Blockchain is coming to financial services. Just how quickly it marches on financial services organisations and what, exactly, the technology brings is still up for debate, but it has the potential to facilitate faster, cheaper, safer and more transparent financial transactions. But, it could also means significant job losses for financial services jobs in the middle and back office.
A panel at a recent Trading Show in New York debated what it will mean for the financial services industry. These are the takeaways
“Things that used to take three days and cost billions of dollars have been cut in half because of this disruptive technology, as opposed to the current model, which is far too cumbersome and bureaucratic.” said Bhavin Kapadia, an independent OTC derivatives blockchain consultant. “The legacy systems that banks have today are ridiculous – they cost millions of dollars, and they hire a consultant to manage a huge product, who reports to clients and managing directors about the status of the project, and it’s the blind leading the blind.
“Blockchain offers enormous practical advantages to financial institutions in its ability to streamlines such processes,” he said. “For example, a smart contract could support efforts to increase the speed and transparency of booking a trade.”
There is a wide range of other applications for blockchain aside from Bitcoin transactions, many that could replace tasks that humans have traditionally been hired to do. For example, IBM has used blockchain for channel financing, and many feel that syndicated loans or private markets where there is currently no liquidity are other good candidates where blockchain is a natural fit.
“You have to look at specific problems and see if blockchain is a solution rather than applying it everywhere," said Chris Burniske, the blockchain products lead at ARK Invest. “You also have to think through who loses. Which business models and roles will become obsolete?”
Blockchain adds to the value of the data that financial services firms collect, according to Rajeev Ranjan, a policy advisor with the Federal Reserve Bank of Chicago. But if more firms use blockchain to automate more data management and analysis functions, that could enable them to reduce headcount.
Financial services intermediaries' and service providers' business models are at risk.
“Unnecessary intermediation might actually go away, and custodians might be hit the most,” Ranjan said. “They’re still going to be there, but we’ll see a fundamental change in the way they conduct business. Firms will become more efficient, although some intermediaries might still be in place due to the trust factor,” he said.
Blockchain enables you to exchange value with another person without a middle man. The flip side of that coin is that "middle-men" firms employ people to execute those functions, and such jobs may be in jeopardy.
“In the future, this will allow you to trade value with another person without having a third person as an intermediary, which will open up so many opportunities – it’s why people are so excited,” said Stefen Choy, the co-founder of Tech Trader Fund. “Using blockchain, you can trade anything with anyone around the world without dealing with an intermediary."
One of blockchain’s best features – the fact that all counterparties involved in a particular transaction or smart contract have access to the distributed ledger – is ironically slowing its adoption among traditional financial services firms. That reluctance to embrace blockchain in some circles could actually preserve certain at-risk jobs at traditional financial institutions and intermediaries – at least for the immediate future.
In particular, Wall Street banks and broker-dealers do not want their customers’ trading data to be publicly available – they prefer walled gardens with defined parameters.
That said, Goldman Sachs, J.P. Morgan Chase and Bank of America Merrill Lynch, among other industry heavyweights, are collaborating with blockchain startup R3, so the tide may be turning, especially given blockchain's potential to bolster big banks' cost-cutting initiatives.
“We’re seeing the evolution of closed-permission blockchains and the rise of consortia with multiple parties collaborating between industries; for example, every major bank is a member of R3,” said Ron Quaranta, the chairman of the Wall Street Blockchain Alliance. “Blockchain is really good at storing and sharing data, but not at very high volumes or frequent processing, so it’s not a good transactional overlay for the highest-frequency or high-capacity trading we have on the Street.”
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