Blockchain Growing on Financial Institutions (Only Under a Different Name)

Bitcoin introduced the first usage of blockchain technology with the broad intent to circumvent centralized authorities by means of the distributed ledger. While many have become skeptical due to the highly speculative and the perceived shady aspect of the cryptocurrency side, many have also been intrigued by the potential legitimate uses blockchain affords. One clear — and commonly referred to — example is supply chains. By drawing on records distributed among the parties involved, the processes between suppliers, transportation, importers, customs, etc., could be streamlined, and disputes occurring along international borders could be resolved more easily. Savings for such back-office operations could amount to $20 billion a year for the financial industry, according to Santander Bank. Apart from this, across the financial industry, entities have begun to find their own unique uses for blockchain technology.

Blockchain technology was designed to circumvent authorities, but it has piqued the interest of heavily regulated stock exchanges https://t.co/wVWWKkwpLk

— The Economist (@TheEconomist) November 18, 2018

With Fusion LenderComm, a platform running on the blockchain, financial firm Finastra aims to facilitate smoother collaboration between syndicated lenders by, for example, connecting the individual systems of banks that collectively lend out large loans to fund infrastructure projects. On a larger scale, the Bank of Canada and the Monetary Authority of Singapore (MAS) are cooperating in experimenting with a shared ledger to economize international payments. MAS itself, alongside Singapore’s stock exchange (SGX), revealed on Nov 11 their intent of using a blockchain-based prototype for the delivery, payment, and settlement of assets. Australia’s stock exchange (ASX) expects to similarly replace its current clearing and settlement platform, CHESS, by mid-2021. Perhaps the most innovative use of blockchain comes from Swiss stock exchange owner, SIX, which has a distinct digital trading platform and plans to ‘tokenize’ assets, like stocks and bonds, which it claims will make more types of assets available to trade by dropping the threshold for minimum trade sizes. Clients are already on board, such as a museum that is seeking to tokenize its art collection, creating a new source of funding and exposing investors to the fluctuating value of the art through tokens they could trade. As businesses and institutions have begun to find their own uses for blockchain technology, they are not so keen on the idea of having their distributed ledgers open to all. Access to most enterprise blockchains is ‘permissioned’ only to restricted users. In significantly reducing potential contributors, this also expedites the functioning of the blockchain by eliminating the time-consuming proof-of-work systems — usually necessary for distributed record updates. In the case of ASX, the stock exchange itself would act as the single counterparty that would grant participants approval, with direct access exclusive only to certain banks and brokers. Financial institutions have a strong incentive to retain this approach, not only because of their legal obligations but also so as not to divulge their financial positions. These types of restricted, centralized silos are almost exactly what the original proponents of blockchain sought to undermine with the technology. It is ironic that blockchain’s success is the reason it is now being used in service of what it intended to substitute. To perhaps further distinguish the form blockchain has taken in this formal application, and to dissociate themselves from the sordid reputation of cryptocurrencies, firms such as Corda, who developed Finastra’s Fusion LenderComm, and Digital Asset, who did similar work for ASX, refer to what they provide their clients exclusively as ‘distributed-ledger technology.’ What do you think about traditional financial institutions co-opting distributed-ledger technology for their own private purposes? Let us know in the comments below!