Ready or not, blockchain digital ledger technology is coming to the trading markets. And soon.
Why?
Blockchain technology is a shared, cryptographically secure ledger of transactions, which in theory could save every financial trading house and institution millions of dollars on the cost of settling trades and other financial transactions, while improving efficiency and reducing errors.
According to Tabb Group, the implementation of blockchain-based technology is coming and is inevitable. Blockchain is highly scalable and secure, and relies on encrypted distributed ledgers to ensure accuracy and transparency, which only works in its favor, said Shagun Bali, the Tabb research analyst who wrote Blockchain Technology: Pushing the Envelope in FinTech.
Blockchain technology has the potential to change the way the industry tracks, clears and settles many of the institutional capital markets electronic transactions, disintermediating the need for an independent third party, Bali wrote.
The financial services landscape is taking notice. The adoption of blockchain across capital markets is now seen as a matter of when, and not if, Bali added. Over the next 12 to 24 months, she sees early adoption growing as blockchain solutions are rolled out for syndicated loans as early as Q2 2016, although use cases such as equity clearing may still be a decade away.
The leading use cases are driven by experiments, investments and partnerships by several of the worlds biggest banks, such as the recently announced R3 consortium with 25 large investment banks developing common standards for blockchain technology. In addition, startups are validating enthusiasm for the technologys potential beyond the transfer of bitcoins.
Tabb Group has identified $66.8 million in new investments in blockchain-related fintech firms to date in 2015. This easily exceeds the $51.2 million raised in all of 2013 and 2014, underscoring the fact that Wall Street is serious about using blockchain technology.
Although the potential of the technology is only just emerging, blockchain is viewed by Tabb as becoming the backbone of the future capital markets infrastructure systems.
The blockchain landscape and evolving ecosystem present a unique opportunity and a fundamental foundational element for additional innovation in financial markets, Bali said. However, further due diligence for defining industry standards with regards to settlement, counterparty and other transactional risks involved is critical. As blockchain gains greater mainstream adoption, a strong regulatory framework will be necessary to maintain a balance between security and future mass-market blockchain scalability, a critical industry challenge that lies ahead.
R3, the bank-backed consortium that is leading the blockchain charge, continues to build interest in the technology. The firm has spent the last year hiring several technologists to spearhead its yet-to-be-created technology, and has enlisted more than 30 major banks and Wall Street firms to use its system.
Even the exchanges cannot help but take notice of blockchains potential.
Nasdaq announced that it is readying its Linq trading platform, which will feature blockchain technology, and has named the first firms that will use the trading system. They include Chain.com, ChangeTip, PeerNova, and others.
The first platform of its kind, Nasdaq Linq is a digital ledger technology that leverages a blockchain to facilitate the issuance, cataloging and recording of transfers of shares of privately held companies on the Nasdaq Private Market.
