Five Ways Blockchain Will Disrupt Mainstream Financial Technology

Traders Magazine Online News, March 19, 2018

Max Artemenko

Blockchain has gained rapid notoriety as the newest breakthrough decentralized technology to revolutionize and streamline the way our financial processes operate. From digital currencies to commercial applications, blockchain technology is poised to cause mass disruption of the financial technology as we know it.  But to really make a break through, blockchain must attract the institutional investors and that is beginning to unfold. Many banks, financial firms, and even the government have begun taking advantage of blockchain to streamline banking and trading processes.

For example, central banks look to blockchains for improve the efficiency of their own transactions and those in their national economies. The Central Bank of Brazil is working on a blockchain-based payment system for transactions with commercial banks. Meanwhile, the National Bank of Ukraine and the Peoples Bank of China are both exploring the potential of electronic, blockchain-based versions of their currencies, to better fit their increasingly digital economies and to enable more accurate measurements of economic indicators, like the velocity and distribution of money. Venezuela is also planning on launching a blockchain-based currency called the Petro, which will be backed by the price of Venezuelan oil and will be accepted as a means of paying taxes.

Although the buzz around blockchain has been propelled by cypherpunks, or cryptography activists, pursuing libertarian, anarchist, or anti-corporate utopias, the institutional investment world has begun to take note of this profit-generating technology that has created “Bitcoin millionaires” out of every day investors.

Below are five use cases for blockchain in the banking and finance world that has created a steady uptick in interest from the institutional community: 

1. 1.       Applying smart contracts to syndicated loans

A group of software and financial firms led by Credit Suisse is tackling the problem of upgrading the technology underpinning syndicated loans, in which multiple lenders pool funds for a single borrower. Today, such loans are usually implemented via fax over the span of days. Converting syndicated loans to smart contracts - platforms for self-executing code as they edit the underlying ledgers, on a blockchain would expedite their creation, eliminate costly paperwork, and facilitate secondary trading.

1. 2.       Collateralized debt obligations

Derivatives are like insurance contracts expressed as an underlying asset that is used to hedge risk. The democratization inherent to cryptocurrencies has opened the door for startups like Dharma, which is building a protocol on the Ethereum blockchain for derivatives as complex as collateralized debt obligations. Dharma anticipates that the transparency of Ethereum smart contracts would permit more accurate assessments of complex derivatives.

1. 3.       Post-Trade Processing

The Depository, Trust, & Clearing Corporation is partnering with IBM, Axoni, and R3 to rebuild its post-trade processing system for credit default swaps. The infrastructure behind the new system will be a permissioned ledger distributed among its clients, designed to eliminate redundant processing and automate post-trade events like bankruptcies and subsequent pay-outs.

1. 4.       Financial exchange settlements

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