We have entered a period of what Google’s chief economist, Hal Varian, likes to call “combinatorial innovation”; a term for when many factors combine to drive the creation of new inventions. Today, the key factors sparking innovation are transparency of information, speed and connectivity, open source software and APIs which enable the development of layered ecosystems of applications. One such innovation that was created by the coming together of these factors is the blockchain.
What is blockchain and how can it benefit why should finance professionals care?[caption id="attachment_6330" align="alignright" width="200"] William Benattar, GreySpark[/caption] The blockchain serves as an append-only data store of transactions that has two components: a replicated ledger and a distributed database. The database is stored and synchronized by all parties (referred to as nodes) to a shared ledger within the blockchain network. Bitcoin, a digital currency that uses blockchain technology, is used to track money transactions but it can also track the exchange of other assets including financial securities or data related to an individual’s identity such as IDs or proofs of address, for example. Blockchain is far from being a passing fad and finance professionals need to become familiar with the concept because, in time, it is likely to fundamentally overhaul the way financial transactions are made. Indeed, once it begins to be adopted more widely, it will revolutionize the structure of the financial services industry as the technology eliminates the need for trusted intermediaries such as clearing houses. Financial institutions that are not exploring the opportunities that blockchain creates will lag behind in terms of knowledge and strategic options, particularly in relation to efficiency and cost saving opportunities. Further, front office systems automation, as well as the simplification and standardization of back office systems, are areas that are likely to take place as a result of blockchain technology implementation. Financial institutions, therefore, have duty to look to innovative technology solutions the adoption of which may be more imminent than is currently understood.
Where do you see blockchain making an impact within finance? When?GreySpark is currently exploring seven capital markets’ use cases for the blockchain:
- Payments and remittance
- know-your-client or anti-money laundering
- digitized financial instruments
- regulatory reporting
- clearing and settlement
- smart contracts applications for servicing of financial instruments