Clearing with Blockchain Technology

For some the introduction of blockchain technology is as cutting edge as the internet itself, others see it as the natural progression of things. Regardless of your opinion, blockchain technology is progressing at a rapid pace and changes the way financial firms and other businesses think about doing business, similar to the way drone technology has changed policing.  BlockChain Distributed Ledger System

What is Blockchain Technology and how will it change the way Banks and Clearing houses do business?

Millennials are shocked to hear that at one time trades were booked by writing up tickets and placing them in basket to be processed at the end of the day (hopefully). Since then the computer has helped speed up the pace and transactions can be processed throughout the day. But many trades still take up to 3 days to clear. ACH technology (over 40 years old) can still take 2-4 days to post transactions.

Customers wanting quicker solutions, gave entrepreneurs cause to develop transaction systems that speed processing through banking and intermediary cross checks. Blockchains are a near perfect fit because they’re based on a system where accuracy checking and verifying are no longer necessary.

Definition of a Blockchain –

A blockchain is a distributed database that maintains a continuously-growing list of records called blocks. Each block contains a timestamp and a link to a previous block. Data posted in a block cannot be altered once it is recorded. (Wikipedia)

How secure is blockchain technology?

Blockchains are cryptographically chained together, where a new transaction is added on to the end of the chain. The transactions are recorded in a permanent un-changeable manner that can never be written over or erased. Additionally, everyone in the system has access to what has been recorded making the technology suitable for applications beyond bitcoin and virtual currency records.

New & Emerging applications for Blockchain Technology

The biggest opportunities for blockchain technology are in trade finance, clearing and settlement, asset and transaction recording, and digital identity. Trade finance and securities are two document intensive applications where blockchains are expected to excel. Japan Exchange Group recently adopted blockchain technology to manage stockholder accounts where they decentralized information and added a tamper resistant data solution. Another project, sponsored in part by Visa, provides for real-time settlement of payments for cross-border and domestic fund transfers.

Blockchain technology threatens the very existence of intermediaries and has already had a profound effect on involvement in transactions. Simply put, Blockchains eliminate the need for neutral third parties to track transactions and keep ledgers, and at the same time speed up processing.

Traditional trade transaction processing models require subscriptions to be sent and verified by Transfer Agents; then a trade confirmation and payment request is released. Final settlement can take several days and involve multiple parties. Blockchain transactions happen in real time.  

Eventually Blockchains are expected to mean decentralized banking where transactions are no longer channeled through banks, clearinghouses, and others. As of this year over 70 major financial institutions are collaborating on research and development of distributed ledger technology with leaders like R3 Blockchain Consortium and DLG Distributed Ledger Group.

New opportunities for blockchain technology are sprouting up everywhere.

But some Broker Dealers are concerned about the use of Blockchains

Blockchains are great for deterring theft and anti money laundering, but brokers are concerned that the system creates too much transparency; for instance, strategies where large investors, hedge funds, or takeover investors do not want others to know the positions they are accumulating. Blockchain ledgers specifically retain past transactions for all to see, leaving investor buy-sell activity disclosed to anyone with access to the ledger.

Of intense concern is the disclosure of transactions where sophisticated investors could cross research a firms trading strategy in real time to uncover short selling positions.  This scenario could have a significant impact on market trading.

Further, as we approach the end of 2016 there is much talk but limited regulation or legal framework in place to protect rights and obligations of users and institutions. Without further definition about how Blockchains will be regulated, firms are holding at pause.

Broker Dealer and RIA firms interested in cutting edge technology strategy should keep an ear to the ground on Blockchain developments and look for more and more ways they can be folded in to recordkeeping.

#Blockchain  #EmergingTechnology  #Fintech  #distributedledger


RND Resources Inc has consulting solutions for Broker Dealers and RIA firms entering and actively engaged in Fintech strategy.  Our professional IT experts can assist with developing Blockchain solutions for you firm.  For additional information, call (818) 657-0288 and speak to Amie.

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