Blockchain in the Financial Sector

In this contribution, we focus on the uses of the blockchain in the financial sector. In its most extensive form, blockchain technology could dramatically change the financial sector and monetary systems.

Virtual currencies
Even without making use of virtual currencies, such as bitcoin, blockchains can be used to settle transactions quickly and cheaply by rendering the involvement of traditional players in the banking system superfluous. This is done by making assets “intelligent”. We’ll write more about this in a later post. In the meantime, it’s important to note that most scenarios assume that a virtual currency will gain in popularity and significantly accelerate the speed with which the economic system operates. That being said, the setbacks which bitcoin has experienced have undermined, to a certain extent, the public opinion on the potential of virtual currencies. For instance, virtual currencies, which have scarcely any transaction costs, make micro-payments possible and will significantly accelerate the development of the Internet of Things. Consider for example a pay-per-view business model for newspapers, whereby 0.1 cent per consulted article is automatically paid, or a parking meter that charges 4.16 cents per minute a car is parked at a certain location. Both are currently inconceivable given the transaction costs associated with the intermediaries involved.

Several central banks have already started experimenting. For example, on 24 March 2016, the Dutch National Bank stated in its annual report that it is committed to the sustainability of payment traffic through the development of a concrete prototype for a virtual currency, DNBcoin, based on blockchain technology. The Bank of England announced earlier that it had developed its own virtual currency, RSCoin, in order to effectively monitor money supply in the future, once virtual currencies have become mainstream.  The World Bank, the IMF and the Federal Reserve are all following these developments closely. In this regard, Adam Ludwin had the following to say:

“The medium of money has only changed a few times in history, from precious metals to bearer currencies to now our ledger-based electronic systems. Bitcoin and blockchain represent a transition to a new medium. This transition is often referred to as distributed ledger technology, which is a reference to today’s centralized ledgers. But I find it more helpful to look back to bearer instruments, like banknotes, to appreciate what this new medium enables: a digital bearer instrument.

[SNIP] The goal of the blockchain industry is to collapse these steps into a single step, where payment is the settlement, just like with physical notes. This is what I mean by digital value transfer, which I sometimes like to call money-over-IP. Soon, the phrase “cross-border payment” will make about as much sense as “cross-border email.”

Beyond virtual currencies
The fact that blockchain technology will influence the financial system in other ways is proven by the interest demonstrated by many other players. For example, together with the technology company R3CEV, 42 of the world’s largest banks are currently investigating how the blockchain can be used to, amongst other things, speed up financing transactions and minimise the settlement time for all types of transactions. The consortium has even achieved an impressive first result: Corda, a blockchain-inspired register to record agreements between regulated financial institutions, without the characteristics of public blockchains which would be inappropriate for the objective  pursued. The information in the register will not be publicly accessible and transactions will have to be validated by the parties themselves. The advantages of a decentralised register, however, such as speed of settlement, are maintained.

Belgium is not far behind. KBC’s Bolero Crowdfunding recently launched an app to enable the trading of crowdfunding shares via blockchain technology.

Finally, recent technological progress has not escaped the attention of established players responsible for monitoring behind-the-scenes developments. Euroclear and Swift have indicated that they are learning more about the technology. What’s striking is that although blockchain technology puts their very existence at risk, they do not appear to be concerned for the time being. It seems that the breadth and complexity of the financial legislation currently offer them adequate protection.

The following chart indicates those aspects of the financial sector in which blockchain, or technologies inspired by blockchain, is expected to have the greatest impact.

Compliments of NautaDutilh – a member of the EACCNY