From bitcoin to the back office, and beyond!
The technology behind bitcoin is just beginning to be mined for use in a wide array of financial services. But it has limitless potential for use in institutional investing, from interest-rate swaps to settlements and back-office functions, say those who've studied and are actively pursuing its development.
“We see all kinds of ways it could evolve,” said David E. Rutter, New York-based CEO of R3CEV LLC, a cryptofinance firm working with a consortium of 22 banks to study the application of distributed ledger technology — the infrastructure called blockchain that connects all computers that verify and validate all bitcoin transactions — to financial services. “It's early days with this technology. Right now, we're balancing Wall Street knowledge with the knowledge of how blockchain works.”
That's no simple task. According to a report released Sept. 30 by consultant Greenwich Associates, “Distributed Ledgers in Capital Markets: Answering the Big Questions,” 102 financial professionals interviewed for the report said there's a basic understanding of blockchain technology, but that “taking that premise and deploying it broadly within institutional capital markets is a complex undertaking.”
“This means that product managers and strategists are having a field day coming up with new applications for the technology, all while software developers are working day and night in hopes of making those dreams a reality,” the report said.
That's why the consortium, which includes banks such as State Street Corp., Goldman Sachs Group Inc., Deutsche Bank AG, Barclays PLC, UBS AG and Royal Bank of Canada, is starting from square one, with all kinds of services on the table for study. Among the early subjects related to institutional investing: trade finance, securities finance, over-the-counter derivatives, interest-rate swaps, fund administration, and back- and middle-office functions.
But, members of the consortium said, there could be other uses that haven't even been thought of yet.
One area of emphasis behind State Street Corp.'s involvement is what impact blockchain technology could have on activities now handled by custodians like itself — State Street had $28.7 trillion in assets under administration as of June 30.
“Now you know why we're so interested in this,” said Hu Liang, senior managing director, head of the emerging technologies center at State Street Corp., . “The technology could save us a lot of money. But we're also doing this for defensive reasons. The technology could have a very direct impact on our business. Some things probably can't be automated, but certainly so much of this can be applied to custody. We want to be ahead on this.”
And though it's too early to say how the technology can work for financial services, sources said it's not too early to take a look at blockchain applications and build on them. Those that don't are taking a risk, said Daniel Connell, managing director, head of market strategy and technology, Greenwich Associates, Stamford, Conn., and co-author of the report. “Does it transform those in the financial services industry or is it disintermediation?” asked Mr. Connell. “It's disintermediation if folks ignore it. It's something that everyone will need to pay attention to.”