Whether you know DLT as Distributed Ledger Technology or as Blockchain Technology (as it’s more commonly known), its effect now, and in the future, is decentralization. And the big question is decentralize what – and for who?
Thus far, the traditional banking industry is understandably dragging its feet – banks’ fees and services are at stake. But with 90% of members of the European Payments Council stating recently that they expect blockchain technology to fundamentally change the industry by 2025, it looks certain that DLT will replace or revolutionize elements of the banking system ahead. So will the banks embrace or be replaced by it? So far they have only dipped their toes in the water. But a number of banks are now experimenting with issuing bonds on blockchains. This makes financial sense.
The beauty of blockchain is its automation and the redundancy of the middleman. Use of blockchain cuts down the number of intermediaries involved in the transactional process for issuing financial instruments. Indeed German fintech firm Cashlink research shows that over the life cycle of a bond, the use of blockchain technology could save at least 35% of the costs of issuance by automating processes such as correspondence, validation and manual updating of bond documentation.
The European Investment Bank is already showing its confidence in blockchain. In April it raised €100m from a two-year bond, registered on the ethereum blockchain network, in the first such deal involving a syndicate of banks. But when it comes to day-to-day transactions, banks so far have moved little. But they have reason to be worried. If blockchain technology becomes mainstream, the impact will be on all of this:
- Payments: A decentralized ledger for payments (e.g. Bitcoin), blockchain technology could facilitate faster payments at much lower fees than banks.
- Clearance and settlement: Facilitating payments is a big money spinner for banks Distributed ledgers will reduce or negate those operational costs.
- Fundraising: Initial Coin Offerings (ICOs) – the cryptocurrency industry’s equivalent to an initial public offering (IPO) – could unbundle access to capital from traditional capital-raising services and firms.
- Securities: By tokenizing traditional securities such as stocks, bonds and any other asset — and putting them on public blockchains — blockchain technology could reduce the cost to access the capital markets by creating more efficient, interoperable capital markets.
- Loans and Credit: Another money-spinner for banks. By stripping away the need for gatekeepers in the loan and credit industry, blockchain technology can replace costly banks and massively reduces loan processing time.
- Customer KYC and Fraud Prevention: KYC and AML compliance are costly policies to implement and maintain. The average bank spends £40 million a year on KYC Compliance, according to a recent Thomson Reuters Survey. But by storing customer information on decentralized blocks, blockchain technology can enhance efficiency and save costs by making it easier and safer to share information between financial institutions.
If banks are hesitant at the moment to embrace blockchain, they won’t be able to ignore its impact for long. The answer is to grab its advantages to introduce a new level of transparency and security, significantly reduce complexity and abandon redundant elements of current infrastructure. Thanks to their deep understanding of end users' needs, financial institutions are in the right place to embrace the opportunities of blockchain and to benefit from its new transactional paradigm and its cost saving potential. But they need to act fast. Because the only way is forward, before the Fintechs step forward …