Financial Markets

Blockchain for Financial Markets: The next big thing or no big thing?

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The application of blockchain in financial markets has caught a huge wave of publicity over the past few months. Stories on distributed ledger technology have graced the pages of major media such as Financial Times, Forbes and Fortune, along with countless financial industry publications.

The questions I get most often are along these lines: is blockchain an irresistible disruptive technology? Or are there serious questions and hurdles standing in the way of blockchain’s broad adoption and deployment?

Strangely, the answer to both questions seems to be “Yes.” What’s to account for this seeming dichotomy?

I’m hard-pressed to recall a new technology since the turn of the century that has received such concentrated attention from financial institutions.

According to a new study on “Blockchain in Financial Markets” by the IBM Institute for Business Value (IBV), 14% of financial market firms expect to have blockchain in production in some form or another by 2017. It’s getting increasingly difficult to find an exchange, clearinghouse, bank or brokerage house that isn’t at least in the planning stage for blockchain.

Moreover, in the past three years, more than 2,500 patents have been filed in the name of blockchain, and venture capitalists have invested more than $1 billion.

Why the interest? The potential benefits of blockchain are myriad.

For example, blockchain’s trusted processes could greatly simplify and reduce the cost of many parts of the trade lifecycle for many instrument types. The trust comes from blockchain networks’ benefit of a permanent immutable record accessible by all authorized parties. This becomes even more attractive with the NextGen Consensus approach being developed as part of the Hyperledger project.

In addition, a key design point of blockchain is that no one party can modify, delete, or even append any record to the ledger without consensus from others on the network, making the system useful for ensuring contracts and other legal documents are free of alterations or fraud.

For all its appeal, blockchain still has some hurdles to clear before it achieves its destiny as a disruptive technology.

The technology itself is still young; however, with Hyperledger v1 becoming available, maturity will only get better. Strong security practices are essential. At a very basic level, private cryptokeys must be safely secured. But there are other areas of concern, too.

Blockchain standardization efforts, which will be important, are in their infancy. And what the regulatory implications for topics like settlement finality in a blockchain world will be, are far from certain at this time.

So what are financial institutions to do?

IBM recommends creating a few, discrete blockchain projects. Hyperledger, as a fabric grounded in Open Source and Open Governance, is a great place to start. Code is available now to implement in PoCs and early pilots, and deployment is easy with IBM’s Bluemix PaaS offering. This will give you needed experience and an active role in the security, standardization and regulatory discussions.

Joining with some existing blockchain consortia may strengthen your voice. And having a trusted IT partner with financial industry expertise may help insure against hooking up with a shooting star that burns out as soon as a standard or regulation goes the wrong way.

Most importantly, maintain the most vigorous and vigilant security posture, no matter how secure or trustworthy you believe – or are told – about any blockchain network.

My team and I will be at Sibos in Geneva later this month and look forward to talking with you about the new IBV study as well as your Blockchain plans and projects. To learn about IBM activities at Sibos, visit ibm.com/Sibos.

To view the full IBV study, visit ibm.biz/blockchainfm

 

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