SWIFT important report: The impact and potential of blockchain on the entire process of securities trading

Rage Comment : Although many people have predicted that blockchain technology will replace third-party institutions such as SWIFT, SWIFT, a financial information service research organization, believes that blockchain technology will not completely replace third-party institutions. Industry companies only need to reposition their roles in the post-trading operation process, which is not a threat to the survival of the relationship. Third parties that confirm or verify the existence of transactions will not be replaced by blockchain, and it will be very expensive to improve legacy systems that have been implemented for many years. The interconnected nature of securities trading systems means that changing any one workflow will affect other areas, and not all areas can enjoy the benefits of blockchain.

Translation: Nicole

It may come as a surprise that blockchain technology will require securities markets to undergo a transformation.

Financial information service research organization SWIFT released a report today, arguing that blockchain technology will not completely replace third-party institutions, even though blockchain technology will require many securities companies to carry out a lot of transformation work.

The report, based on interviews and focus groups with 75 members of the technology and post-trade process community, found that industry firms need to rethink their roles in post-trade operations, but, SWIFT went on to say, this is not yet an existential threat.

After following the WeChat account “区块链笔Blockchain”, reply with the keyword “ SWIFT ” to view and download the report.

Michael Mainelli

Michael Mainelli from Z/Yen Group, who co-authored the report, said in a statement:

“The challenge of using an interoperable distributed ledger for securities settlement comes not only from proving the feasibility of the technology, but also from gaining the necessary industry collaboration to transform the business processes of securities firms.”

The study, titled “Blockchain’s Impact and Potential on the Entire Securities Trading Process,” found that blockchain, or “interactive distributed ledger,” could reduce the cost of post-trade settlement for securities firms worldwide by $40 billion per year.

But the report also highlights the possibility that new technologies like blockchain could be nothing more than “pixies”.

Some roles are irreplaceable

The report, written by SWIFT Academy with help from Mainelli and Alistair Milne from Loughborough University's School of Business and Economics, is based on two "general views" expressed by the academics in the interviews.

The report’s authors questioned the idea that blockchain could potentially replace third-party maintenance functions in the post-trade environment, which some argue could prevent duplicate and fraudulent transactions.

According to the report, blockchain technology is positioned as an alternative to the current way of classifying transaction history and mediating applications in disputes.

The report also mentions that in this case, the trusted third party — who confirms or verifies that the transaction actually took place — cannot be replaced by blockchain.

Mainelli and Alistair Milne

The author states:

“In the real world, distributed ledgers will not completely remove the need for a central third party, whose role is to confirm identities and assets (the role of a notary), as well as to resolve disputes and enforce legal obligations.”

Expensive operation process

In the current securities trading structure, participants “clearly understand the responsibilities and rights of each party”, including institutional investors, asset managers, custodian banks, brokers, hedge funds, central counterparties and central securities depositories.

The transition from third-party institutions with trusted documents and institutional knowledge to interactive distributed ledgers is uncertain, as how third parties choose which services and data to use is not fully revealed through the post-transaction process.

While this is not an impossible process, it would undoubtedly be a very expensive one, the report goes on to explain:

“It would be very expensive to improve the current system, considering that it is a legacy system that is many years old.”

Based on the interviews, the report “unsurprisingly” concludes that permissioned blockchains outperform permissionless blockchains.

The report states:

“Our main point is the feasibility of ‘profiles’ that give ledger participants the power to control access and update encrypted files.”

In other words, it ensures that not everyone can see these encrypted files.

Dispute issues

According to the report, the interconnected nature of securities trading systems means that changing any one workflow will impact other areas, and not all areas will be able to reap the benefits of blockchain.

The report cites the example of syndicated loans where the repayments could take 20 days or more to process legal disputes, which “would not be affected by the way ownership data is recorded”.

According to the report, the interconnectivity of securities trading is likely to be problematic when large financial institutions and corporations want to develop proof-of-concept mechanisms.

Rather than focusing on just one specific application, concept developers should keep in mind that “substantial changes in operations” should include collecting, storing, and analyzing data from a variety of applications.

The report concluded:

“The challenge of using an interoperable distributed ledger for securities settlement comes not only from proving the feasibility of the technology, but also from coordinating and rebuilding the business processes of individual firms.”