The financial markets are evolving and the next exciting catalyst for change is Blockchain, and while in its infancy, it has the industry talking.
Born out of the crypto currency Bitcoin, the Blockchain technology is an efficient and transparent cryptographic ledger system – or a chronological order of all Bitcoin transactions recorded in a public ledger. The technology has been called “the future for financial services infrastructure”.
Now, almost every financial market player is exploring how this innovative technological disruptor is going to transform their business and many companies see the significant potential that Blockchain has to offer. This was largely evident at the most recent SWIFT Sibos seminar, which took place at the Sands Expo and Convention Centre, Marina Bay Sands, Singapore, from 12 to 15 October 2015.
A recent Oliver Wyman report shows that Blockchain technology could cut banks’ infrastructure costs for securities trading, regulatory compliance and cross-border payments by up to R286 billion ($20bn) over the next seven years. While banks are looking at its potential in the payments environment, the post-trade players are asking whether it could also be used to streamline securities services as well. According to Strate CEO, Monica Singer, the main appeal of the technology to the securities services industry is that it can act as a system of record. “It’s reliable, granular and irreversible – which completely aligns to our objectives of transparency, risk mitigation and to our delivery versus payment model that is final and irrevocable.”
While Financial Market Infrastructures (FMIs), such as CSDs, have historically been labelled as the resilient and conservative companies that kept financial markets robust during the Global Financial Crisis, Singer believes the window of opportunity to innovate has presented itself. “Yes, the Financial Crisis has created regulatory pressures that has prompted CSDs globally to develop further solutions to enhance the safety and robustness of the financial system. I encourage CSDs to continue focussing on their core and provide these solutions. However, I question the consequences that we may face if we ignore disruptive technologies and the opportunities that they bring,” Singer explains.
In principle, sources note that Blockchain technologies could lead to significant reductions in the costs and risks of securities settlement and asset-servicing processes. They could also diminish systemic risk. Singer says that CSDs globally are already looking at aspects of Blockchain for their business, with two large European CSDs already investigating the potential of distributed ledger technology for asset settlement and reference data applications.
“While such initiatives are being explored, we have to recognise that much research needs to be done before we can apply it to the securities settlement landscape,” says Singer, adding that operational and regulatory aspects have to be considered. Blockchain would need to undergo several enhancements in order to evolve and be tailored to the securities environment and its regulatory landscape.
“We cannot afford to sit on the side lines and ignore the potential impact that disruptive technologies could have for South Africa. Both Strate and its peers internationally are investigating the potential that it offers and I can only imagine that Sibos 2016 is going to provide significant insight into the future of the financial markets,” she concludes
Sibos 2016 is set to take place at the Palexpo in Geneva, Switzerland, from 26-29 September. For more information, click here.