Using Blockchain for Financial Technology

Blockchain has a significant effect on the fintech industry; this means that established financial services companies and new solution providers must consider using blockchain to their advantage, rebuilding economic infrastructure and finding new ways to make money and connect with customers. We’d also like to point out that many other industries are starting to enjoy these benefits, either because of how they use the banking system or how well they run their businesses.

 

The First Few Outs

Over the past ten years, fintech innovation has been moving faster and faster; this includes the use of blockchain, despite initial doubt and pushback from traditional finance incumbents, or TradFi, who were worried about the lack of regulation and that decentralising specific processes was impossible, among other things. But at their heart, blockchain and distributed ledger technology have always given TradFi players a lot of room for growth. More and more institutions and businesses are admitting that cryptography, blockchain, and distributed ledger technologies can help them be more efficient and give them new ways to make money. Many existing TradFi companies are considering the much bigger chance to change digital assets and business processes, but many others are still avoiding or spreading doubt about these chances.

 

In one example, a recent study from Bain & Company says that tokenisation in the issuance, secondary markets, and asset administration could save three to five basis points (bps), or 15 to 20% of total fund support costs. Private markets are of particular interest. Three to five bps may not sound like much, but the cost savings are enormous when you consider that global private equity and venture capital, global private debt, and global private real estate add up to $473 trillion.

 

Getting Beyond the Noise

As with any new tool, there is a lot of “noise.”  At the time this article was written, most of the bad news was related to regulatory problems in the U.S., such as Securities & Exchange Commission (SEC) lawsuits against Binance and Coinbase, uncertainty about the role of the SEC vs. the Commodity Futures Trading Commission (CFTC), and proposed legislation in Congress that is likely to make headlines but has little-to-no chance of passing shortly (even though the authors of the bill are optimistic).  

 

On the bright side, Ripple’s lawsuit with the SEC over whether the XRP token is a security or a currency has led to some early legal clarity for digital assets. Big players like Blackrock are trying again to get a Bitcoin ETF approved in the U.S., and regulatory engagement is growing worldwide, which will help the space grow in the long run.  

 

When we eliminate the “noise,” we see a more significant signal trend that isn’t as clear (and maybe that’s on purpose). Namely, financial institutions have already started implementing blockchain solutions into their ongoing operations or completely redesigning business functions from the ground up. 

 

Institutional adoption is early, but that doesn’t make it unimportant.

Some say that blockchain projects haven’t done much for banks yet, but blockchain technology is starting to open doors to new income streams and more efficient ways of doing things.

 

Since the system went live, JPMorgan has used its own JPM Coin to settle more than $300 billion worth of deals. In light of these results, the company recently revealed that corporate clients can use JPM Coin to make payments in euros. This effort shows that digital assets can be a differentiator that allows for faster, more efficient payments and helps institutions learn more about working together.

 

The Canton Network was the first blockchain network for business assets that could be used privately. The stated goal of the Canton Network is to build a decentralised blockchain infrastructure that will connect the currently separate systems in financial markets without sacrificing privacy, scalability, or the ability for institutions to create and customise their subnetworks.

 

This project is being run by 30 well-known financial services companies, such as BNP Paribas, Deutsche Borse, and Goldman Sachs.

 

Starting with an incubator in 2015, Fidelity entered the digital asset space; this led to the creation of Fidelity Digital Asset Services, LLC, which offers clients a platform for trading cryptocurrencies and a way to store them, as well as asset management tools that give them exposure to the space. 

 

As adoption becomes more common, look for similar goods and services from other companies. In the future, TradFi may use the technology to make other goods and services, such as natively digital financial products with smart contract automation, insurance solutions that use blockchain, etc.

 

Real-world assets (RWAs) can be turned into tokens. 

People have long thought that being able to represent real-world goods on a blockchain would be the next step in innovation. Some expected benefits are faster trading of illiquid assets, the ability to divide ownership into smaller pieces, and lower overhead costs. But even though many people have tried to move RWAs to the blockchain, they haven’t been successful very often. One of the main reasons why this doesn’t work is that it’s often impossible to legally link the physical asset to its digital counterpart(s). This is caused by different regulatory requirements in other countries, an inherent reliance on centralised parties, problems with detecting and stopping fraud, and a lack of data standards that would allow a system to support different types of assets.  

 

Businesses are trying to find ways to deal with these problems by making tokens that have the benefits of tokenisation and still meet legal compliance requirements. The ERC-3643 token is a new example. It used to be called the T-Rex Protocol. The goal of the initiative is to create a permission token standard for real-world assets. This standard will include smart contracting language to handle the underlying asset and make sure it complies with regulations. Even though it’s still not clear if ERC-3643 will become the standard, this change is essential in many ways:

 

As the underlying asset and the rules about how and where it can be traded are automatically implemented, it may be possible to tokenise an asset in a way that is genuinely digitally native. Better and faster compliance with regulations and reporting are likely to be the first advantage. Since computers control asset trading, transactions can happen more quickly, making the system more efficient and possibly eliminating the middlemen who act as verification agents (though we note that some verification agents could become validators as part of the business model, if necessary).

 

In the end,

Even though blockchain has been the subject of much talk, it is finally starting to live up to some of its promises. Institutions are beginning to use it, and the goal is to make them more efficient and find new ways to make money. And even though many financial services companies will take a “wait and see” approach until there is more regulatory clarity, as standards for on-chain data get stronger. Ecosystems get more developed, they do so at the risk of not being ready for fundamental changes that will affect the industry in both good and bad ways.  

 

Whether they know it or not, these institutions will need the technical and functional skills to work in an environment that is likely to change faster and faster. Institutions can get involved in many ways, such as directly experimenting, building solutions, or adding to thought-leading industry groups like the Wall Street Blockchain Alliance (WSBA) or the Alternative Investment Management Association (AIMA). 

 

No matter what you choose, being a part of the business in some way is essential for its future growth and relevance. And not using this new idea is like not using the internet and online shopping 20 years ago.