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TOP 10 CHALLENGES FOR INVESTMENT BANKS 2016


Blockchain Technology:
Preparing for change

Challenge 04

INTRODUCTION

New technologies have radically altered front-office functions for investment banks, bringing unprecedented efficiency gains and new business opportunities.

Yet, despite advancements over the past 20 years, middle- and back-office functions remain mostly antiquated, slow and not very efficient. Here, firms are still dealing with overly complex procedures involving multiple counterparties, manual processes and third-party service providers.

During the past year, blockchain technology has rapidly gained traction in the capital markets industry as one of the most exciting technological developments in recent history. In surveying the global financial technology sector, Accenture has identified blockchains as “possibly the biggest opportunity from taking an open approach to innovation”. This technology has the potential to help minimize counterparty risk, reduce settlement times, improve contractual term performance and increase transparency for regulatory reporting.

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BLOCKCHAIN-RELATED VENTURE CAPITAL



SETTLEMENT DAYS



Syndicated Loans

ADOPTION TIMELINE



BLOCKCHAIN TECHNOLOGY

What is blockchain technology?

Blockchain is a disruptive technology platform that uses cryptography and a distributed messaging protocol to create shared ledgers among counterparties. Originally, blockchain technology was used by cryptocurrencies whose popularity gave rise to the idea of blockchains as a means of building consensus. Since then, banks have begun exploring ways to apply blockchain-distributed technology to payments. In the context of capital markets, blockchain distributed ledgers enable open-source, decentralized, replicated, shared and cryptographically secure operations that are validated by mass collaboration and can be applied to many financial instruments.

Unlike traditional ledgers in banks, which use central authorities to manage transactions (see Figure 1), distributed ledgers built on blockchains validate transactions through a protocol managed by the user community via a consensus mechanism (see Figure 2). This decentralized approach changes the power dynamic within the financial system, shifting power from institutions to users.

Asset transfers can be facilitated without third-party intermediaries through the use of “smart contracts” – programmed code that replicates conventional commercial agreements by digitizing business transactions between parties and validating them through a blockchain. Practically speaking, this means blockchain-enabled networks have the potential to increase trading efficiency, improve regulatory control and eliminate unnecessary intermediaries.

Figure 1: Capital markets today

Source: Accenture Research
Figure 2: Capital markets in 2025

Source: Accenture Research

When does blockchain make sense?

Blockchains are most valuable when:

They are used to keep track of complex things.

For example, a swap with multiple parties that has been sold and resold and moved between custodians is often problematic in a traditional back office, but a distributed ledger can accommodate various players. A similar result can be achieved with a properly designed database, but the ledger eliminates power struggles and ensures there is no single point of failure.

There is no well-established authority in place.

Examples include syndicated loans, fixed-income, currency and commodity (FICC) derivatives, private equity and bilateral over-the-counter transactions.

Transactions involve finite or countable resources.

A blockchain enabled distributed ledger makes it possible to track assets in ways that are not possible with a traditional distributed database.

A cryptographic audit trail is required.

Examples include financial accounting and regulatory reporting exercises.

How can blockchain help

Though still in the early stages, market players have begun exploring how blockchains can help investment banks. Blockchains can be used to:

Reduce total cost of ownership.

Blockchain stacks offer a robust and verifiable alternative to traditional proprietary stacks at a fraction of the cost.

Clear and settle transactions faster.

Blockchain technology can facilitate the transition from overnight batch processing to intra-day clearing and settlement.

Manage system-of-record sharing.

Blockchain technology makes it possible to give various parties (e.g., clients, custodians and regulators) access to their own live copies of a shared system of record.

Create self-describing electronic transactions.

Smart contracts can use blockchain’s programming language to create context-aware transactions for complex arbitration. For example, a credit default swap could pay out automatically according to pre-agreed logic that watches market data feeds.

What does adoption look like?

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
Source: Accenture Research

What's the catch?

The use of blockchain technology in capital markets raises a number of unanswered questions in three key areas:

Getting Started

Many firms are in an exploratory phase, testing out the technology in their own technology labs and innovation centers. Despite numerous technical and regulatory uncertainties, blockchain technology has many possible applications in capital markets. For example, suggested use cases in testing mode today may include Know Your Customer/Anti-Money Laundering (KYC/AML) data-sharing, trade surveillance, regulatory reporting, collateral management, trading, settlement and clearing.

Firms that want to assess the viability of blockchain technology for specific financial instruments, such as syndicated loans, should consider a number of factors, such as anticipated reduction in settlement days, current clearing and settlement costs, digitization potential, product volume, cost of capital avoided and implementation costs. The next step is to clearly identify risks and challenges. Only then should a firm begin developing a detailed blockchain roadmap, determining product and asset class adoption and creating an implementation schedule.



CONTACTS

This content has been prepared by Accenture and is for information purposes. No part of this content may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice.