Such stuff as DLTs are made on

Blockchain has moved from a technology dream to a reality, and financial institutions should be prepared for it, says David Becker of Broadridge

In the first 50 days of 2017, more than 54,000 news stories were published mentioning blockchain or distributed ledger technology (DLT), amounting to more than 1,000 per day, according to a Google news search of English press. A good amount of this ink was spilled on predictions of how the technology will revolutionise areas of life ranging from automated cars to stock trading and currencies.

Recent research by Broadridge and Bain & Company bears out this optimism. In surveys and interviews with executives from about 100 major global financial institutions, financial regulators and exchanges, including those in the Asia Pacific (APAC) region, more than 80 percent indicated that they expect blockchain to have a “transformative” impact on the banking and asset management industries.

With the promise of revolutionary infrastructure and process changes and eye-popping cost savings—the research estimates $15 billion to $30 billion in total annual cost and capital savings to global financial market ecosystems—one might expect every financial services company to rush to claim its part of the blockchain pie. However, almost 40 percent of the companies consulted said they are maintaining a “wait-and-see” approach to the technology.

Two common reasons were given for this reluctance to move forward on blockchain development and deployment: the potentially enormous cost of the infrastructure upgrades; and uncertainty over the future of blockchain regulations.

While this level of reluctance to engage with blockchain may seem discouraging, we feel that the mix of optimism and uncertainty the research reveals paints a realistic outlook for the future of blockchain implementation in APAC.

To invest or not to invest, that is the question

Many of those interviewed indicated that constant pressure to show near-term results made it difficult to gain top management buy-in for the potentially enormous cost associated with the development and roll out of blockchain technology. As one financial industry executive commented: “Everyone is struggling with business cases and exactly where to apply their efforts.”

Other companies see blockchain as a potential threat to their competitive positions, and are thus incentivised to try to preserve the status quo.

Against this backdrop, executives essentially face a game theory-type decision about blockchain implementation. Those who invest and upgrade early could gain an early-mover advantage, but they also risk disrupting their own business models and competitive positions. As another executive explained: “No one wants to be first, but no one wants to be last either.”

In our view, whether a company prospers or flounders in the blockchain age will be heavily influenced by the strategic decisions they make today. The research identified four basic options for DLT-related investments. Companies can: become leaders in innovation; attempt to be fast followers; watch, wait and prepare; or opt out altogether.

We see a strong case for top management to carefully define their attitude and approach to the technology along this spectrum and to develop well-planned and considered blockchain innovation programs.

This likely means identifying ‘no-regret’ blockchain-related investments that will increase efficiencies and deliver cost advantages in the near term while simultaneously laying a foundation for wider, and likely more expensive, infrastructure upgrades once the technology reaches critical mass in the wider market.

Once more unto the breach

Many of the companies that remain on the sidelines—whether waiting and seeing or resisting the technology trend—cite regulatory uncertainty as a key reason for not investing in research and development.

We found reason to be sympathetic with this viewpoint, but after talking to a wide cross section of regulators, blockchain consortia such as Hyperledger and private companies, we believe regulatory implications and uncertainty over standards are no reason to delay planning for and initial investments in the technology.

Indeed, the Money Authority of Singapore and Japan’s Financial Services Agency participated in blockchain forums hosted by Broadridge earlier this year in Singapore and Japan, respectively. In both cases, the regulators indicated strong support for the development of blockchain applications in their local markets. Supportive statements by the relevant regulators in Australia, China and Hong Kong lead us to believe that the stance is similar in these markets.

We see an opportunity for financial companies to identify no-regret internal upgrades that will enhance efficiencies and could deliver significant cost savings without regulatory implications. From this perspective, regulatory implications are only likely to become a challenge when it comes to replacing entire market infrastructures with blockchain technology—such as migrating entire trade reconciliation and clearance systems.

