Blockchain: The most disruptive technology on Wall Street since the Internet

It has been seven years since the development of blockchain technology. However, the general public has not had much exposure to it, and various hype has prevented us from understanding its core. However, the attitudes and development projects of global participants and governments have given us the most intuitive understanding. Wall Street has also told us through its experience in technological innovation that blockchain technology is definitely the next generation of Internet technology, but we still have a lot to do.

Translation: Annie_Xu

By now, many people know blockchain as the technology behind the controversial bitcoin currency, but blockchain is much more than that. It is extremely innovative and far-reaching. The technology can transparently, securely and digitally track the ownership of assets before, during and after a transaction. And it has the potential to revolutionize a wide range of industries, including how stock exchanges operate and how people vote. From Wall Street to Estonia, financial companies are investing in and testing blockchain.

Bob Greifeld

Market research firm McKinsey & Co. pointed out that blockchain will "substantially reshape the capital markets", but "the blockchain revolution will not happen suddenly". Nasdaq CEO Bob Greifeld said: "Blockchain will improve the efficiency of financial markets that we have never seen before."

I agree, and believe that blockchain is like the Internet in the 1990s, with the potential to completely transform complex financial systems.

Our strategy is to invest organically and take advantage of leading innovators in the space. In January, Broadridge made a small investment in Digital Asset Holdings, founded by former JPMorgan Chase executive Blythe Master, which uses distributed ledger technology to manage short-term lending, including the famous asset repo. We have also joined the Hyperledger Project, an open source project dedicated to improving general blockchain standards. We are not the only blockchain researchers. Aite Group predicts that by 2019, capital market companies will invest $400 million annually to develop blockchain-based solutions. Last year's investment was only $75 million.

Blockchain Blueprint

The impact of blockchain on the financial services industry can be divided into short-term, medium-term and long-term.

In the short term, distributed ledgers can handle transactions within complex structures - high value-added, low volume transactions, such as syndicated loans, which would take 20 days to settle in the era of manual processes.

Blockchain has the potential to speed up operations, reduce legal costs, and reduce settlement costs. It can increase liquidity in lending markets and increase the efficiency and liquidity of over-the-counter derivatives trading, such as credit default swaps and private securities markets. In three to five years, blockchain can have a significant impact on these markets.

Bank of America Merrill Lynch, Citigroup Inc., Credit Suisse AG, Depository Trust & Clearing Corp. (DTCC), JP Morgan Chase & Co. and Markit have successfully used blockchain for credit default swap operations, while DTCC, which is responsible for recording over-the-counter transactions, is exploring whether blockchain can be used for actual transactions. Estonia is trying to use blockchain to improve shareholder verification and simplify voting processes. The project is part of Estonia's e-Residency system project, which is committed to developing a globally universal citizen digital identity authentication.

In the medium term, that is, in the next 5 to 10 years, blockchain can standardize the database used to describe counterparties and security identifiers, which is a very costly task for large global banks. However, this data is too important for financial markets, so some successful cases need to be seen before accepting blockchain as an important central database.

Australia leads the way

Long-term refers to the next 10 years or more. Blockchain can be used in cash equity and fixed income markets, which are markets with large transaction volumes and relatively high efficiency. Although blockchain can reduce settlement time and increase effective assets, the market needs to increase the acceptance of the technology before it can be widely used. Currently, Digital Asset Holdings has targeted the equity market and cooperated with the Australian Stock Exchange to replace the existing clearing and settlement platform with distributed ledger technology.

It’s one thing to know how blockchain works in the closed Australian market, and another to apply it to a complex market like the US. While blockchain is bound to revolutionize lending, derivatives markets, and even the Australian stock market; to effectively change the core functions of the US stock exchange, all companies must invest heavily and work together to apply the new technology. Such a radical change requires true industry leadership, large investments, and long-term planning. A recent McKinsey report, “Beyond the Hype: Blockchain is the Capital Market,” points out that blockchain development is difficult, “the biggest difficulties are the technology itself, as well as market, legal and operating protocols, and challenges to existing banking rules.” Given the high complexity of this technology, this transformation must be revolutionary and require a unified response strategy and careful deployment.

But the rewards could be huge. Autonomous Research reports that blockchain could reduce settlement costs by a third, or $16 billion a year, and reduce capital requirements by $120 billion. However, the McKinsey report notes that blockchain adoption “requires collaboration among market participants, regulators, and technology experts.” We already have such technology collaborations in place. We have invested in Digital Asset Holdings with many of the top companies, including ABN AMRO, Accenture, ASX Limited, BNP Paribas, Citi, CME Ventures, Deutsche Borse Group, DTCC, IBM, ICAP, Goldman Sachs, JP Morgan, Santander, InnoVentures, and PNC Financial. Similarly, our credit default swap trials with three other banks are examples of such collaborations. Blockchain is the next generation of transaction processing technology, and we are eager and committed to accelerating this innovation in financial services. We have seen Wall Street’s technological leaps forward. In 1968, the New York Stock Exchange closed every Wednesday from June to December to complete all paperwork because it could not handle the daily trading volume of 15 million shares. Even on busy days, the NYSE can now process 2 billion shares per day, easily completing a trade every three minutes. In the short term, Broadridge will increase its investment in start-ups and professional initiatives, and we hope to create next-generation solutions by using disruptive technologies that improve efficiency and collaboration.