By Steve Grob, director of group strategy,
At a recent event I was asked to pick
three technologies that could really upset the capital markets
apple cart. Blockchain, the distributed ledger technology that
underpins Bitcoin, was one of those that I selected.
The best way to think about Blockchain is
that it solves the trust problem when two parties wish to
transact with each other. It achieves this by distributing the
transaction record across multiple servers that are open to
all. This was essential for Bitcoin because with no one
'owning’ the cryptocurrency, some mechanism was
required to provide a record of who was spending what.
The really big idea, however, is that
Blockchain has the potential to remove the need for all the
third parties – central securities depositories,
custodians, clearing houses, etc – currently involved
in the financial markets food chain.
So could it work?
Up to now Blockchain technology has
appeared tamper-proof against even the most ardent hackers and,
if it were to become ubiquitous and used by everyone, then its
potential truly is vast.
There are some big snags, however. The
first is regulation as it is unlikely that different regulators
will view it the same way or opine on it at the same time. We
might even get into a regulatory tug of war as regulators in
different jurisdictions try to use it as a way of expanding
their own territorial horizons -- the European Securities and
Markets Authority has already published a call for evidence
paper on virtual currencies and distributed ledgers.
The second challenge is that if Blockchain
use is only partial then we will still need all those pesky
counterparties and intermediaries so it’s a bit of
an all or nothing play. Finally, there are already a number of
technology firms competing with their interpretation of
Blockchain technology so, again, we may find that
Blockchain’s early allure crumbles to nothing
through competing standards.
Nevertheless, there is plenty of talk
about it at the minute and several firms are making significant
bets on its outcome. I suspect, however, that in developed,
westernised countries there is simply too much vested interest
against anything so radical. On the other hand, Blockchain may
give developing countries and their markets a chance to
leapfrog the global competition.