5th January 2016    3 minute read

Blockchain’s Disruptive Role In Investment Banking

Blockchain’s Disruptive Role In Investment Banking

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Blockchain technology makes it possible to track the exchange of virtually anything (money, houses, car titles, stocks) without the need to rely on one single entity (like a bank) to act as an intermediary. Rather than relying on a middleman, blockchains are databases running across a network of independent machines that use mathematics to objectively keep track of the changes of assets. The most well-known use of blockchain technology is in tracking the exchange of the cryptocurrency known as Bitcoin.

What blockchain technology promises to do is offer a far more secure, reliable, transparent, and automated process to exchange money, securities, and all other assets. Here’s how:

  • The creation of a secure transaction ledger database shared by all parties in an established, distributed network
  • The elimination of third parties, as all assets are held in the cloud and tied to their owners’ identities (rather than institutional custodians)
  • All processes are automated without the need for human interference (which also eliminates error handling)

The end result is a reduction of infrastructure as well as transaction costs associated with contracting, including smart contracts, which would eventually allow a consumer to purchase a home directly from another person, without having to include third parties, which is incredibly exciting for the everyday consumer – it gives them the ability to circulate currency on their own terms, without having to pay a percentage of every transfer to an intermediary.

One would think that the evolution of this technology would be welcomed with cold shoulders by financial institutions, as one could seemingly eliminate the need for a bank when it comes to buying a car or even acquiring a business. But, in fact, the inverse is true. Banks are extremely interested in the potential that blockchain technology has to offer, which is why we’re seeing new developments on a regular basis in support of the technology:

  • Nasdaq OMX (the company behind the Nasdaq stock exchange) uses blockchain technology to oversee the exchange of private stock
  • The SEC recently approved Overstock’s blockchain stock plan
  • Linux has developed an open-source standard for blockchain technology (Open Ledge Initiative) that has attracted big names such as IBM, Intel, Cisco, J.P. Morgan, Wells Fargo and the London Stock Exchange

But why would financial institutions welcome blockchain technology?

Sure, investment banks make some money off transaction fees. However, in the grand scheme of things, the money acquired by these fees could be trivial when compared to the potential of streamlining the consumer’s investment process. Blockchains make it quick and easy for both large institutions and independents/small businesses owners to, for example, set up an online store or even raise capital for an existing profitable business. IBM – in discussing their support of the Open Ledge Initiative, stated that they believe that blockchain technology could help bring the Internet economy into the 21st century by decentralising the web.

It has the potential for introducing a new level of automation and transparency to the business world, from stock exchanges to all other financial markets. With both automation and transparency being buzzwords of the 21st century, it’s about time that investment banking joined the fray. Blockchain makes this possible, and helps to simplify and modernise the investment process, not only for larger institutions, but for investors groups as well.

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