“Eating Their Lunch:” Blockchain Upstarts Challenge Investment Banks
Access to personal financial data and the emergence of blockchain technology have been the catalyst for a revolution in the banking sector. At the start of this year, banks within the European Union were ordered by the Competition and Markets Authority (CMA) to grant customers access to their personal data.
Banks must allow customers ownership of their financial data which they can then share with other banks and regulated financial businesses to shop around for a better deal — such as getting a cheaper overdraft.
With Open Banking, anything from customer transaction history and product information to branch locations will now be owned by the customer, not the bank.
This combination of available financial data and new possibilities for blockchain-driven efficiencies have made the climate ripe for the disruption of traditional investment banks.
“Accenture has estimated that some major investment banks could make a whopping $10 billion in efficiency savings by utilizing blockchain technology,” explains Thomas Levene, founder of Best Blockchain Solutions Consultancy.
“In current systems, there needs to be careful checks and balances of huge amounts of data that can prove time consuming for investment banks and remain open to some degree of error.”
For example, blockchains carry the promise of making international money transfers cheaper and faster for all parties involved. And while it may be in fledgling stages of innovation, once the technology has proven its speed and scaling abilities, investment banks and international settlements will undoubtedly become increasingly comfortable as transaction partners.
Levene explains, “The other side of the crypto coin is that while existing investment houses need to adapt and adopt, they could very well be replaced, at least in part, by new blockchain startups that have the potential to ‘eat their lunch.’ And it’s a big lunch. In the 2017 fiscal year, Goldman Sachs amassed $32 billion."
Currently for large issuers, it’s a given that you simply have to use investment banks. But assuming regulatory compliance, it doesn’t need to be this way.
“Companies like tZero, whose Chief Executive Officer is the founder of Overstock, are aimed at eating some J.P. Morgan lunch. They are creating a distributed ledger platform for capital markets. Some have called this offering, whose ICO finishes at the end of June 2018, WallStreet 2.0, as they aim to fuse traditional finance with the benefits of a token crypto economy,” says Levene.
Using blockchains, compliance for investment banks could be fully automated. Dividends and voting could also be done on the blockchain automatically and without expensive backroom office administrators.
This elimination of middlemen coupled with unlimited access to the market, day or night and even on weekends, is set to revolutionize the finance sector.
Thus, it’s no surprise that significant numbers of blockchain-based prediction market platforms and exchanges have sprung up to challenge the dominance of traditional investment banks.
Augur, Bodhi, Numerai and Artificial Intelligence Exchange are just a few of the firms that have launched with decentralized prediction market protocols and exchanges, and if these new models prove to be better than current systems, they could soon be snatched up by investment banks eager to protect their market share.
Polymath is challenging the status quo of capital markets with a network that connects token investors, KYC providers, smart contract developers, and legal experts to help firms form the basis of their securities token.
Meanwhile, Globitex is one of several platforms making it possible to buy commodities with crypto assets.
Not Going Down Without a Fight
In response to these new market entrants, the traditional sector has been hedging its bet on beating the upstarts through significant adaptation and adoption of new technologies.
Goldman Sachs, J.P. Morgan and Santander have been making moves to couple with blockchain technology.
“It’s not surprising that investment banks, including Goldman Sachs and JP Morgan, are getting on board with blockchain,” Levene says. “These two apparently completed a test in the $2.8 trillion equity swaps market with a 100% success rate using blockchain technology.”
J.P. Morgan has also established a Blockchain Centre of Excellence, and Goldman Sachs has revealed plans to setup a trading operation in Bitcoin. Meanwhile, Santander has joined the blockchain with the launch of a new foreign exchange payment system, One Pay FX.
“The current system is ripe for disruption,” Levene concludes. “Time-consuming and expensive venture capital funded investment bank models cannot compete with streamlined token-based funding efforts that are already having an impact on traditional investment banks’ bottom line.”