Interest in blockchain for capital markets has exploded in recent years, with investment in this emerging technology more than doubling between 2014 and 2015 alone. Following Accenture’s recent investment and alliance with Digital Asset Holdings, David Treat discusses how and why blockchain-enabled distributed ledgers are poised to transform investment banking in the coming years.
Why is this the time right for blockchain technology in capital markets?
In the last 20 years, we’ve witnessed significant technological advancements in capital markets, much of it concentrated in front-office functions. Middle- and back-office functions, on the other hand, often remained slow and inefficient. An asset can be traded today electronically in the blink of an eye and then take days to settle. Both investment banks and their clients are demanding more—and the market is responding.
Investment in blockchain technology increased from $30 million in 2014 to $75 million in 2015, and is expected to grow in 2016 and beyond. Initiatives like the Linux Hyperledger Project are attempting to develop open-source distributed ledger frameworks so that developers can focus on building industry applications. Meanwhile, consortiums like the Linux Foundation are bringing together technology and capital markets firms to establish standards for blockchain technology in capital markets. There’s no doubt about it: Change is afoot.
Will blockchain technology replace the capital markets ecosystem as we know it?
The likely outcome is that blockchain technology will primarily work within the existing infrastructure or ecosystem to help to restructure and simplify many existing processes and strip out significant inefficiencies associated with reconciliation. Banks will be looking for ways to become more efficient and improve client services, and regulators will be interested in increasing transparency and optimizing execution and settlement.
How do “smart contracts” fit into the picture?
“Smart contracts” are embedded with computer protocols that can automatically verify and execute the terms of the contract without relying on a centralized business logic engine. The proponents of "smart contract" solutions typically envision removing intermediaries through their solutions to achieve greater efficiency while maintaining auditability of the transactions. While it seems likely that individual transactions can be successfully enabled through this technology, there are still technical challenges to be worked out with regard to what happens when it goes wrong, such as data feed issues, upstream security issues, execution timeframes, etc.
However, it is the implications on the overall system that raise even more serious concerns. A primary function of intermediaries (e.g., clearinghouses) is to ensure that if one counterparty is unable to fulfill their part of a transaction, that the others can be kept whole and systemic risk reduced. The ability for a "smart contract" based solution to provide the same degree of risk mitigation is not yet evident, and would be required to make regulators comfortable.
In contrast, the likelihood of clearinghouses to implement a different type of blockchain solution to increase efficiency, auditability and transparency seems more likely and would preserve the current infrastructure, front-to-back flows and regulatory constructs.
Smart contracts may be a viable approach in the future, but for now, it seems prudent to continue to manage a consolidated set of rules and constructs centrally, and take advantage of "message" based distributed ledger and blockchain solutions to achieve the targeted efficiency, control and transparency gains.
Accenture recently formed an alliance with Digital Asset Holdings, a distributed ledger technology developer. Tell us about that decision.
We believe that blockchain technologies—and blockchain-enabled distributed ledgers in particular—have the potential to transform capital markets and the financial services landscape. So when the opportunity arose to team up with one of the emerging leaders in the field, we didn’t think twice.
In January, Accenture and 12 other organizations from across the global financial ecosystem pooled resources to invest more than $60 million in Digital Asset Holdings. We also formed an alliance with the group to collaborate on innovative solutions for banks, brokerages and infrastructure providers that Accenture will implement as a preferred systems integrator. We are confident that this company’s software is going to significantly improve post-trade processing, making it more secure and more efficient while reducing costs and unlocking new revenue opportunities for investment banks.
How is Accenture Technology Labs supporting blockchain development?
Accenture’s Technology Lab in Sophia Antipolis serves as our Blockchain Center of Excellence and helps position Accenture as a key and active player in the blockchain space. It provides access to both technical and business expertise around blockchain. The center focuses on building points of view, proof of concepts, educational materials and more. It addresses all the distributed ledger capabilities across different blockchain schemes (public, consortium and private), with industry verticalization and domain specialization (IoT, transactions, messaging, etc.), underpinned by the best underlying technologies from startups, our key partners and from the open community.
Specifically, the Labs provide reference architecture(s), technical integration modules and frameworks, industry specific use-cases and training materials. It provides the necessary due diligence and testing of technology applications with our initial technology partners and solution providers such as Digital Asset Holdings, IBM, Ripple, Eris and Multichain, as well as testing of emerging third party solution providers which gives it a unique ability to report on market trends and blockchain startups. To date, the Labs have built a number of working blockchain solutions in sandbox environments, allowing for deep testing capabilities ahead of production ready solutions.
Ten years from now, where do you see blockchain technology in capital markets?
Blockchain solutions will not replace the current capital markets ecosystem. Instead, we believe this technology will offer the opportunity to fundamentally re-architect processes–driving blockchain from experimentation to mainstream adoption across multiple business applications. These processes include ones which are currently difficult to reconcile owing to a number of internal and/or external participants, latency challenges and security concerns. Examples include settlement optimization, client onboarding KYC/AML, standard settlement instructions, collateral management, regulatory audit and reporting, and a host of others.
Read about Accenture's Capital Markets Blockchain Practice