Is Blockchain the saviour of global financial markets?

By Steve Grob, director of group strategy, Fidessa

At a recent event I was asked to pick three technologiesthat could really upset the capital markets apple cart. Blockchain, thedistributed ledger technology that underpins Bitcoin, was one of those that Iselected. 

The best way to think about Blockchain is that it solves thetrust problem when two parties wish to transact with each other. It achievesthis by distributing the transaction record across multiple servers that areopen to all. This was essential for Bitcoin because with no one ‘owning’ thecryptocurrency, some mechanism was required to provide a record of who wasspending what.

The really big idea, however, is that Blockchain has thepotential 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?

Technically, yes. 

Up to now Blockchain technology hasappeared tamper-proof against even the most ardent hackers and, if it were tobecome ubiquitous and used by everyone, then its potential truly is vast. 

Thereare some big snags, however. The first is regulation as it is unlikely thatdifferent 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 differentjurisdictions try to use it as a way of expanding their own territorialhorizons -- the European Securities and Markets Authority has already published a call for evidence paper on virtualcurrencies and distributed ledgers. 

The second challenge is that if Blockchainuse is only partial then we will still need all those pesky counterparties andintermediaries so it’s a bit of an all or nothing play. Finally, there arealready a number of technology firms competing with their interpretation ofBlockchain technology so, again, we may find that Blockchain’s early allurecrumbles to nothing through competing standards.

Nevertheless, there is plenty of talk about it at the minuteand several firms are making significant bets on its outcome. I suspect,however, that in developed, westernised countries there is simply too muchvested interest against anything so radical. On the other hand, Blockchain may give developing countries and their markets a chance to leapfrog the globalcompetition.