Tuesday, February 20, 2018

Blockchain in the Financial Technology Space

Financial Technology (fintech)
Having been in the financial technology (“fintech”) space before it was known as “fintech,” the growth of global transactions has required more and more advanced technology applications to speed up and reduce transaction costs for securities such as equities. Traditional trade processes within asset management can be slow, manual, cumbersome, and filled with risk when reconciling and matching—and they’re getting more complex with cross-border transactions and for nonstandard investment products, such as loans. Each party in the trade life cycle (e.g., broker dealers, intermediaries, custodians, clearing and settlement teams) currently keeps their own copy of the same record of a transaction, creating significant inefficiencies and room for error.

Unfortunately, a fair amount of trades have errors, requiring manual intervention and extending the time required to settle trades. Because it does not require an exchange to verify, clear, and settle security transactions (such as equities, repo, and leveraged loans), blockchain will save a large amount in fees and capital charges globally by moving to a shorter, and potentially customized, settlement window. Blockchain will eliminate significant fees across FX, commodities, and OTC derivatives. Blockchain technology could simplify and streamline this entire process, providing an automated trade life cycle where all parties in the transaction would have access to the exact same data about a trade. This would lead to substantial infrastructural cost savings, effective data management and transparency, faster processing cycles, minimal reconciliation, and the potential removal of brokers and intermediaries altogether.

Financial derivatives are the most common application of a smart contract, and one of the simplest to implement in code. The main challenge in implementing financial contracts is that the majority of them require reference to an external price ticker. For example, a very desirable application is a smart contract that hedges against the volatility of ether (or another cryptocurrency) with respect to the US dollar, but doing this requires the contract to know the value of ETH/USD or BTC/USD at any particular moment. They would have to leave the zone of trust. In practice, information issuers are not always trustworthy, and in some cases the banking infrastructure is too weak, or too hostile, for such services to exist. This approach is not fully decentralized, because a trusted source is still needed to provide the price ticker, although arguably this still is a massive improvement in terms of reducing infrastructure requirements (unlike being an issuer, issuing a price feed requires no licenses and can likely be categorized as free speech) and reducing the potential for fraud. The current industry trailblazers working to enable a smarter and more connected financial system by digitizing the world’s assets are Digital Asset Holdings (www.digitalasset.com), Chain.com, and the aforementioned Ripple.

Source: Source: Blockchain: A Practical Guide to Developing Business, Law, and Technology Solutions 1st Edition by Joseph J. Bambara

1 comment:

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