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Blockchain-enabled distributed ledgers: Are investment banks ready?

OVERVIEW

The development of blockchain technology has the potential to redefine the operations and economics of the financial services industry.

Despite significant technological gains in capital markets over the past 20 years, middle- and back-office functions often remain antiquated, slow and inefficient thanks to overly complex processes involving many counterparties, manual tasks and third-party service providers. Assets that trade electronically in the blink of an eye can still take days to settle. Blockchain-enabled distributed ledgers could change all that.

Interest in and funding for this type of financial technology is growing exponentially. An estimated $75 million was invested in blockchain efforts specific to capital markets in 2015, up from $30 million in 2014. By 2019, that figure is expected to reach $400 million. Individual organizations, industry consortiums and even major central banks are all jumping on board to see what blockchains can do. Are you ready to jump too?

BENEFITS AND CHALLENGES

Distributed ledger and blockchain technology fundamentally changes how data is managed, moving from a scenario where each organization maintains its own copy of a data set to one where everyone has controlled access to a shared copy.

Benefits

In the context of capital markets, potential benefits include:

  • Faster settlement times that are user-optimized

  • Lower collateral requirements and counterparty risk

  • Improved contractual term performance

  • Greater transparency for regulatory reporting

  • Better capital optimization

Challenges

However, like any new technology, blockchains have their challenges:

  • Privacy: Balancing the confidentiality and traceability of trading activity

  • Security: Protecting against reorganization by one or more participants

  • Scalability and latency: Finding solutions that can handle the required volume

  • Implementation: Establishing standard tools or administration interfaces

  • Governance: Redefining the “new normal” threat matrix for shared ledgers among large banks

EVOLUTION OF BLOCKCHAIN

If 2015 was the year of blockchain exploration and investment, then 2016 will be the year of early adoption. Integrating distributed ledger and blockchain solutions into legacy bank infrastructure will not be simple, but capital market firms are uniquely suited to the challenge. Given the industry’s history of early adoption, firms are skilled and experienced at creating proof-of-concept (PoC) teams, defining use cases and judging the results. By 2025, Accenture anticipates widespread blockchain adoption across capital markets.

2015

Exploration & Investment

  • Initial capability & use case assessments
  • Early adoption likely for internal reconciliation

2016-2017

Early Adoption

  • Leading-edge banks see the value of blockchain and begin deployments for asset classes that are bilaterally traded and/or have no central clearing authority
  • Regulatory certainty drives adoption for external uses
  • Regulatory authorities realize the benefits of blockchain for auditing and compliance, and rule-making begins

2018-2024

Growth

  • Banks begin to see the benefits accorded to early adopters and—combined with regulatory guidance and certainty—the network effect takes hold
  • New service providers and models emerge
  • Deployments go viral across numerous asset classes
  • New products and services are created; incumbent processes and services are discarded

2025

Maturity

  • Blockchain adoption is considered mainstream and integral to the capital markets ecosystem