BlockChain and the disruption of financial services

Author: Luleka Mtongana
Source: GIBS News

​Blockchain, the online distributed ledger technology, has the potential to fundamentally disrupt the global financial services industry, as well as how monetary instruments and assets are transferred, stored and traded. Leader of RMB's Blockchain Initiative and one of the founders of the bank's FinTech unit, Farzam Ehsani told a recent Gordon Institute of Business Science (GIBS) forum he believes Blockchain technology will be as transformative to our financial system as the internet as been to global communications.

Blockchain is a superior database where stored data is encrypted, while access to the data is also encrypted. The distributed nature of the network across many computers means that it has built-in redundancy and transactions are immutable: It is impossible to alter the record, creating a credible audit trail. On the Blockchain, multiple copies of data exist across multiple computers, creating a peer-to-peer network.

​Use of Blockchain has begun to grow beyond its initial deployment for the Bitcoin cryptocurrency system, as a tamper-proof database that can verify the validity of all transactions. 

Ehsani explained that until 2009, no one had transferred value digitally from one person to another without a trusted intermediary, such as a bank.  The Blockchain protocol makes use of consensus to build trust, as all the computers in the network have to agree whether a transaction is valid or not. This allows for instant and direct settlements and does away with the need for intermediaries. In the future, financial instruments such as equities, bonds and derivatives, as well as physical assets such as property and cars will be issued onto the Blockchain: "Imagine the possibility of buying or selling a house, and it being transferred into your name, in a matter of not weeks or months, but seconds or minutes," Ehsani said.

"This is not some crazy unbelievable theory, but will become reality in the not too distant future. There is no question this will happen; it is just a matter of time."

Blockchain's potential to transform the financial services industry post-trade means transactions could be streamlined and simplified so as to cut the costs and counterparty risk associated with clearing and settlement. Ehsani said Blockchain has the ability to disrupt the payments, or value transfer, and value storage offerings that banks currently provide. As value transfer accounts for 40% of total global banking revenue, an opportunity exists for banks to reduce costs.

"Block chain will change the financial landscape," as central banks could be on the Blockchain network and see all transactions in real time Ehsani said. While cryptocurrencies are currently non-sovereign, several central banks are considering issuing their own virtual currencies onto the Blockchain, so that the potential exists to transact directly with them, bypassing commercial banks.

Tanya Knowles, head of Innovation and Projects at Strate, South Africa's authorized Central Securities Depository, explained: "The world is changing and the way we interact is changing. Blockchain has huge potential, not only to make existing processes faster, but also for the peer-to-peer economy."

​While familiarity and adoption of Blockchain technology remains low, Knowles said she believed implementation in emerging markets was likely to be faster, as there aren't legacy systems and legislation to hold these countries back. Widespread adoption of the technology is still some time away, but collaboration would be crucial to Blockchain's ultimate success. This includes collaboration with partners across the financial services industry, as well as regulators and central bank authorities.

Blockchain is forcing South African financial institutions, which are used to competing for market share to adjust to a new, collaborative paradigm, Ehsani explained: "Most money in the future will be on the Blockchain, regulated by central banks. It will allow for instantaneous payments and smart contracts. But it is still very early days for possible revenue models," he said.

As a technology still in the early stages of its development, Blockchain does have potential pitfalls and unexplored outcomes. The technology is not completely immune to cybercrime, as collusion amongst users could theoretically result in modifications; and regulatory and dispute resolution issues are in their infancy. Ehsani said the socio-political implications of Blockchain are a cause for concern: The potential exists to penalise a country with a lack of computing power and exclude them from the system, which could cripple a small economy.

However, at this early stage of Blockchain's development, Ehsani said the most critical task was to gain a clear understanding of what the Blockchain is: "Don't be deceived that it is just a technology in its infancy, as you may live to regret your decision," he concluded.

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