Tomorrow, and tomorrow, and tomorrow

In its research, Broadridge and Bain identified several key areas where companies could implement these no-regret investments that have the potential to deliver near-term efficiency gains and cost savings without significant regulatory implications.

Three particularly promising ideas are:

  • Implementing a thin layer of blockchain on top of existing financial markets infrastructure. This entails working with financial infrastructure utility service providers that are at the forefront of blockchain developments to identify niche applications of DLT technology to deliver near-term benefits with reasonable upfront investment.

  • Enhancing cyber security, which will be essential to implementing a technology as potentially disruptive as blockchain. This will also deliver near-term gains in markets where news headlines on cyber attacks, cyber espionage and cyber terrorism seem as ubiquitous as those on blockchain technology.

  • Adopting open application programming interfaces (APIs), which will be critical to the adoption of blockchain when it comes to plugging the technology into current IT infrastructures. Meanwhile, these APIs can serve as a foundation for smart contracts, the tokenisation of assets and efficiency gains via information sharing across markets and asset classes.

So, that leaves us wondering what financial companies should do when the market reaches the stage where blockchain ushers in potentially revolutionary changes such as entirely new, instantaneous and transparent trade reconciliation and settlement systems.

With a clear understanding that there is little standing in the way of financial companies in Asia investing in and rolling out initial foundations of blockchain, there is no reason to doubt the thousands of news reports—and the 80 percent of respondents to our research questions—expecting the technology to initiate a market transformation.

The latest features from Asset Servicing Times
Brexit has meant some difficult decisions for UK-based financial services firms. Stephanie Palmer-Derrien asks whether Ireland could be the answer
Mark Baker of SimCorp assesses the results of two recent surveys to gauge what matters most when optimising collateral and controlling liquidity
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
Jay Patani of software company ITRS looks at how financial institutions of all shapes and sizes can reduce reputational risk in their trading systems
As the FCA consults on the potential expansion of its Senior Management and Certification Regime, Stephanie Palmer gauges the initial reactions
In a climate of regulatory change, cost pressures and cyber threats, the network management industry will be at its strongest if it sticks together. Stephanie Palmer reports from The Network Forum in Warsaw
Regulation and technology were still the hottest topics in town at Fund Forum International in Berlin. Stephanie Palmer reports
As the active-passive fund debate reaches fever pitch, there is a third option, says Broadridge’s Stephanie Clarke
Asset managers are increasingly relying on data, and the service providers that can manage it, heard attendees at London’s TSAM conference
View features section
Country profiles
The latest country profiles from Asset Servicing Times
The Asian market may be improving on the harmonisation front, but the situation is still far from ideal. Experts discuss what there is still left to do
Brazil is hogging the limelight from its South American neighbours. But, although reforms are in full swing, there is still work to be done
Securities Lending Times

Visit our sister site
for all the latest securities lending news and analysis
No nation is an island, and the Polish CSD has post-trade services to cater to all of Central and Eastern Europe, says KDPW’s Iwona Sroka
In a region as geographically, culturally and economically diverse as Asia, funds passports have a tricky road ahead if they’re to redefine the industry
Amid cross-border restrictions and tightened belts, Luxembourg’s kingdom of real estate investment won’t be crumbling any time soon
The Chinese market has taken a knock to its confidence, but despite its size, it is still merely an emerging market, and must take these setbacks in its stride
Rich in sunshine, cork hats and tired clichés, Australia’s funds industry doesn’t buck the trend, boasting record levels of assets under custody
As the Saudi Arabian stock exchange finally opens its doors to foreign investments, the influx from abroad will be in baby steps, not leaps and bounds
View country profiles section
The latest interviews from Asset Servicing Times
Drew Nicol and BNY Mellon’s James Slater discuss the results of a joint research study with PwC exploring buy-side opinions on central counterparties, incoming collateral rules and the rise of peer-to-peer lending
Real Estate Investment Times

Visit our sister site
for all the latest real estate investment news
View interviews section