It’s long been argued that blockchain – the underlying DNA of cryptocurrency Bitcoin – could transform the way financial services companies do business, but 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.
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.
Santander estimates that using blockchain to streamline cross-border payments, securities trading and regulatory could generate cost savings of between USD15 billion and USD20 billion by 2022.
But for blockchain to play a significant part in areas such as central counterparty party clearing, trade settlement, collateral management, regulatory reporting, and corporate actions, it must first overcome some operational and regulatory challenges.
The key to blockchain’s success
In a new report, we explore 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.
Blockchain’s benefits, such as real-time settlement capability, reducing counterparty risk and enhanced automation, could certainly disrupt T2S. 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 4.7 million transactions with a value of approximately 10 trillion to 15 trillion euros. By contrast, daily transactional volumes in Bitcoin total around 250,000 with a value of just USD257 million.
Blockchain’s success will also be conditional on a smooth integration with legacy technologies – the costs of getting this wrong could be high. And in an increasingly digital world, it’s vital that blockchain proves 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.
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.