Read this article and learn about:
- The key characteristics of blockchain and other Distributed Ledger Technologies (DLT)
- What does the technology promise and why is everybody talking about it?
- What are the recent developments in this nascent fintech industry?
- Some possible scenarios over the medium- to long-term
- What you should consider before deciding on your firm’s involvement
About the author:
Igor Gramatikovski, Product Manager for Trade Processing, SimCorp
Onslaught of new terminology
Although there is currently no official taxonomy for Distributed Ledger Technologies (DLT), it is safe to say the term blockchain commonly refers to a distributed database structure that can only be updated by appending a new set (or block) of valid transactions to the log of previous ones.
At its most basic, blockchain is a protocol for digital value exchange, solving the problem of double spending, inherent in the transfer of any digital asset, while at the same time removing the need for a centralized authority of trust – a party that would record and verify transactions.
The initial incarnation of blockchain technology has its roots in the implementation of the digital currency bitcoin. However, it has gradually come to also refer to the various other technologies that have been inspired by blockchain but developed in order to address some of its inherent deficiencies for the needs of institutional financial markets. Some of these technologies are essentially a different implementation of a distributed ledger and consequently share only a few common properties with the original implementation. Furthermore, the term is used in connection with some more advanced and only loosely related concepts such as smart contracts, whereby business rules implied by a financial contract are embedded (encoded) in a programming language and executed with the transaction.
Why is it important to financial markets?
By potentially providing a common and ubiquitous ledger, blockchain supporters believe it could reduce the friction created in financial networks when different intermediaries use different technology infrastructures. In theory, the distributed nature of blockchain could also reduce or remove the need for intermediaries to validate financial transactions.
By potentially providing a common and ubiquitous ledger, blockchain supporters believe it could reduce the friction created in financial networks when different intermediaries use different technology infrastructures. Igor Gramatikovski, Product Manager for Trade Processing, SimCorp
The prospect of streamlining infrastructure and even removing redundant intermediaries from the process creates the opportunity to generate significant efficiency gains. This of course, excites a financial industry still struggling to come to terms with the post-crisis financial framework and its associated systemic costs. And while financial intermediaries such as investment banks are enticed by the tantalizing promises of the technology, others such as exchanges and trading facilities, clearing houses, central securities depositories and payment processors are concerned they would be significantly disintermediated and disrupted, some to the point of complete obsolescence.
So, although for various reasons, both investment banks and financial intermediaries have entered the investment frenzy, competing and often partnering with a plethora of new FinTech startups.
One type of financial markets institutions have however, been conspicuous by their absence. Asset managers, while playing a key role in capital market infrastructures, are amongst the last of the financial giants to enter the blockchain race. The main reasons for this is that they are perceived to be much further down the disruptive line of attack, and their ‘wait-and-see’ posture also reflects their much lower appetite for risk.