By Phillip Silitschanu
Thus far, the industry that seems poised to see the greatest changes is the Financial Services and capital markets industry. Here, we have already seen blockchain being utilized in various forms, in smart contracts digital currencies, such as Bitcoin and Ethereum. For now, these have been “experiments” (albeit very successful and profitable ones), but this appears ready to change from experiments conducted in the realm of computer scientists and “nerds” to becoming a mainstream tool in various industries. But it appears that the developments in blockchain are reaching critical mass, and could be upon us sooner than anyone realizes.1
One area in the finance industry which has already begun to see the stirrings of a global technological revolution is that of digital currency. With digital currencies, similar to Bitcoin, a business who wishes to transfer currency from their country to a recipient in another country (or vice versa), could potentially do so effortlessly. Making international wire transfers could potentially be accomplished directly using blockchain based currencies, directly from sender to recipient. This may still be a few years away, and international currency transfer services are still a useful option for businesses who seek to make international currency transfers.
It is worth noting that as recently as ten years ago, if you wanted to watch a movie at home, you’d leave your house, go to the local video store, rent a movie, bring it home, then return it. In the span of just five years, the entire movie rental industry was transformed from a brick and mortar business model, with thousands of locations, with physical DVDs to rent, to a mail order DVD model, and then almost overnight to a digital streaming business model. Today, it is virtually impossible to find a video store to physically rent a DVD, and it is much easier to simply stream a movie from the comfort of your home. The development of distributed data (in the case of streaming movies, distributed media), brought about sudden revolutionary change in the home media industry. Blockchain, also a form of distributed data, when properly developed and applied to the financial services industry, could bring about similar, sudden, and revolutionary change.
The potential transformation in the financial services industry is seismic, a complete and total transformation, especially in regards to the clearing and settlement of securities portion of the industry. Today, a security, for example a share of stock, is simply a dematerialized agreement between numerous databases. Put simply: if you own one share of “XYZ Corporation,” you don’t actually own a physical, tangible, paper, stock certificate. All you own is what your broker’s computer database states you own, and your broker can assure you that you own that share because other entities’ databases all agree that you own that one share of XYZ Corporation. The broker has a database, the transfer agent has a database, the clearing and settlement firm has a database, the trading firm has a database, and on and on. Essentially, there is an entire, multi-billion dollar industry built up around the maintaining and reconciling of databases, spread across thousands of firms, employing millions of people. All this, to simply ensure that one database reconciles with all other databases, so that you can be assured that your ownership of the one share of XYZ Corporation is properly recorded and reflected.
Blockchain, in various forms, promises to revolutionize the way the ownership of securities is recorded. Securities, instead of being a nebulous share of ownership, can be transformed into a unique, distinct, one of a kind mathematical formula, in digital form. This digital mathematical formula will be able to reflect the entire history of ownership, engrained within the actual mathematical formula. Every time that that blockchain share of XYZ Corporation changes hands, that transaction, and the recordation of that new owner, is recorded directly in the chain of information contained within the mathematical formula that constitutes that unique blockchain. In this way, the fact that you and you alone own that particular share of XYZ Corporation is indelibly recorded in that share itself. Anyone, such as a broker, or asset manager, custodian bank, etc., could, with the right software, easily “see” that you are the owner of that share. No longer would they have to check their own database, and reconcile that database with every other database, in order to be sure of who is the owner of each share.
No matter what, it would appear that blockchain is here to stay, in some form or another. It remains to be seen what form blockchain will take, and who will lead the revolution in the industry. Until then, the methods and services currently in place (i.e., international currency transfer services to transfer funds) will continue to be the reliable way to conduct business in the financial services space.
Phillip Silitschanu is the founder of Lightship Strategies Consulting LLC, and CustomWhitePapers.com. Phillip has nearly 20 years as a thought leader and strategy consultant in global capital markets and financial services, and has authored numerous market analysis reports, as well as co-authoring Multi-Manager Funds: Long Only Strategies. He has also been quoted in the US Financial Times, The Wall Street Journal, Barron's, BusinessWeek, CNBC, and numerous other publications. Phillip holds a B.S. in finance from Boston University, a J.D. in law from Stetson University College of Law, and an M.B.A. from Babson College.
1. Bitcoin Exchange Bitfinex Adds Ether Trading Amid Increasing Demand, http://www.coindesk.com/ethereum-bitfinex-ether-trading/