Morgan Stanley's banking analysts have released a big new report on the impact of Blockchain in banking. If you're concerned about future-proofing your finance career against the impact of Blockchain, here's our takeaway below.
For anyone who doesn't even know what Blockchain is, Morgan Stanely defines it as, "data sharing across a network of individual computers," or, "computers transferring blocks of records in a chronological chain." As such, it's a "distributed ledger." The two terms are used interchangeably. Users sign up to a software protocol which describes rules for the, "type, quality and transferability of data," as well as, "rules for authorisation,verification and permutation."
By signing up to a "shared,encrypted, transparent database," Morgan Stanley says banks will be able to reduce the teams of people responsible for "authenticating and approving each specific transaction." In this way, they'll be abvle to, "radically restructure the cost base."
"We're not talking five, ten, 15% cuts in costs we're talking 30/40/50%," Blythe Masters tells the analysts. "There's only one way to do that and that is to share a mutualized common infrastructure that previously was kept separately and run independently by every market participant."
For this reason, Morgan Stanley's analysts think Blockchain could be the answer to banks' return on equity (RoE) issue. "Sharing and decluttering of infrastructure could radically reduce costs and provide a much needed boost to RoE." On the other hand, they admit that it might just add to IT spend and push profits to "other players" [Blockchain providers]."
Blockchain is about more than cost savings. Morgan Stanley's analysts point out that Blockchains also increase speed: "Transactions are more streamlined as a buyer's and seller's account update simultaneously when a transaction is authorised."
They also reduce mistakes as buyers' authorisations are visible not just to transacting "parties" but to, "any related parties including lawyers,controllers, accountants."
Blockchain also reduces capital requirements: "Fewer mistakes means less capital tied up in disputed trades and more capital for new trades improving velocity of capital."
It increases visibility: "Transactions can be monitored in real time."Both parties have a digital record showing who authorised approval for transaction."
And, it's eaiser to resolve disputes and cut fraud: "Both parties have a digital record showing who authorised approval for transaction."
Blockchain is software, say Morgan Stanley's analysts. And there's no "one size fits all" application. There will be different Blockchains for different solutions.
"Post-trade settlement is costly," points out Morgan Stanley. "Each transacting party has a team of controllers, internal auditors,external auditors and regulators reviewing transactions."
Under Blockchain, there will be far more visibility and therefore far fewer people will be needed to help with the "don't knows" where settlements are disputed.
Front office trade finance jobs may be made easier by Blockchain. But anyone working with trade finance payments could suffer. "With a blockchain,all parties – financiers, trading houses,and any other trusted intermediaries – are able to see when the goods have shipped and can release funding appropriately.This should reduce time to confirm assets,confirm transaction, release payment and received confirmations," says Morgan Stanley.
"For custodians such as BNY Mellon,State Street, Northern Trust, Citi, JPM, which generate profits from ensuring securities are accurately measured and moved... blockchain technology threatens their value add and shorter settlement periods could cut into revenues more than they could free up capital for buybacks," say Morgan Stanley's analysts.
"Financials cannot afford to reinvent their financial technology, nor take a massive punt on new technology until proven," says Morgan Stanley. Instead, banks will look to plug into technologies that already exist. Consultants who can arrange for this will be highly sought-after.
Blockchain implementation isn't a certainty, say Morgan Stanley's analysts. There are plenty of hurdles to be overcome, not least the question of who will create the standard for all market participants to link to. "This is simpler to do in a smaller,vertically integrated market like Australia, which has one regulator responsible for all the participants in the post-trade food chain – the exchanges,clearers, banks, investment banks,and asset managers." The Australian Stock Exchange is already ahead of the rest of the world, say the analysts.
In other words, if you move to Australia and work on Blockchain now, you could move back to London or New York in three years' time and make a large amount of money as an "expert." Sounds like a good move.