some include:

  • Though the adoption of blockchain technology promises long-term benefits when it comes to productivity, efficiency, timeliness and reduced costs, it is costly to put it in place initially. The software required to run blockchain technology in organizations typically must be developed for the specific firm, and is therefore expensive to purchase, acquire or develop in-house. Moreover, organizations may have to obtain specialized hardware for use with the software.
  • Blockchain is a complicated technology that requires deep understanding of programming and computer science, as well as the business for which it is built. Furthermore, because it is so new, there are not many experts on the job market anywhere in the world. Most universities have not had time to update their curriculum to include this technology, or standardize existing courses. Therefore, firms that want to use blockchain might not be able to find the right team to put it into practice. 
  • Most countries around the world are in the process of developing the appropriate laws for the blockchain technology. Until now, these laws have mainly focused on cryptocurrencies and related activities, but in a few years, many countries will have created regulations that should allow businesses to adopt the blockchain technology freely. Without knowing what the exact laws will be, many entrepreneurs are rightfully wary of getting started, because they might have to make drastic changes to their projects later.

A consortium approach to Blockchain Platforms provides many of the same benefits affiliated with private blockchain — efficiency and transaction privacy, for example — without consolidating power with only one company.

Consortium blockchain platforms have many of the same advantages of a private blockchain, but operate under the leadership of a group instead of a single entity. This platform would be great for organizational collaboration and increases the success of building a minimum viable product(MVP).

As the coming years bring more clarity, collaboration and standardization, one thing is certain: The financial industry has not seen the last of blockchain.

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Praveen Pondichery is Country Manager for India forTransaction Network Services. Pondicherry can be reached at praveen@tnsi.com.

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