Blockchain: Is it going to revolutionise clearing and settlement?
With backing from major banks there has been massive advancements in Blockchain over the past year. Most recently is the craving for post-trade efficiency and how it can be achieved through this ever-evolving technology. The R3 Project, a Blockchain research and development effort, started last year on September 15 with a consortium of 9 of the big names in International banking including our own Commonwealth Bank. This number has grown to 42 in just a year including Northern Trust, MetLife and Westpac to name a few. The burning questions from the financial services community continue to be around how safe is Blockchain, what are the opportunity costs and what regulatory authority, if any, would be required to oversee its operation?
As Blockchain forges ahead there are many questions that need to be answered including from a global perspective. Fortunately, some regulatory bodies are approaching the rising hype in a co-operative way. The UK’s Financial Conduct Authority & Australia’s own ASIC have signed an agreement, the first of its kind, allowing Fintech innovators who meet the eligibility criteria of their home regulator’s Innovation Hub to access regulators in the other jurisdiction for assistance and guidance which will help to break down the barriers to entry. There is strong support that Blockchain can eliminate some of the risks, including fraud risk, in the financial services industry, in part due to the nature of how the distributed ledger technology operates. For example, current and historical ownership of securities can be validated by all parties connected to the system, keeping a potentially unhackable record, that is not able to be altered, of the transaction making fraud virtually impossible. Transfers of ownership are added to the Blockchain after validation. Issues around the speed at which information can be validated and read as the Blockchain grows are raising some concerns on the applicability of this technology.
Some regulators are quite open to the idea of de-centralising the ledger book for the finance industry to achieve efficiency and transparency. The issues with the rapid expansion of technology continue to be understanding the capabilities, impact and end-to-end functions of Blockchain. Regulators, regulations and regulatory technology will need to keep up with the developing technology and the application of Blockchain. While the technology is evolving industry is questioning whether there is an actual need to develop regulation when final versions of how Blockchain would operate have not been realised. The more necessary regulatory concerns under Blockchain are most likely to be around Privacy, data encryption, unique identification of users, currencies traded (virtual and real) and tax accounting, including cross jurisdictional tax treaties. These issues are not new but the Blockchain technology may force many of them to be addressed by regulators.
This leads us to the conclusion that Blockchain will continue to develop and as technology improves will infiltrate our lives on a day to day basis. Other applications outside of financial records will push Blockchain into the mainstream. For example: Everledger – used by the diamond industry to reduce fraud and theft by tracking mining, authentication and ownership.
The efficiency and cost effectiveness opportunities will drive Blockchain development and only if efficiency and cost benefits can be gained will Blockchain be implemented in a post trade environment. Many markets operate effective clearing and settlement platforms at very low cost to market participants where efficiency and cost reduction will continue to drive improvements. Blockchain may not be the revolution but will be the evolution of clearing and settlement.